Before you can start tax planning, knowing about taxes is a must. Mister Chuck go through an Individual tax return breaking down each part of the return.
Publication 17, Your Federal Income Tax (For Individuals)
Hello, I'm your host, Mr. Chuck. I'm a retired accountant, turn truck driver, I have reduced my debt to zero in a short matter of time, debt reduction to achieve financial freedom takes commitment, confidence, determination, taxes, before you can start planning about your taxes, knowing about your taxes is a requirement, I'm going to go through the individual income tax return for the United States and break it down in every part. And there's two things that you can do for your tax planning right off the bat. And the first one is understanding how the taxes go together. And all the different schedules and to keeping good records, keeping your receipts and keeping track of your records and your income and your expenses. Especially those of you who receive a 1099. If you don't know what a 1099 is, you're probably never received one. If you're getting one for the first time, you probably learned the hard way. What it is. The 1099 means you're self employed, which means you pay all your own expenses, and you get no benefit from your employer. They're just giving you the gross amount of the what they owe you and with no withholdings and no deductions. Before I get into the return. I saw a story in Facebook the other day and had like I thought it was kind of funny, but it makes a good point. So here it is. There is a gentleman who parked his Rolls Royce out in front of a bank. s so let's just say doesn't matter what city but it was a large city like New York City la in the downtown area. Anyone into the bank, and he sought to find the loan officer, which he did. And he asked them, I want to borrow $5,000, I'm gonna travel overseas, I'm going to be gone for about a week, maybe two weeks, and I need $5,000 to pay my expenses. And I don't have the money on me right now. And I said, Well, we can't just loan you the money, we would, you know, need some collateral from you or more background information. And he offered while I have my Rolls Royce parked out front is worth about $300,000 is paid off in full. I have all the required paperwork, title, everything insurance, and here's the keys. I can just give you the car when I come back. Then I get the car back when I pay the loan back. They all thought in the bank that was pretty silly. And they kind of laughed at him. And he went they gave him the $5,000. And he left and went on his trip a little bit later that day. They went out front saw the car, they pulled it around and parked it in the parking garage. About a week and a half later, he returns with his $5,000. And he paid him $5,015.25 or something around like that, which was the $15.25 was interest for the two weeks. And when he paid it off, they said Sir, we did some research on you and we found out who you really are. You're a multi millionaire. And why did you need to buy? borrow $5,000 when you should have had that money easily accessible. He said, Well, where else could I park my car for $15.25 for the week and a half I was gone. So that's good point. He was planning ahead and figure it out. It was cheaper for him to borrow the money and pay the interest than it would be to put his car in a parking garage and pay the parking rate for the week and a half. He was gonna be gone. That's planning. That's the point. I thought man, that guy. That's why he has a lot of money. He thinks outside the box. Let's get started. The only resource you need. If you're gone to learn about your income taxes. This is the individual income tax or the form 1040. There's other form 1040 ez 1040 Whatever a 10 40x. But then we're gonna be talking about the 1040 how it put together and how it's made up. For those of you who want a guide or an major instruction manual for all your individual tax return questions, publication 17. income taxes for individuals is the place to go. As for federal income tax, it gives you an overview of everything you need to know to prepare a tax return. When I first started learning about income taxes, publication 17 was a requirement for me to read and understand. By the time I got done with the force, first income tax course I ever took, I took the h&r block income tax return, I never worked for h&r block, but I did have my own income tax preparation. And that is the handbook you should have to refer to, for all federal income tax questions you might come up with or come across this a note. It's not federal tax law. And there may be some mistakes in there. And if you follow that, and if you follow it with there was a mistake. It's your responsibility to know that that is not correct. This a disclaimer. And the IRS tells you the same exact thing. It's been a few years since I actually was paid professionally to do an income tax return. Since I'm now a truck driver, but I do my own every year. I know all the schedules. I know everything that's involved. But as I looked at my return for that 2020 year, I noticed they changed the layout of it somewhat. I'm looking at the 1040 us individual tax return for year 2020. It's got your name, first name, last name, middle initial, your spouse's name, your address, you know, you put in your social security numbers, your standard deduction, you know, you claim yourself, you claim your spouse, and any dependents you might have. You list their name, their last name, their social security number and a relationship to you. Now there are rules about who you can claim as dependents and who don't qualify as dependents, such as if you have elderly parents, and if they live with you, and you should supply more than half of their support. Generally, if they live with you, and you pay for all their meals, and you buy him some clothes, you're good to go, you can claim it as a dependent. But if they don't live with you, and you give them money to pay the rent, or whatever, they may not qualify as dependent, so you got to read the details. And that's where publication 17 would come in. So we dropped down. That's the basic, you know, the starting of every return. Now, I know a lot of people use tax software, which is great because your name and your social security number guide got carried through to every page on every return at the top. So if you're doing that manually, you have to be writing the same information over and over and