This free tax course is based on the IRS Publication 17 and other relevant IRS publications. Each chapter of this free tax course supplements and compliments specific IRS publications for the most current tax year possible. When studying this free tax course, the text and the IRS publication extracts must be read together for a full understanding of this free tax course.
Chapter 1 of our free tax course outlines tax filing information. Tax filing information gives the overview of the Form 1040 or the US Individual Income Tax Return as well as filing requirements for taxpayers.
First of all, let's examine what filing tax return means. Filing tax return (aka filing income tax return or filing federal tax return) means sending your tax return to the Internal Revenue Service or the IRS.
Gross income is defined as total income before taxes, deductions, credits, and allowances have been deducted. Gross income is shown in the middle section of the first page of tax form 1040.
Different tax filing requirements exist for dependents. That means if a taxpayer can be claimed as someone else's dependent, then they are subject to different tax filing requirements from ones previously discusses.
Other situations when a taxpayer must file a tax return are outlined in IRS publication 17. Below is a summary of when a taxpayer needs to file a tax return.
In the past, people had to file their income tax returns on paper. Nowadays with the introduction of IRS' electronic income tax filing system, electronic filing (e-filing) is easier than filing on paper.
Social security number is very important on a tax return. Social security number is one of the first things the IRS looks at when matching and verifying information.
Your accounting method determines how you report your income and expenses. There are two main accounting methods when filing tax returns. The cash accounting method is the most often used by most taxpayers.
Where to file your tax return depends on where you are living when you file your tax return. Below is a table of different addresses and zip codes you need to use when sending your tax return to the IRS.
Tax filing status or just filing status is very important in a tax return. A taxpayer can only have one tax filing status. There are five tax filing status to choose from and the right tax filing status is not always obvious.
There are five different tax filing statuses according to the IRS. A taxpayer can only have one tax filing status even if he or she qualifies for more than one tax filing status.
When a taxpayer is married and not considered unmarried, the taxpayer can either file his or her tax return using the married filing jointly tax filing status or married filing separately tax filing status.
If you are married but do not want to file your tax return jointly with your spouse, you can choose to file your tax return using the married filing separately tax filing status.
The cost of keeping up a home is needed to figure out if a taxpayer qualifies to file his or her tax return as a Head of Household if he or she meets other requirements.
To qualify to file a tax return as a Head of Household, a taxpayer usually has to name a qualifying person on his or her tax return whom qualifies him or her as a Head of Household.
In general, a married person cannot file as a Head of household on his or her tax return. However, there are times when a married person can use the head of household tax filing status.
In Chapter 3 of the free tax course, you will learn about exemptions and dependents. There are two types of exemptions for tax purposes; personal exemptions and dependent exemptions.
What are income tax exemptions? Income tax exemptions reduce your taxable income. You may be able to take a tax exemption for
yourself, your spouse (if married filing jointly), and each dependent.
Each taxpayer is generally allowed one tax exemption for himself or herself. If the taxpayer is married then one tax exemption is allowed for his or her spouse.
You are allowed one exemption for each person you can claim as a dependent. That means you need to figure out first if you can claim someone as a dependent before you claim the exemption on him or her.
In order to claim tax exemption for a dependent, there are tests that your or the dependent must meet. In general you can claim a tax exemption for a qualifying child or a qualifying relative only if these three tests are met.
The basic definition for qualifying child dependents is used in determining if a child is a qualifying child for other tax purposes other than dependent tax exemption purposes.
For dependent tax exemption purposes, the tests for qualifying child are explained below. Either these tests for qualifying child dependents must be met for a taxpayer to claim tax exemption for a dependent or the tests for qualifying relatives must be met.
In most cases, because of the residency test for qualifying child, a child of divorced or separated parents is the qualifying child of the custodial parent.
When more than one person files a tax return claiming the same qualifying child then the IRS uses the Tie Breaker Rule to decide who to give the tax exemption to.
For a person to be a qualifying relative of a taxpayer, the four tests for qualifying relatives below must all be met. If the four tests for qualifying relative dependents are met, the taxpayer may claim a tax exemption for dependent as well as personal tax exemptions.
There are four tests for qualifying relative dependents. If your dependent fails one or more tests to be a qualifying child, he or she may pass the tests for qualifying relative dependents and you can then claim him or her as a dependent for tax exemptions.
Chapter 4 of the Free Tax Course deals with wages, salaries, tips, etc. These wages are often reported on W-2 tax form or form 1099-MISC for miscellaneous income.
Below are different types of income for tax filing purposes. If you are retired to file a tax return, you must report all the taxable income (income subject to tax) you received during the tax year on the IRS tax form 1040.
