Although income tax initially sputtered to a start in the United States, it’s now an annual given. The government requires taxpayers to fill out Form 1040, or some derivation of it, every year—and it’s been that way for 109 consecutive years now. Most US citizens and permanent residents making above a certain amount of money will pay income tax, and some nonresident aliens will also be required to pay taxes. So, what are some important items you need to know about this form before you fill it out for tax day?
Form 1040, U.S. Individual Tax Return
You’ll report your gross income at the beginning of this form. Beyond regular wages, income can include interest, dividends, capital gains, and retirement. Other sources of income might include alimony, business income, unemployment compensation, and the like. Some sources of income, like rental real estate, require you to fill out additional documents, or schedules, detailing these additional sources of income. For rental real estate, this is generally Schedule E.
Related: How to Report Rental Income: A Complete Guide for Landlords
Once you report your gross income, you’ll show your deductions and credits. First, you have above-the-line deductions—any deductions shown on Form 1040 before the adjusted gross income (AGI) line. These deductions include line items like self-employment retirement and IRA contributions. If you have above-the-line deductions, you’ll fill out Schedule 1 to explain them in more detail.
After your above-the-line deductions, if you have any, you’ll need to decide if you want to itemize or take the standard deduction. If you itemize, you’ll add up all your deductions individually. If you take a standard deduction, you’ll claim one IRS-set amount of money. For the 2023 tax season, married couples filing jointly can claim a standard deduction of $25,900; for single taxpayers or married taxpayers filing separately, it’s $12,950; and for heads of households, it’s $19,400. Generally, if the standard deduction is less than your itemized deduction, you’ll choose to itemize.
Related: Top 11 Real Estate Tax Deduction: What You Should Know in 2022
Credits usually come in five groupings: (1) family and dependent credits (e.g., child tax credit), (2) income and savings credits (e.g., retirement savings contribution credit, undistributed capital gains), (3) homeowner credits (e.g., residential energy credit), (4) electric vehicle credits (e.g., new and used clean vehicles), and (5) health care credits (e.g., premium tax credit). If you can claim some of these credits, be sure you can back up your claims with documentation. No one wants to be unprepared during a tax audit.
Once you know your gross income, deductions, and credits, you can calculate taxable income. With this number, you will then consult tax tables to identify which tax rates apply to you. The amount of money you owe the government is called your tax liability. To be sure this number is accurate, you may want to consult a tax professional. Inaccurate tax reporting can compound issues with your taxes year after year.
If you’re 65 and above, you can use form 1040-SR, a derivation of Form 1040. It’s essentially the same as 1040, but it has a couple of key differences: one of the helpful features is larger boxes and larger print—no more squinting necessary! Additionally, it offers an easy-reference standard deduction table right on the form.
For landlords, Form 1040’s Schedule E is the schedule of concern. It reports income or loss from rental real estate. If you are new to Schedule E, there are ways to properly keep track of all your accounting details so you can fill the schedule out with ease and confidence. Software, like TenantCloud’s tax accounting software, can help you easily calculate the numbers needed for this schedule. If you aren’t sure you can fill out your taxes by yourself, be sure to take advantage of a tax professional’s help. You want to know with confidence that your tax returns are correct.
Related: How to Fill Out Taxes Right: Schedule E Tax Form, Categorize Documents, Store Information