This lesson, and all subsequent lessons are available
upon request, and only after completing
a qualifying exam based on Lesson 2
Friday, March 18, 2011
Friday, March 11, 2011
Lesson 2 - The Process of Preparing Your IRS Form 1040
To navigate through the IRS Form 1040, we are going to use the same
process that is used by boy scouts, army leaders, and anyone charged
with the mission of navigating through a foreign, unfamiliar landscape.
They first get an understanding of the broadest view of the landscape,
to see where they are in relation to where they are trying to go.
Once that is established, they can then focus on a direction in which to
proceed, with the understanding of the various supporting efforts that
are going to be required to follow in that direction--the rivers to be
forded, the brush to be cleared, the ...whatever. But each supporting
effort is done with the understanding of why it is done: to allow them
to continue in the direction to their destination that they have identified.
In our case, the "broadest view of the landscape" of preparing our 1040
is what I call the "General Formula of the 1040."
Once the General Formula is understood, then it can be used to
systematically prepare the 1040, performing the various supporting
(clearing brush, fording rivers ...whatever) efforts to get you to your
destination--completion of your 1040.
In our case, the supporting efforts are the various schedules (Schedule A,
Schedule B, etc.) and forms (Form 2441, Form 8880, Form 8863, Form 5695, etc.).
These schedules and forms are the rivers to be forded and the brush to be
cleared. Taking care of them is simply a necessary task to allow you to keep
following the 1040 General Formula, which is the map you have of the 1040
land that you are navigating. So don't focus on the schedules and forms
before learning the map. Don't focus on the rivers and brushes before
knowing where you are going.
I say all of that in an attempt to shore you up for working to understand the
1040 General Formula. Not to memorize it. Just to really understand it's logic.
Okay, here is the 1040 General Formula:
But there you go. You have just completed preparing your
process that is used by boy scouts, army leaders, and anyone charged
with the mission of navigating through a foreign, unfamiliar landscape.
They first get an understanding of the broadest view of the landscape,
to see where they are in relation to where they are trying to go.
Once that is established, they can then focus on a direction in which to
proceed, with the understanding of the various supporting efforts that
are going to be required to follow in that direction--the rivers to be
forded, the brush to be cleared, the ...whatever. But each supporting
effort is done with the understanding of why it is done: to allow them
to continue in the direction to their destination that they have identified.
In our case, the "broadest view of the landscape" of preparing our 1040
is what I call the "General Formula of the 1040."
Once the General Formula is understood, then it can be used to
systematically prepare the 1040, performing the various supporting
(clearing brush, fording rivers ...whatever) efforts to get you to your
destination--completion of your 1040.
In our case, the supporting efforts are the various schedules (Schedule A,
Schedule B, etc.) and forms (Form 2441, Form 8880, Form 8863, Form 5695, etc.).
These schedules and forms are the rivers to be forded and the brush to be
cleared. Taking care of them is simply a necessary task to allow you to keep
following the 1040 General Formula, which is the map you have of the 1040
land that you are navigating. So don't focus on the schedules and forms
before learning the map. Don't focus on the rivers and brushes before
knowing where you are going.
I say all of that in an attempt to shore you up for working to understand the
1040 General Formula. Not to memorize it. Just to really understand it's logic.
Okay, here is the 1040 General Formula:
(1) Total Income – Total Adjustments = Adjusted Gross Income (AGI)
(2) AGI – Deductions – Exemptions = Taxable Income
(3 ) Tax Amount on Taxable Income
(Tax Amount found in the Tax Tables)
(Tax Amount found in the Tax Tables)
(4 ) Tax Amount – Tax Credits = Total Tax
(5 ) If Payments > Total Tax, then a Refund from IRS is due
If Payments < Total Tax, then a Payment to IRS is due
If Payments = Total Tax, then no Payment to IRS or from IRS is due
If Payments = Total Tax, then no Payment to IRS or from IRS is due
With this map, we now have a route to get to our destination.
Here then is what you have been waiting for: a step-by-step
"recipe" for preparing your IRS Form 1040
(that it is a 12-step program tells you how powerful it can be, as AA and NA can tell you):
Here then is what you have been waiting for: a step-by-step
"recipe" for preparing your IRS Form 1040
(that it is a 12-step program tells you how powerful it can be, as AA and NA can tell you):
Step 1. Prepare your Total Income.