The Form W-2 is used to report earned compensation including wages and salaries. The Form W-2 is explained below including frequently asked questions about W-2 forms and what you can and cannot do with the W-2 Form.
Below is the list of what taxable compensation include. Employers generally include the following types of taxable employee compensation in box 1 of the W-2 form.
It is important to keep good record of tip income. Below is the tip income reporting policy advised by the IRS for tax filing purposes including how to report tip income to the employer.
Since a lot of tip income are in cash and are often untraceable, some people think it is ok to not report tip income. Below are what would happen if you don't report tip income.
There are other income that must be included on line 7 of the 1040 tax form for wages, salaries, tips, etc. These other income are not 'other income' that must be entered on line 21 of the 1040 tax form under "Other Income".
Below are interest and dividends explained for tax filing purposes. Interest and dividends are reported on the tax form 1040 on the lines just after wages, salaries, and tips.
Interest and/or dividends may also be reported (usually by a stockbroker or mutual fund) on a substitute Form 1099 INT or substitute Form 1099 DIV. These forms do not look like the federal forms.
Most interest income is taxable interest. In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable interest income, even if you have not withdrawn it.
Some types of interest income are exempt from federal income tax. If you are required to file a tax return you must show any tax exempt interest you receive for informational purposes only.
Dividends are distributions of money, stock or other property paid to you by a corporation. Dividends may also be reported to you on a Form K-1 from a partnership, an estate, a trust, or an S-corporation.
Ordinary dividends are the most common type of distribution from a corporation. Ordinary dividends are paid out of the earnings and profits of a corporation and are ordinary income to the taxpayer.
Mutual funds (regulated investment companies) and real estate investment trusts or REITs pass capital gains to their investors in the form of capital gain distributions.
A nondividend distribution is a distribution that is not paid out of the earning and profits of a corporation. A nondividend distribution reduces the basis of your stock.
The definition of alimony according to the IRS may be different from other definitions of alimony. The table of Alimony Requirements (Instruments Executed After 1984) can be found in the IRS publication 17 page 128.
Unemployment compensation includes benefits to unemployed individuals that a state or the District of Columbia paid from the Federal Unemployment Trust Fund.
Chapter 6 of the Free Tax Course is all about IRS' standard deduction versus itemized deductions. Choosing standard deduction or itemized deductions and how to claim them right are one of the most important parts of preparing your tax return.
If the total amount of your itemized deductions is higher than your standard deduction, you will probably want to itemize. By itemizing, you reduce your adjusted gross income and have a lower taxable income.
When deducting medical expenses on your tax return, you need to know which medical expenses are tax deductible and which medical expenses are not tax deductible.
The medical expenses shown in the table below are not tax deductible and cannot be included when calculating the amount of tax deduction on your medical expenses allowed.
There are other medical expenses that are tax deductible. See the tax deductible medical expenses chart here. Below are other common medical expenses that many taxpayers question about their tax deductibility.
In order for a tax to be deductible by you, the tax must be imposed on you and must be paid by you during the tax year. You report deductible taxes on line 5 through 9 of Schedule A.
Below are some taxes and fees that are generally not deductible. The Non deductible taxes and fees table below is included in the IRS Publication 17 page 147.
If you have any debts, you will have many types of interest payment you make. Some interest payments you pay are tax deductible while others are not. Below is information on what interest payments are tax deductible.
In Chapter 7 of the free tax course, you will learn all about income tax and withheld taxes as well as how to figure out your income tax and understand how your tax is paid by withholding.
Income tax is a percentage of your taxable income. You figure your taxable income by subtracting either your standard deduction or your itemized deductions and your exemption amounts from your adjusted gross income or AGI.
If your taxable income is less than $100,000, use the federal income Tax Table to find your tax liability. The federal income tax table can be found in the 1040 Instructions booklet.
If your taxable income is $100,000 or more, use the Tax Computation Worksheet. Choose the section for your tax filing status to compute your income tax.
What are withheld taxes? & What does taxes withheld mean? Withheld taxes are tax payments withheld from your income and made to the IRS in your name during the tax year by the payer of the income.
Taxes must generally be withheld from wages, from some gambling winnings and in certain cases from interest and dividend payments. For some types of required withholding, the withholding rate is also set by law.
In this Chapter 12 of free tax course, we discuss depreciation. In order to discuss depreciation, we first define different types of properties including real properties.
MACRS applies to most tangible depreciable property placed in service after 1986. You must use MACRS to depreciate all real property you acquired before 1987 that you converted from personal use to a business or income producing use after 1986.
