How to File an IRS Form 1040: A Step-Wise Guide

How to File an IRS Form 1040: A Step-Wise Guide

by | Mar 4, 2022 | Form 1040

March has arrived, and you have more than 40 days to file your income tax forms. After that, it’s time to pay the IRS and claim certain tax credits/refunds. If you are an Indian citizen in the United States or a US resident, we can show you how to fill out the 1040 form in simple steps.

Recommended: New to the US – Here’s what you need to know about filing your taxes as an NRI in the US –

What Exactly is a 1040 Form?

1040 is a tax form used by United States residents to file their federal income taxes annually. Hence, it’s essential to know how to fill out 1040. The form aids in calculating annual income and the claim on deductions and tax credits. 

There were multiple variations of 1040 before 2017. However, since the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, most Americans have been filling out 1040 forms.

Senior citizens can file Form 1040-SE, while non-residents must file Form 1040-NR.

To complete your 1040 form, you have two options:

  1. You can either file electronically, known as e-filing. 
  2. Alternatively, you may print the form, fill it out, and mail it to the IRS (Internal Revenue Services). 

Compared to manual filing, e-filing is simple, convenient, and quick. In addition, when you e-file your tax returns, you can receive your refund faster. Physical or paper filing takes longer to reach the IRS and delays the refund process.

How to Fill Out a 1040 Form?

Don’t be intimidated looking at the form. Trust us; it’s not that challenging. We provide a step-by-step guide (on the same flow as it is on the form) on how to fill out 1040:

Filing status: It’s essential to specify whether you’re filing your 1040 as a single person, a married couple, filing jointly, or filing separately with your spouse. You can also mention if you are the head of the household or a widower. This will help you take advantage of certain standard deductions based on your status.

Personal information: Fill in your full name, address, and social security number in this field. Whether filing jointly or individually, you must also include additional input about your spouse and dependents.

Election contribution: There’s a neat box in the form that now allows you or your spouse to contribute $3 to the presidential election fund. The money will be equally split between Democrats and Republicans. It would not affect your tax refund or liability.

Cryptocurrency

Cryptocurrency: There is a rise in digital or cryptocurrency as a preferred investment mode. For instance, 46 million Americans are among 300 million cryptocurrency users across the globe. As a result, this feature enables you to declare if you have exchanged cryptocurrency in the previous financial year.

Standard deduction: Your standard deduction eligibility is based on your age, filing status, and whether or not you are blind. Fill in the boxes as applicable. Those who are married and filing jointly with their spouse should also mention if they are financially dependent on another. And if you’re a dual-status alien, you should also mention this in the form.

Dependents: In this section, you may fill in the details about your dependents and seek a tax credit. In this section, you should list your dependents, age, and their relationship with you. You should also mention if you are entitled to a child tax credit or a credit for other dependents.

Calculate-Taxable-Income

Calculate taxable income: This section is crucial, and you must fill it in properly. Here is where you list the fruits of your labor from the previous year. This column is where you disclose your earnings from your job. If you are a salaried employee, provide a W-2 form. 

Next, simply tick boxes that show your non-employment income, like earned dividends and interest, annuities, pension, IRA tax rebates, social security benefits, and so on. You can find a list of many other deductions on the IRS website.

Calculate your tax liability: Now is the time to count your blessings in the form of tax credits. These are the taxes withheld by your employer. Subtract the tax credits from the total amount you must pay. 

The tax bill is the final number. If your tax bill exceeds your tax credits, pay the IRS whenever you file your tax returns. You will receive a refund from the IRS if you have overpaid. If you e-filed, your refund will be directly deposited in your bank account. Otherwise, the IRS will mail you a check.

Schedules

To file your income tax returns, you need a simple 1040 Form. There are separate schedules you attach with 1040 in case of additional income, or if you owe the IRS more money, or you would like to claim extra credit. 

These schedules are as follows:

Schedule 1– Fill this schedule if you have earnings from:

  • A business (also file form C) 
  • Alimony payments 
  • Agricultural income
  • Educator expenditures
  • Rental income (file form E)
  • Health savings account
  • Health insurance, 
  • Retirement contribution deductions 
  • Student loan or other sources

Schedule 2 – Fill this if you owe the IRS:

  • Self-employment tax
  • Alternative minimum tax (AMT)
  • Household employment tax
  • Net investment income tax
  • Additional Medicare tax
  • Recovery rebate credit because you did not receive a coronavirus stimulus check, an economic impact payment. 