Step 2. Prepare your Total Adustments.
Step 3. Subtract your Total Adjustments from your
Total Income.
Total Income.
The result is your Adjusted Gross Income.
Step 4. Prepare your Deductions.
Step 5. Prepare your Exemptions.
Step 6. Subtract your Deductions and your Exemptions from
your Adjusted Gross Income.
your Adjusted Gross Income.
The result is your Taxable Income.
Step 7. Go to the Tax Tables on page 74 of the 1040
Instructions, and find the row that has your
Taxable Income in it.
Instructions, and find the row that has your
Taxable Income in it.
Step 8. In that row, look across it until you see the column
for your Filing Status.
for your Filing Status.
The number you see in that row and column is your
Tax Amount.
Tax Amount.
Step 9. Prepare your Tax Credits.
Step 10. Subtract your Tax Credits from your Tax Amount.
The result is your Total Tax.
Step 11. Prepare your Payments.
Step 12. Compare your Payments with your Total Tax
If your Payments are greater than your Total Tax,
the difference is your Refund.
If your Total Tax is greater than your Payments.
the difference is The Amount You Owe.
If your Payments are equal to your Total Tax,
congratulations, you have aced the Income Tax
Management Game. You did not have too much
taken out of your paychecks all year, rewarding
the federal government with an interest-free loan
all year, while depriving yourself of the extra
money in your paycheck. And you did not have
too little taken out of your paychecks all year,
requiring you to have to write a check to
the government (ouch).
Management Game. You did not have too much
taken out of your paychecks all year, rewarding
the federal government with an interest-free loan
all year, while depriving yourself of the extra
money in your paycheck. And you did not have
too little taken out of your paychecks all year,
requiring you to have to write a check to
the government (ouch).
But there you go. You have just completed preparing your
IRS Form 1040.
Sign it, and mail it in. Either wait for your refund from the
U.S. Treasury, or write them that check, or simply smile
and toast yourself.
Sign it, and mail it in. Either wait for your refund from the
U.S. Treasury, or write them that check, or simply smile
and toast yourself.
This is the recipe that we are going to use for the remaining
lessons in this course. Each subsequent lesson will show you
how to do each step. But remember, the details in those
lessons are no different than "clearing the brushes" or
"fording the rivers."
The main thing is to keep following the recipe, the map.
The example below will make infinitely more sense to you if you
have a blank copy of a 1040 form to fill out as you read through
the example.
Then when you have completed the 1040 with the
numbers in the example, telling you which lines to put the numbers
in, you will be able to connect the completed 1040 to the steps in
the example, and through that process, you will be well on your
way to mastering the following lessons and really understanding
how to confidently complete your 1040 forms for the rest of your
life.
Just the savings in fees you pay preparers will more than
justify the effort you put into doing this. And if you need any help
at all in working through the example, simply ask your questions
in the "Comments" section at the bottom of this post, and they
will be answered.
lessons in this course. Each subsequent lesson will show you
how to do each step. But remember, the details in those
lessons are no different than "clearing the brushes" or
"fording the rivers."
The main thing is to keep following the recipe, the map.
The example below will make infinitely more sense to you if you
have a blank copy of a 1040 form to fill out as you read through
the example.
Then when you have completed the 1040 with the
numbers in the example, telling you which lines to put the numbers
in, you will be able to connect the completed 1040 to the steps in
the example, and through that process, you will be well on your
way to mastering the following lessons and really understanding
how to confidently complete your 1040 forms for the rest of your
life.
Just the savings in fees you pay preparers will more than
justify the effort you put into doing this. And if you need any help
at all in working through the example, simply ask your questions
in the "Comments" section at the bottom of this post, and they
will be answered.
Example : Single person with no dependents, with $70,000 wages and $10,000
investment income (dividends, interest), renting an apartment.