To figure your depreciation deduction, you must determine the cost or other basis of your property. If you bought the property, the basis is usually its cost.
Under MACRS, property is assigned to one of several property classes. These classes establish the recovery period (the number of years) over which you recover the basis of your property. The class the property is assigned to is generally determined by its class life.
In this chapter of free tax course, you will learn about rental real estate, rental income, rental expenses as well as deduction limits based on property use, personal use of a vacation home or dwelling unit, limits on rental losses and how to report rental income and expenses.
You are taxed on the amount of rental income that exceeds your related expenses, including depreciation. If your expenses are greater than the rents you receive, you have a loss.
Rental income is any amount you receive for the use or occupation of property. In addition to normal rent payments, there are other amounts that may be rental income.
Below are examples of improvements that can be deducted. Caution: work you do (or have done) on your home that does not add much to either the value or the life of the property, but rather keeps the property in good condition is considered a repair, not an improvement.
As you learned in Chapter 12 of the free tax course, you can deduct some or all of what you paid for income producing property by taking yearly depreciation.
You may be able to take a special depreciation allowance (in addition to your regular MACRS (Modified accelerated cost recovery system) depreciation deduction) for qualified property placed in service during the tax year.
If you have any personal use of a vacation home or other dwelling unit you rent out, you have to divide your expenses between personal use and rental use. Rental use is limited to the days the property is actually rented.
If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose.
How you figure your net rental income or loss for a dwelling unit used for both rental and personal purposes depends on whether the dwelling unit was used as a home and, if used as a home, how many days the property was rented.
Rental real estate activities for which you receive income mainly for the use of tangible property rather than for services are considered passive activities.
If you rent out buildings, rooms or apartments, and provide only heat and light, trash collection, etc. you normally report your rental income and expenses in Part I of Schedule E.
A partnership is an association of two or more people to carry on a business for a profit as co-owners and share in the profits and expenses for the business.
As discussed previously on Other Schedule E Income, Schedule K-1 reports to you your share of the income, deductions, credits, and losses of various entities that pass through income.
Generally, you can deduct contributions you make to a traditional individual retirement agreement or IRA as an adjustment to income on line 32 of Form 1040.
You can generally deduct up to the amount of your IRA contributions. As you learned previously, your IRA contributions are limited to the smaller of your total taxable compensation.
If you (or your spouse) are covered by an employer retirement plan at any time during the year for which contributions were made, the amount of your IRA deduction may be reduced or eliminated.
Although your deduction may be reduced or eliminated, you can still contribute the full amount permitted by law up to $4,000 ($5,000 if age 50 or older) or 100% of your taxable compensation, whichever is less, to your IRA.
If you moved to a new home because you changed job locations or started a new job, you may be able to deduct some of your moving costs as an adjustment to inocme.
To qualify for this moving expenses tax deduction, your move must be closely related to starting your new job, your new main job location must be a required distance from your former home, and you must work a required number of weeks.
If your move meets the relationship test, distance test and time requirements, you can deduct the reasonable expenses of moving your personal effects and household goods and of traveling (not including meals) to your new home.
If your employer does not reimburse you for your moving expenses, deduct all allowable expenses. If your employer reimburses you under a nonaccountable plan, your reimbursement will be included in box 1 of your W-2.
You can claim the following adjustments only if you are self employed. See Chapters 14 and 17 of the free tax course for a discussion of self employment and the tax consequences of being self employed.
The following adjustments are either easy to figure or do not apply to many taxpayers. So that you can determine whether any of these adjustments apply to you, they are briefly described in the following discussions.
If you are an eligible educator you can deduct up to $250 of qualified expenses as an adjustment on line 23 of Form 1040. Also, the letter "E" should be entered in the space to the left of the amount.
If you withdraw money from a time deposit savings account (such as a certificate of deposit) before the maturity date, your financial institution may charge you a penalty of some of the interest your received.
You can deduct, as an adjustment to income, any payments you make to or on behalf of your spouse of former spouse, if your spouse must report these payments as alimony income.
This chapter of the free tax course deals with other taxes not yet covered. After you have finished calculating your tax from taxable income and have subtracted your total credits from the first section of page 2 of form 1040, you next have to add in various other taxes to arrive at your total tax.
The tax laws gives special treatment to some types of income, allow special deductions for some types of expenses, and allow credits for certain taxpayers.
If you received $20 or more in cash and charge tips in a month from any one job and did not report all of those tips to our employer, you must report the social security and Medicare taxes on the unreported tips as additional tax on your tax return.
You must complete Form 1040 Schedule H, Household Employment Taxes, if any of the following apply you paid any one household employee cash wages of $1,500 or more in the tax year.