over. And if you do it manually, you can make a math error. If you do it on computer and you have software, then he can the long as you enter the correct numbers, the math will be done right. And the numbers will be carried to the correct place. That was probably the hardest thing for me to learn it was all the different schedules and what goes where, okay, it starts out line one wages, salary tips, you know, you just add them all up, plug them in there. If you have software, you just add each individual w two for you and your spouse, and then the computer does a foyer. Then entrust tax exempt qualified dividends IRA distributions pension. Basically the front of return is given you your income, capital gains a loss Schedule D and you have your total income. Then you have adjustments to income and this is where it changed a little bit they have created a schedule one gives you your additional income which is your self employment income from Schedule C, Schedule E and schedule F. We're going to talk about all these schedules and the total of these con on to skip Module One, and then you have unemployment income. So they took it off the face of the 1040. And they put it on schedule one, which is the after the 10. For 40 is the first thing right behind that, that you have to put everything in the proper order. If you look at the top right hand corner was says the year attachment sequence number. Oh 101 means that's the first thing you put behind the 1040. And you can just look at any schedule, and it's got a number on there, and you put them in that order. That's what the IRS wants you to do. Then we have part two, adjustments to income adjustments would be IRA contributions, self employed, simplified employers plan, Simple Plan, anything like that self employed health insurance, half of your self employment tax on that comes to the front of the page to line 10 a. Then after that, we have your standard or itemized deduction, which is Schedule A, and it tells you that on the form, then has qualified business deductions, and then it has your taxable income. The last episode when I was talking about you retire in December, and then you start withdrawing money out of your IRA or your 401k in January, this is the number I was talking about. So if you're no longer gonna be working for wages, you would subtract your W two income from your taxable income. And then you replace that with the amount of money you're going to take out your IRA. And then you look at that, and to the tax table to figure out how much tax is you gonna pay, or what tax bracket you're going to be in. And then schedule two is additional taxes, which would be mostly from self employment. And my wife's case, or household employment taxes, which is another form of unemployment or self employment tax, where they're referring to as other taxes. And then part one of this form is an alternative minimum taxes, which you would you know, know about that if you ever got nailed by it. And then schedule three, or four and are different credits, there's two different things that help you reduce your taxes, deductions, which reduces your income and or a tax credit, that reduces your Tax. Tax credits are better because as $1 for dollar reduction, the deductions only reduce your income, and then you apply the tax rate after your income is reduced. So we got a 1040, then you schedule one schedule to schedule three, which are all those together, or just where you bring in totals. So on schedule one, if you and your spouse work you got to W twos is the total above wage w twos. If you have multiple schedule C's, it's the total of all your schedule C's added together the bottom line. So that's what the 1040, schedule one, schedule two and schedule three is made up off. In fact, they made that more complicated. It used to just go to the front of the 10 40k. Schedule A is your itemized deductions. itemized deductions are things that the IRS or the government allows you to deduct from your income. There's either or you can take the standard deduction, which is the dollar amount they are giving you. Or you can take the itemized deductions, the actual amount that you paid for these particular items. They're made up of medical, which has to exceed seven and a half percent of your federal adjusted gross so unless you have a major medical expenses, and you paid for them all in the same year, and yet exceeds you seven and a half percent of your federal Jester gross and then that excess is a deduction, real estate taxes on your home, mortgage interest on your home charitable contributions, and other miscellaneous which would be some employee business expense that you paid that year. employer did not pay. And that's got to exceed 2% of your federal Adjusted Gross. So what these limits are is knocking out people who are trying to cheat. They're saying, if you didn't spend at least this much, we're just gonna give it to you. And we're gonna knock that out. But if you spend more than that, then maybe we might need to look at it down the road and question it and see what it's really all about. And you got to put a detail in what makes up these dollar amounts. Medical is at hospitals, a doctor is a dentist, his prescriptions, all those breakouts. So the best tax planning strategy you can do is keep all your receipts for everything you think might be a deduction on your return. So Schedule A, you got to know what's on schedule a medical, mortgage interest, real estate taxes, charitable contributions, and miscellaneous things that your employer did not reimburse you for that you paid for while you were working. And there's other things, preparation of your tax return. And there's some other things get publication 17 can help you figure out those items that I don't remember what they are off top my head at Schedule A. Schedule B is where you list all your interest income, and your dividend income. It used to be if you had more than $400 in interest or dividends, you had to do a Schedule B and then those totals go where you give a detailed listing of what where you got the money from, and then those totals goes to the front page of the tab 40. or up to schedule C or self employment. Schedule C is a income statement for your business. So if you have an accountant, and they're doing an income statement, a balance sheet statement of cash flow, for example, you when you get your December income statement or financial statements from your accountant, you