By The Galecki Financial Management Team
During tax season, many of us navigate the complexities of our annual filings with a mix of hope and perhaps a touch of apprehension. But what if your tax return wasn’t just a look back at the past year, but a valuable road map for your future financial planning? As Fee-Only wealth advisors, we believe your tax return holds crucial insights that can inform and enhance your broader financial planning strategy.
By partnering with a Fee-Only professional, you gain a strategic ally who can translate your tax situation into actionable steps toward a more financially efficient and profuture.
In plain language, let’s decode the key components of your 1040 tax form.
The 1040: Calculating Your Final Tax Picture
The 1040 is the document you submit to the IRS each year to file your annual income tax return. It’s where you record your income, deductions, and credits to decide your final tax responsibility.
Source: IRS
Here is an explanation of some of the important concepts on the 1040:
- Line 1: W2 Salary is input on line 1. The subcategories include items such as household employee wages and tips.
- Lines 2 and 3: Interest and Dividends. These lines report interest and dividends earned from your bank accounts or any other non-retirement investment accounts.
- Line 4a: IRA distributions. The entire amount of distributions you received from your Individual Retirement Accounts (IRAs), both traditional and Roth, is shown on this line. This is where Required Minimum Distributions (RMDs) are listed.
- Line 4b: Taxable amount. The amount of your IRA payouts from line 4a that are subject to federal income tax is reported on this line. If you give to charity using the Qualified Charitable Distribution Strategy (QCD), you would see the letters QCD next to this line showing a lower taxable amount than a total distribution.
- Line 5a: Annuities and pensions. This line reports the total amount of your pension and annuity payments, before taxes were deducted.
- Line 6a: Social Security payouts. As reported on Form SSA-1099, this line shows the total amount of Social Security benefits you received throughout the year.
- Line 6b: Taxable amount. This line shows the amount of your Social Security benefits from line 6a that is subject to federal income tax. Only up to a maximum of 85% of Social Security payments are taxable. This percentage can be lower for some taxpayers if other sources of income are lower.
- Line 7: Capital gain or (loss). The net gain or loss from the sale of capital assets, like stocks or bonds, is shown on this line. Typically, Schedule D is used to calculate this amount.
- Line 8: Other income. This line shows other types of taxable income not included on lines 1 through 7. This income is reported on Schedule 1. It includes items such as business income, rental real estate, unemployment compensation, farm income, gambling winnings, and many more.
- Line 11: Adjusted gross income (AGI). This line reports your gross income (the total of lines 1, 2b, 3b, 4b, 5b, 6b, 7, and 8) minus some “above the line” deductions, including interest on student loans or contributions to an IRA. Your eligibility for numerous other tax credits and deductions is influenced by your AGI, making it an important figure.
- Line 12: Standard deduction or itemized deductions. The standard deduction starts at $14,600 for single files and $29,200 for people who file married filing jointly. It can be more depending on age and dependents. If itemized deductions (home mortgage interest, real estate taxes, medical expenses, and charity) are more than the standard deduction, taxpayers will have Schedule A detailing those deductions.
Next we move to Page 2 of the 1040, showing the actual taxes paid.
Source: IRS
- Line 16: This is the baseline level of tax, calculated using the figures from page 1.
- Lines 17-23: Various types of tax credits (like the child tax credit) and additional taxes (like self-employment tax) are calculated on these lines.
- Line 24: This is the total tax owed for the year.
- Lines 25-33: These lines detail payments that were made toward the year’s tax liability. Amounts withheld from wages are listed on 25a. Estimated tax payments are on line 26. Line 33 is the total amount you paid for the year.
- If total payments on Line 33 are more than the amount of tax owed on line 24, you will receive a refund. This is detailed on line 34. If total payments on Line 33 are less than the amount of tax owed on line 24, you owe. This is detailed on line 37.
Get More Support From a Fee-Only Wealth Advisor
Understanding the fundamental concepts on your 1040 form can empower you to navigate tax season with greater confidence. Even while taxes might still appear complex, breaking down the key components can make the process much easier.
Beyond tax season, our team at Galecki Financial Management is committed to providing worry-free, Fee-Only financial planning. From our initial financial review to designing a customized plan aligned to your specific goals and tax situation, we strive to create the greatest possible client experience.
To schedule a meeting, call (260) 436-8525 or email [email protected].
About Galecki Financial Management
At Galecki Financial Management, we help individuals and families confidently pursue their financial goals. We’re anything but a business-as-usual wealth management firm. We’re different. Friendly. Casual. And really good listeners. Indeed, that’s a big part of what makes us different. Everything we do is based on what we hear from you, because our experienced team of professionals specializes in comprehensive financial planning, cash flow analysis, IRA rollovers, financial services, money management, estate planning, retirement planning, and advising. We help you identify your short- and long-term goals, and then we work together to pursue them. Lastly, and most importantly, we’re Fee-Only, meaning we’re only compensated for our time. Our only incentive is to help you succeed.