Money Essentials

1040 tax form explained

The lowdown on 1099s, AGI, exemptions, deductions and credits.


In January of every year, you will receive a host of tax statements -- the information you'll need to fill out your return.

Any information you receive will also have been sent to the IRS, so look them over carefully and be sure to report their data accurately on your return.

- Your W-2 form reports how much money you made at your job and how much tax you paid for the year.

- The 1099-G reports unemployment compensation or state tax refunds.

- The 1099-R reports retirement-plan income.

- The 1099-MISC reports income if you're an independent contractor, collected rent, or received royalties.

- Other 1099s, such as the 1099-B, 1099-DIV, and 1099-INT, report income from financial transactions (in this case, capital gains, dividends and interest income, respectively).

- Many of your 1099 forms get reported on the schedules that round out your 1040. For instance, if you're self-employed, you may need to file Schedule C and Schedule SE. If you received rent or royalties, you may need to file Schedule E. Capital gains get reported on Schedule D. Interest and dividends, if they exceed a certain amount, get reported on Schedule B.

By simply going through the 1040 line by line you'll see what schedules you need.

The number at the bottom of the first page of the 1040 is your adjusted gross income (AGI) -- your total income minus certain adjustments, such as IRA deductions, alimony payments, and medical savings account contributions.

Your AGI determines whether or not you're eligible for tax breaks and also determines whether you're eligible to make deductible IRA contributions or to open a Roth IRA.

Your AGI minus all other exemptions and deductions to which you're entitled equals your taxable income. Say your AGI is $70,000 and you can subtract $7,850 in deductions plus another $6,800 for personal exemptions. Your taxable income is $55,350.

The more exemptions and deductions you take, the lower your taxable income.

You're entitled to take a personal exemption for yourself, a spouse, and each dependent.

Everyone is also given a standard deduction, which is inflation-adjusted; for tax year 2012 it is $5,950 for singles, $11,900 for married couples filing jointly and $8,700 for heads of households.

But you might be better off itemizing your deductions if you add up everything that you're permitted to deduct, such as mortgage interest, charitable contributions, and state taxes -- and that amount exceeds the standard deduction. If that's the case, list all your deductions on Schedule A and attach it to your 1040.

Tax credits

Unlike deductions and exemptions, which lower your taxable income, tax credits are dollar-for-dollar reductions of the taxes you owe and are worth more than a deduction or exemption of the same amount.

Say you're in the 28% bracket and owe $1,000 in taxes. If you can take a $100 tax credit, you'll only have to pay $900 in tax ($1,000 minus $900). A $100 deduction, by contrast, only reduces your tax liability by $28 ($100 multiplied by 0.28), which means you'll pay $972 in taxes.

There are lots of books to help you sort through your annual return and give you a basic understanding of taxes. Three favorites that you'll find in any bookstore: "J.K. Lasser's Tax Guide, Ernst and Young Tax Guide," and "The Wall Street Journal Guide to Understanding Your Taxes."

You also can find online sources of help by checking out the CNNMoney Tax Center. If you need federal forms and instructions, go to the IRS website.

glossary
Glossary
take the test
Take
the test
more lessons
More Money Essentials
lessons
Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
Meet the kids dressed as Oscars red carpet stars By now, you've seen the red carpet looks from the 2015 Oscars. But you haven't seen 5 year-olds dressed up like A-listers at the awards, until now. Photographer Tricia Messeroux and designer Andrea Pitter recreated the pint-sized looks in just 36 hours. More
Flying economy doesn't have to be miserable For those willing to shell out just a little extra, several à la carte services offer experiences usually reserved for First Class passengers. More
Consumer Reports' Top Picks - American cars are back The magazine's favorite cars include three American models for the first time in years, thanks to a big boost from Tesla. More

Updated 11/23/2011 with SEO tweaks - abell
Updated 7/27/2012 content changes - aross
Updated 7/30/2012 content changes - aross