According to The Standard Federal Tax Reporter from the legal publisher Commerce Clearing House (CCH), the income tax code is over 70,000 pages in length when compiling the Internal Revenue Code along with IRS regulations, revenue rulings, tax court case precedence, and other clarifications.
The Government Accountability Office estimated in 2002 that individual taxpayers may have overpaid by $945 million by not itemizing deductions. This only includes missed deductions from Schedule A and doesn’t include Schedule 1 or any other forms.
The Internal Revenue Code is long and complex. If you aren’t aware of the tax laws or strategies and don’t include the forms or deductions, then you’re overpaying in taxes. This is why working with a knowledgeable and experienced tax professional pays off.
Although you’re working with a licensed tax professional, it’s still helpful to know how to read your income tax return. While preparing your income tax return is a complicated matter, reading your income tax return doesn’t have to be complicated. Your refund due or amount you owe is an equation that can be presented in easily understood terms.
Your income tax return starts by calculating your total income, which is the result of your combined earned income and unearned income. Earned income includes wages from your employer or from self employment. Unearned income commonly includes investment income such as interest, dividends, and capital gains. Unearned income also includes items such as IRA distributions, pensions, annuities, social security, as well as any passive income from business or real estate investments.
After we calculate your total income, then we deduct adjustments from your Schedule 1. This commonly includes retirement account contributions and student loan interest. We then arrive at your adjusted gross income. AGI is a frequently used criteria to qualify for tax incentives and financial underwriting. It’s important for you to know your AGI.
Once your adjusted gross income is calculated, then we must include your itemized deductions or standard deduction and charitable contributions, as well as the qualified business income deduction. The standard deduction can only be claimed if you don’t itemize deductions. We’d itemize deductions if their total value exceeds the amount of your standard deduction. The qualified business income deduction can only be claimed by business owners within certain industries or under certain income thresholds. Adding these deductions enables us to arrive at your taxable income.
Now it’s time to calculate your tax by using the appropriate worksheets. Once we calculate your tax, we still have further adjustments by calculating items of additional tax and tax credits. We’ve finally arrived at your total tax. However, we can’t forget to include payments made towards your tax liability.
Withholdings from your W2 as well as quarterly estimated tax payments you made through the course of the past year are factored in. The earned income credit, child tax credits, and an education tax credit are also included in this section if you qualify. These items add to your total payments.
We’ve finally come to a conclusion and have either established the amount you owe or your refund due. We can enter your bank details, file the return, and wait for the fun to start again next year!
Remember, while the story of reading your income tax return can be simplified, preparing your income tax return is a complex process that’s best left to a licensed tax professional such as a Certified Public Account or Enrolled Agent. Both CPAs and EAs may become licensed with the IRS with the same practice rights in tax matters and should be adequately equipped to prepare your income tax returns.
For help preparing your income tax returns, or questions about your income taxes, please contact me, John Boyle, for further support.