Below is a list of additional taxes that are less common. You enter on line 63 of the tax Form 1040 the added total of all taxes discussed in this chapter. You also include on line 63 the following less common additional taxes.
After you have figured your income, calculated your income tax, claimed your nonrefundable credits and added any additional tax you owe, you are ready to determine whether you are due a refund or if you owe an additional amount.
Who must make estimated tax payments for next year? You need to determine at the beginning of the tax year whether you must make estimated tax payments.
The flow chart below helps you determine if you have to pay estimated tax to the IRS. Check out the IRS publication 505 (page 19 table 2A, titled Do you have to pay Estimated Tax?) for withholding and estimated tax.
You do not have to make estimated tax payments until you have income on which you will owe the tax. If you have income subject to estimated tax payments during the first payment period, you must make your first payment by April 15.
You should pay enough estimated tax by the due date of each estimated tax payment period to avoid a penalty for underpayment of estimated tax for that period.
Each installment of the required annual amount must be sent with a Form 1040-ES estimated tax payment voucher. If you made estimated payments during the prior tax year, the IRS will mail you a current tax year Form 1040-ES.
Most employers must withhold social security tax from your wages. If you work for a railroad employer, that employer must withhold tier 1 railroad retirement (RRTA) tax and tier 2 RRTA tax.
Can my penalty for underpayment of estimated tax be waived? The IRS can waive the penalty for underpayment if it determines
you did not make a payment because of a casualty.
If you have a balance of tax due on line 76 and cannot pay all or part of it with your tax return, you can ask for an installment agreement which will allow you to make monthly payments of the amount you owe.
If you owe past due federal tax, state income tax, child or spousal support, or certain federal non tax debts such as student loans, all or part of any refund due you may be used to pay (offset) the past due amount.
What are the IRS rules for filing for tax extensions for people living outside of the US? You are allowed an automatic 2 month tax return extension (until June 15) without filing the Form 4868 to file your tax return.
Errors on your tax return may delay your tax refund or result in notices being sent to you from the IRS. If you discover an error, you can file an amended federal tax return or claim for refund.
Mail your return to the Internal Revenue Service Center for the place where you live. If you are filling Form 1040X amended return in response to a notice you received from the IRS, mail it to the address shown on the notice.
Generally, you must file your Form 1040X within 3 years after the date you filed your original tax return or within 2 years after the date you paid the tax, whichever is later.
If you receive a tax refund of your amended return, interest will be paid on it from the due date of your original tax return or the date you filed your original return, whichever is later, to the date you filed the amended return.
After you have completed the background information on Form 1040X, note that the lines 1-15 have 3 columns labeled A, B, and C. Below is an explanation of how to fill out the 1040X form.
There are two ways of filing a tax return, by paper or electronically. Electronic tax filing or IRS e-file uses automation to replace most of the manual steps needed to process paper tax returns.
As with a paper return, you may not get all of your refund if you owe certain past due amounts, such as federal tax, state tax, a student loan, or child support.
The federal tax Form 8453 is the US Individual Income Tax Declaration for an IRS e-file Return and it is the follow up form required by the IRS unless you elect to use an electronic signature using a personal identification number (PIN).
On the top of Form 8453 notice the Declaration Control Number (DCN). The DCN is a 14-digit number assigned by the ERO (Electronic Return Originator) to each return.
Once you have signed the tax form 8453, the ERO cannot make changes to this document that exceeds specific tolerances established by the IRS without preparing a new form.
The self select PIN allows taxpayers to electronically sign their e-filed return by selecting a five digit PIN. The five-digit PIN can be any five numbers except all zeros.
When your tax return is completed, you electronically "sign" the tax return by entering your self selected PIN using the computer keyboard. If you are filing a joint return, both taxpayers must sign using a PIN.
Beginning in the year 2007 (tax year 2006) you can split your tax refund and have the money deposited in up to three designated different accounts at banks or other financial institutions.
If the IRS acknowledgment of the electronically filed return indicates that the return was not accepted, it may be because the complete transmission was rejected.
There are some indicators of fraudulent activities that are documented by the IRS. It is a good idea to be aware of them so that you can avoid sending nonstandard forms to the IRS with your return or conduce yourself in a suspicious manner.
As of 2007 tax year, forty two states (including District of Columbia) have individual income tax and require income tax returns from individuals required to file.
This free tax course is not
affiliated with the IRS or any federal agencies in any way. All materials are for information only. If you
have any tax questions, you may want to consult your tax attorney. This website only serves as a
note or aid to other free tax courses.