Schedule 3 – Use this schedule to claim IRS credits and payments. This includes: 

  • Foreign tax credits
  • Child and dependent care credits
  • Education
  • General business incentives
  • Home energy credits, etc.

Those who cannot file federal tax returns by April 18, 2022, can request an extension and file by October 15, 2022. If you must make payments, do this before the April deadline.

Back taxes: If you owe the IRS money for previous years’ taxes, you must send 1040 to the IRS. In this scenario, e-filing is not possible.

Refunds: After the IRS processes your returns, you will receive your refund in 21 days.

If you follow the instructions given above, you will be able to file your taxes in no time. If you have all of your receipts and supporting documentation, you should be OK.

Recommended: The Ultimate Documents Checklist to File US Income Tax Returns – AOTAX.COM

If you are an Indian resident in the United States and are unsure how to fill out 1040, contact AOTAX. Our team of capable tax advisers and preparers at AOTAX can assist you in meeting your deadlines smoothly. 

What is US Tax Form 1040 – Foreign Tax Credit?

What is US Tax Form 1040 – Foreign Tax Credit?

by | May 2, 2019 | Blog, Tax Planning, Tax Preparation

What is US Tax Form 1040 – Foreign Tax Credit?

The taxation system in the US taxes its taxpayers on their global income.US Tax Form 1040 Since there are chances that taxpayers could have paid taxes for income in the respective countries, the Foreign Tax Credit system is more useful than one might think.

By definition, the foreign tax credit system is a tax credit system that is non-refundable and is paid to individuals who have paid taxes to foreign governments for their withholdings. The tax credit is available for anyone who has some form of investment in a foreign country or works in a foreign country.

What is it?

The Foreign Tax Credit is essentially a tax break that the IRS and the government provide to help taxpayers reduce their tax liabilities. After all the deductions are taken out of the taxable income of a taxpayer, the tax credit is then applied to it. Naturally, it helps to reduce liable taxes. And it reduces the taxes dollar to dollar.

This means, that if you owe $2,000 to the government and are entitled to receive $900 worth Foreign tax credits, your net liability is $1,100. Thus, you will end up paying only $1,100 as taxes.

Tax credit systems are either refundable or non-refundable. If you have access to a refundable tax credit, this is how it would work. If you were liable to pay $2,000 as taxes and had tax credits of $2,300, the tax credit will take care of the liable taxes. And, you will receive the remaining $300 back.

On the other hand, if the same tax credit was a non-refundable one like Foreign Tax Credit, things would be a bit different. You will have to forfeit the remaining $300. Of course, you do not end up paying any taxes from your pocket for the above-mentioned example.

Who Choose Tax Credit?

There are quite a few benefits which make them a compelling option.

  • The tax credit reduces your tax liability dollar to dollar, unlike deductions which merely reduce your net taxable income.
  • In the event that the tax credit exceeds a certain limit for a year, you can carry forward the excess for the next year.
  • The Foreign tax credit is yours for the taking even if you do not itemize your deductions. You can then opt for standard deductions, on the top of the tax credit.

One must note that not all the taxes that you pay to a foreign government is available as a tax credit against your federal tax liability. If you haven’t paid or accrued the taxes, the taxes in question is not legal, the taxes are not based on income or the taxes were never imposed on the taxpayer, you cannot opt for Foreign Tax Credit.

How to Claim?

You can claim your Foreign Tax Credit either with Form 1116 or without it. Individuals who have only one source of foreign income can opt for a Form 1116. The taxpayers must report whether their income is on an accrual basis or cash basis. Should your budget not consider the incomes until you receive it, you can opt for a cash basis or else the accrual basis.

There are a few a situation where a taxpayer can claim for the foreign tax credit without having to file Form 1116. The only pre-condition being, they should meet the eligibility criteria. If you are a single taxpayer and have paid less than $300 then you can skip filing the foreign tax credit form. Similarly, for married joint filing taxpayer, the limit is $600. The Foreign Tax Credit is an effective measure that allows taxpayers to reduce their liability.