IRS Form 1040
Line Number
Filing Status (determined prior to the 12-step program): Single Line 1
Exemptions (determined prior to the 12-step program): 1 Lines 6a and 6d
Dependents (determined prior to the 12-step program): 0 Line 6c
Step 1. Total Income = $80,000 Line 22
Step 2. Total Adjustments = $0 Line 36
Step 3. Adjusted Gross Income = Step 1 - Step 2
= $80,000 Line 37
Step 4. Deductions = $5,700 Line 40
Step 5. Exemptions = $3,650 Line 42
Step 6. Taxable Income = Step 3 - Step 4 - Step 5
= $70,650 Line 43
Step 7. From Tax Tables (page 82)
Step 8. From Tax Tables (page 82) = $13,850 Lines 44 and 46
Step 9. Tax Credits = $2,500 Line 54
Step 10. Total Tax = Step 8 - Step 9
= $11,350 Line 60
Step 11. Payments = $14,970 Line 72
Step 12. Refund = Step 11 - Step 10
= $3,620 Lines 73 and 74a
That's it. You can now sign the 1040 and wait for your refund.
An observation for you to think about: Individuals pay people
and firms a couple of hundred dollars or more for them to do
this 12-step program for them. Each and every year of their
adult lives.
And trust me, these 12 steps apply to every single taxpayer
every year. Now, there are variations from taxpayer to
taxpayer in the amount of "brushes to clear" and "rivers
to ford."--in the amount of supplementary schedules and
forms to fill out--but those are only necessary to
complete one of these steps. They are no big deal
to complete. And the rule book--the 1040 Instructions
booklet--tells you how to complete any that you may
have to use.
How would you know that you have to
complete one? Easy. Check out the 1040 form
carefully, line-by-line. It tells you when you are
encountering a "brush" or a "river" by printing
the Schedule or Form needed for any lines
that need it.
Questions? Comments? Please use the "Comments"
section below to get them answered or acknowledged.
Assignment
Use the 12-step recipe to review your 1040 Form 1040
for 2009 or any prior year that you have on hand.
from your old 1040, write down the number for each
of the 12 steps to see how your income taxes were
computed for that year.
If you complete this assignment, enter "Assignment Completed"
in the "Comments" section below (as well as anything else
you choose).
-- ///// --
investment income (dividends, interest), renting an apartment.
IRS Form 1040
Line Number
Filing Status (determined prior to the 12-step program): Single Line 1
Exemptions (determined prior to the 12-step program): 1 Lines 6a and 6d
Dependents (determined prior to the 12-step program): 0 Line 6c
Step 1. Total Income = $80,000 Line 22
Step 2. Total Adjustments = $0 Line 36
Step 3. Adjusted Gross Income = Step 1 - Step 2
= $80,000 Line 37
Step 4. Deductions = $5,700 Line 40
Step 5. Exemptions = $3,650 Line 42
Step 6. Taxable Income = Step 3 - Step 4 - Step 5
= $70,650 Line 43
Step 7. From Tax Tables (page 82)
Step 8. From Tax Tables (page 82) = $13,850 Lines 44 and 46
Step 9. Tax Credits = $2,500 Line 54
Step 10. Total Tax = Step 8 - Step 9
= $11,350 Line 60
Step 11. Payments = $14,970 Line 72
Step 12. Refund = Step 11 - Step 10
= $3,620 Lines 73 and 74a
That's it. You can now sign the 1040 and wait for your refund.
An observation for you to think about: Individuals pay people
and firms a couple of hundred dollars or more for them to do
this 12-step program for them. Each and every year of their
adult lives.
And trust me, these 12 steps apply to every single taxpayer
every year. Now, there are variations from taxpayer to
taxpayer in the amount of "brushes to clear" and "rivers
to ford."--in the amount of supplementary schedules and
forms to fill out--but those are only necessary to
complete one of these steps. They are no big deal
to complete. And the rule book--the 1040 Instructions
booklet--tells you how to complete any that you may
have to use.
How would you know that you have to
complete one? Easy. Check out the 1040 form
carefully, line-by-line. It tells you when you are
encountering a "brush" or a "river" by printing
the Schedule or Form needed for any lines
that need it.
Questions? Comments? Please use the "Comments"
section below to get them answered or acknowledged.
Assignment
Use the 12-step recipe to review your 1040 Form 1040
for 2009 or any prior year that you have on hand.
from your old 1040, write down the number for each
of the 12 steps to see how your income taxes were
computed for that year.
If you complete this assignment, enter "Assignment Completed"
in the "Comments" section below (as well as anything else
you choose).