basically have your schedule C. Now there may be some things that are not deductible on Schedule C, that it's on your income tax statement, or things may be deducted differently such as depreciation, your accountant may be doing straight line depreciation on your assets on your financial statements. And he might be using the accelerated method for your income tax return. Or he may be 179, expensing some of those assets where he didn't do it on your income statement. So it's not gonna be a perfect match, it's gonna be somewhat close, it may not be dollar for dollar match. So just be aware of that schedule. See, if you have more than one business, then you need to do more than one Schedule C, each Schedule C. Each business has its own schedule C. So if you have a business and your wife has a business, you got to separate those. The reason is, when you do self employment taxes, you got to pay, your wife's got to pay, and you got to pay based on your income, and you only pay on a certain amount of your income. If you exceed that, then you don't pay anymore. So it's got to be broken out for you. If you have multiple businesses, you have multiple schedule C's, your spouse, if your spouse got multiple business, she's got multiple schedule C's. Now we get to Schedule D, Schedule D is a capital gains and loss. So if you invest in the stock market, or invest in anything, you buy it, you hold it, you sell it, when you sell it, you determine what your purchase your sales price, less your purchase price, less any expenses, you got a gain or loss. You put all your gains together and you got to categorize them. Long term, short term. You add up all your short term gains, you add up all your short term losses, you net them together, you do the same thing. Long term gains, long term losses, you net it together, you add them together, goes to from Schedule D goes to page one. Now, capital gains has their own tax rate. Maybe it won't affect your tax return. Depending on your overall income, you may be at a zero rate, you may pay 10%, or you may pay more. That's the Schedule D separates capital gains and losses. If you have an overall loss, $3,000 of that loss can be deducted on that year, and the remaining losses carry forward. So you got to keep track of that. Also, Schedule D. Now we're up to Schedule E. Schedule E is income from rental properties. And this would be a great way to have passive income. Why is rental property not included on Schedule C, because it's treated differently for taxes, Schedule E, you do not pay self employment tax, that's what makes it good. So if you're working a full time job, or you have a schedule C business, you have rental property. And that rental property is different from your business, it's treated separately. So if you have a profit from that, that profit is only taxed as ordinary income, and as not going to be subject to self employment taxes. Generally speaking, because of depreciation that the IRS allows you to take, you may have a positive cash flow on rental property. But for taxes, you may have a loss, that loss offsets other income on your tax return. That's what makes it a such a great investment money that you know, you got to buy the property, you got to manage the property, you got to collect the rent and you got to do maintenance, all those are expenses, income and expenses. If that turns and then you apply depreciation, you may have a loss, and then that loss is carried to the front of your tax return and offsets other income, thus lowering your taxable income. All these schedules have other schedules that may attach to them, like Schedule C, as a schedule as E, self employment tax. And again, that's sequence number 17. So you got to make sure you put an order. So you do a schedule s e per person. So if you have two or three businesses, you net out the profit or loss from all the two or three businesses, and then the profit comes forward are the laws to schedule s E, where you compute your self employment tax, half your self employment tax become a adjustment to your income. Why? Because if you were an employee, your employer pays half of it, and you pay half of it. So the same things here, they're not going to allow, they're going to give you a adjustment on your income taxes for paying all of the self employment taxes, which makes sense. And then we have other business expenses, schedules like their 8995 qualified business, income deduction, simplified computation. And now we have schedules for all the credits. And I'm not going to go through all of those craft form 7202 credits for sick leave and family leave for certain self employed individuals. There's all kinds of schedules. And as you go through the return, and as you do it, they have on the return at their appropriate places, different schedules that may attach to the form you're working on. That's income tax basic understanding of the back of one moment, if you listen to this podcast using an apple podcast app, please rate and review this podcast for all your non Apple users. You can download iTunes on a Windows machine and go to the upper left hand corner, select podcast, do a search, reduce that increase wealth, you can then rate and review the podcast and also follow the podcast. I appreciate any feedback that I may get. There's one more schedule I didn't talk about that schedule F which would be your farm income and expenses that you report. And again, it's on a different schedule because it's to treat it differently for taxes. My final thoughts the best tax planning can do is one, understand what makes up your tax return and what goes into your tax return. And number two, keeping the receipts for everything you think that may affect your tax return. If you have a business, keeping all your income and track of all your expenses for your mortgage, your hospitalization, your medical and miscellaneous unreimbursed business expenses you may have. If you know somebody who has some credit card debt problems, and you want to help him out, please refer him to this podcast, I would really appreciate it the best place you can find information on what to keep track of for your tax return and to get a better understanding of what makes up your tax return is publication 17. federal income tax for individuals and I do have a link to that in my show notes. You can get a PDF, we can read it through your computer, or you can go to irs.gov and order publication 17 and they will mail it to you