-- ///// --
Monday, March 7, 2011
Lesson 1 - The Organization of IRS Form 1040
The purpose of the IRS Form 1040 is to determine how much of your income is to be taxed, and how much that tax is to be.
If you are like far too many people, you simply do not understand the U.S. federal income tax system, how to best navigate it in your interests.
For instance, it is common among a disproportionately high percentage of people (not you) who get income tax refunds, that they think that they either didn't pay any income taxes (they got them back as the refund), or that...well they don't go much beyond that.
Remember: the purpose of the IRS Form 1040 is to determine how much of your income is to be taxed, and how much that tax is to be.
This one-page (front and back) form, then, should be of immense interest to you.
It should be studied and mastered so that it becomes a tool for you instead of a weapon used against you (by you). And passive disinterest in its purpose, its organization, and its content, by you, automatically turns it into a weapon against your financial interests.
So let's begin.
The IRS Form 1040 is organized into eight sections. They are:
1. Filing Status
2. Exemptions and Dependents
3. Income
4. Adjusted Gross Income
5. Tax and Credits
6. Other Taxes
7. Payments
8. Refund or Amount Owed
Note: Items marked in blue in this course are items you should focus on (in case you hadn't figured that out).
That's it. Now take a look at an IRS Form 1040. If you don't have a hardcopy available to you, you can view one here:
www.irs.gov/pub/irs-pdf/f1040.pdf
Go ahead. Look it over. It won't bite. See how it is organized into the eight sections? (nod if you really do see it; look at it some more if you don't)
Don't be concerned about the various lines in each section. Just peruse it generally to identify the eight sections. If you don't have a hardcopy of the form, you may want to print one from the above link. We will be referring to its various parts and lines repeatedly in this course. And just as a basketball or football coach advises young players to carry around a football or basktball as much as possible to increase familiarity and connection to it, the same applies here. In each case, familiarity with the tool of the game breeds increased skill on the playing field.
While we're at it, let's also get acquainted with the only other tool you will need in this Part I of the course--the 1040 Instructions booklet.
If you don't have a hardcopy of this booklet available to you, you can view one here:
http://www.irs.gov/pub/irs-pdf/i1040gi.pdf
Let's first take a tour of the booklet, to see how it is organized.
Open to the table of contents on page 3.
The first section to focus on, for purposes of your learning how to use this rulebook are pages 7, 8 and 9: Filing Requirements.
For your initial perusal of it, do the following exercise
(consider it your first assignment):
(1) Read pages 7, 8, and 9.
(2) Identify the page numbers of the rulebook for
the eight sections above in the table of contents.
Hint: Here is the answer, with one wrong page
number. Which of the eight sections below has
the wrong page number next to it?
1040 Instructions
Page Number
1. Filing Status 12
2. Exemptions and Dependents 14
3. Income 19
4. Adjusted Gross Income 25
5. Tax and Credits 33
6. Other Taxes 41
7. Payments 43
8. Refund or Amount Owed 69
(3) Go to the tax tables starting on page 74. Peruse
them to see the different filing statuses. Find
your approximate annual income in the tables
and see the different amounts of taxes you
would pay depending on your filing status.
Now grade yourself on this lesson. If you gave yourself a C or lower, study the lesson again until you get at least a B, but strive for an A. No cheating.
In the comments section, tell us what grade you got, and make any comments about how you liked or disliked the lesson, and why. Your comments after each lesson can help us make improvements in the lessons. Plus, you get extra credit if you make (clean and helpful) comments.
-- ///// --
If you are like far too many people, you simply do not understand the U.S. federal income tax system, how to best navigate it in your interests.
For instance, it is common among a disproportionately high percentage of people (not you) who get income tax refunds, that they think that they either didn't pay any income taxes (they got them back as the refund), or that...well they don't go much beyond that.
Remember: the purpose of the IRS Form 1040 is to determine how much of your income is to be taxed, and how much that tax is to be.
This one-page (front and back) form, then, should be of immense interest to you.
It should be studied and mastered so that it becomes a tool for you instead of a weapon used against you (by you). And passive disinterest in its purpose, its organization, and its content, by you, automatically turns it into a weapon against your financial interests.
So let's begin.
The IRS Form 1040 is organized into eight sections. They are:
1. Filing Status
2. Exemptions and Dependents
3. Income
4. Adjusted Gross Income
5. Tax and Credits
6. Other Taxes
7. Payments
8. Refund or Amount Owed
Note: Items marked in blue in this course are items you should focus on (in case you hadn't figured that out).
That's it. Now take a look at an IRS Form 1040. If you don't have a hardcopy available to you, you can view one here:
www.irs.gov/pub/irs-pdf/f1040.pdf
Go ahead. Look it over. It won't bite. See how it is organized into the eight sections? (nod if you really do see it; look at it some more if you don't)
Don't be concerned about the various lines in each section. Just peruse it generally to identify the eight sections. If you don't have a hardcopy of the form, you may want to print one from the above link. We will be referring to its various parts and lines repeatedly in this course. And just as a basketball or football coach advises young players to carry around a football or basktball as much as possible to increase familiarity and connection to it, the same applies here. In each case, familiarity with the tool of the game breeds increased skill on the playing field.
While we're at it, let's also get acquainted with the only other tool you will need in this Part I of the course--the 1040 Instructions booklet.
If you don't have a hardcopy of this booklet available to you, you can view one here:
http://www.irs.gov/pub/irs-pdf/i1040gi.pdf
Let's first take a tour of the booklet, to see how it is organized.
Open to the table of contents on page 3.
The first section to focus on, for purposes of your learning how to use this rulebook are pages 7, 8 and 9: Filing Requirements.
For your initial perusal of it, do the following exercise
(consider it your first assignment):
(1) Read pages 7, 8, and 9.
(2) Identify the page numbers of the rulebook for
the eight sections above in the table of contents.
Hint: Here is the answer, with one wrong page
number. Which of the eight sections below has
the wrong page number next to it?
1040 Instructions
Page Number
1. Filing Status 12
2. Exemptions and Dependents 14
3. Income 19
4. Adjusted Gross Income 25
5. Tax and Credits 33
6. Other Taxes 41
7. Payments 43
8. Refund or Amount Owed 69
(3) Go to the tax tables starting on page 74. Peruse
them to see the different filing statuses. Find
your approximate annual income in the tables
and see the different amounts of taxes you
would pay depending on your filing status.
Now grade yourself on this lesson. If you gave yourself a C or lower, study the lesson again until you get at least a B, but strive for an A. No cheating.
In the comments section, tell us what grade you got, and make any comments about how you liked or disliked the lesson, and why. Your comments after each lesson can help us make improvements in the lessons. Plus, you get extra credit if you make (clean and helpful) comments.
-- ///// --
Introduction
Welcome to Part I of the DaGray Income Tax Management Course.
Part I is designed to teach individuals to prepare and understand their own annual income tax forms.
Confuscious said, "Give a man a fish and he will eat for a day. Teach a man to fish and he will eat for a lifetime.
This course will teach you "how to fish."
Believe it or not, the understanding and mastery of one’s income tax preparation can be the gateway to better management of one’s financial planning for future goals (college expenses, retirement, health care expenses, unseen emergencies), as well as one’s on-going budgets for daily living.
This course will teach you the rules of the game that is the income tax preparation process. They are not as hard as they are made out to be; nor as intimidating as many people feel about them.
And more, it will teach you the basics of the income taxation concept. With this framework of basic understanding, the whole game becomes much easier to learn and master.
Simply stated, your goal is to minimize the amount of your income that the federal government taxes.
Think about it: you are in a game with the government to determine how much of your income it is going to take from you. Therefore, your goal in this game is to minimize that amount.
The playing field is the IRS Form 1040.
The rulebook for the game is taken from the Internal Revenue Code. Not the entire 44,000 pages of the IRC, but the 100 or so pages in the 1040 Instructions booklet that is published each year.
Dont worry. You don't have to learn all 100 pages of the rulebook. You just have to know how to use it as a reference book, just as you don't have to learn all the pages of, say, a dictionary. But you do have to know how to use it as a reference book.
So, in this course you will learn the playing field--the IRS Form 1040-- and you will learn the rules--the 1040 Instructions booklet
And since you now know the goal of the game, you will be prepared to start playing the game of preparing and understanding your income tax preparation. And you will be playing to win: to minimize the amount of your tax obligation.
Have fun. Keep telling yourself that you can do this. Because you can. You just have to want to do it.
-- ///// --
-- ///// --
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