1040

Question 1

What are the most common types of income reported on the 1040

Answer 1

The most common types of income reported on the 1040 are:

1. Wages, salaries, tips etc (W2)
2. Interest and dividends (Schedule B)
3. IRA Distributions
4. Pensions and annuities - Retirement income
5. Social security benefits
6. Capital gains or losses (Schedule D)

The need to report any other income types and adjustments to income didn’t go away — that reporting has simply moved to Form 1040 Schedule 1.

Question 2

Which schedule is used to report certain types of income that aren’t listed on the main form - 1040. This schedule is also used to claim some tax deductions.

Answer 2

Schedule 1

Question 3

What are the two parts in Schedule 1

Answer 3

Part I – Additional Income

Part II – Adjustments to Income

Question 4

What types of income do you report in Part I of Schedule 1

Answer 4

Part I – Additional Income
Part I of Schedule 1 is where you’ll report the following types of income:

Taxable refunds of state and local income taxes

Alimony received (for divorce agreements dated before December 31, 2018)

Income or loss from a business

Gains or losses from sales of business property

Rent and royalty income
Income from a partnership, S corporation, or trust

Farm income or loss

Unemployment compensation

Line 8 of the 2021 Schedule 1 is now the catchall for other types of income that don’t fit into the predefined lines, such as prizes and awards or gambling winnings.

Looking down the lines of Schedule 1, you may notice that some of these items also require an additional form or schedule. For example, if you have income or loss from a business, you’ll also need to attach Schedule C to your return. If you need to report rent or royalties as income, you’ll also have to attach Schedule E.

Question 5

What does Adjustments to income include in Part II of Schedule 1?

Answer 5

Adjustments to income go in Part II of Schedule 1. These include:

Up to $250 of unreimbursed expenses for educators who work in schools

Business expenses of military reservists, performing artists, and fee-based government officials (the only qualifying professions for certain business deductions)

Contributions to health savings accounts (HSAs)

Moving expenses for members of the Armed Forces

The deductible part of self-employment taxes

Contributions to a SEP, SIMPLE, or qualified retirement plan

Health insurance premiums for self-employed people

Penalties on early withdrawals of savings

Alimony payments (for divorce agreements dated before December 31, 2018)

Contributions to an IRA

Up to $2,500 of student loan interest

Up to $4,000 of qualified higher education tuition and fees

Question 6

Why is Schedule 1 Part II - Part II – Adjustments to Income so important to tax payers?

Answer 6

These are valuable deductions for many taxpayers for two reasons. First, these deductions directly reduce your adjusted gross income, opening up the possibility of taking other deductions and tax credits that have adjusted gross income limits.

Another reason adjustments to income are so valuable is that you don’t need to itemize deductions to claim them. Above-the-line deductions reduce your income before applying either the standard deduction or itemized deductions. Since nearly 90% of taxpayers take the standard deduction, above-the-line deductions are a nice tax break without the extra paperwork of itemizing.

Question 7

Who needs to file Form 1040 Schedule 1?

Answer 7

Not everyone needs to attach Schedule 1 to their federal income tax return. The IRS trimmed down and simplified the old Form 1040, allowing people to add on forms as needed.

You only need to file Schedule 1 if you have any of the additional types of income or adjustments to income

Question 8

If you are self-employed, it’s likely you need to fill out ________________to report how much money you made or lost in your business.

Answer 8

Schedule C

Question 9

Which schedule is headlined as “Profit or Loss From Business
(Sole Proprietorship),”

Answer 9

Schedule C

Question 10

In most cases, people who fill out Schedule C will also have to fill out Schedule SE. What is Schedule SE?

Answer 10

“Self-Employment Tax.”

Question 11

Explain Schedule C reporting

Answer 11

Schedule C has five parts.
In Part I, you list all the income of your business and calculate your gross profit.

In Part II, you subtract all your business expenses and calculate your net profit or net loss. This is the figure you report on your income tax return.

You only need to complete Parts III through V if your business requires you to purchase inventory, you need to claim deductions for car expenses or if you have any other expense not listed in Part II.

Question 12

What is the purpose of Schedule SE?

Answer 12

The IRS will require you to complete a Schedule SE in any year your sole proprietorship earns $400 or more of net profit. The purpose of the schedule is to calculate the self-employment tax you must pay.

However, when you fill out your 1040, the IRS allows you to deduct some of these payments.

Question 13

What is AGI?

Answer 13

Adjusted Gross Income

Question 14

If you file your taxes electronically, the IRS form will ask you for your previous year’s AGI as a way of verifying your identity. True/False

Answer 14

True

Question 15

Which Schedule is “Interest and Ordinary Dividends”?

Answer 15

Schedule B

Question 16

Does the total of Interest and the total of ordinary dividend on Schedule B make a stop on Schedule 1 ?

Answer 16

No. It directly reflects on the 1040

Question 17

Which Schedule with the heading “Supplemental Income & Loss” shows income or loss from rental real estate and royalties?

Answer 17

Schedule E

The net amount from the Income and expense is then shown in Schedule 1

Question 18

What does schedule D reflect? Is this directly reflected on the 1040 or does it take a stop on Schedule 1?

Answer 18

Capital Gains and Loss

Its directly reflected on the 1040

Question 19

What happens if the Capital Loss on Schedule D is $12000

Answer 19

1040 will only show a capital loss of $3000 and the rest will be carried forward to the following years

Question 20

What are the two parts of Schedule D

Answer 20

Part I - Short term Capital Gains & Losses - Generally assets held one year or less

Part II - Long term Capital Gains & Losses - Generally assets held more than a year

Question 21

Where on Schedule D [Capital Gains & Losses} do they tell you exactly what was sold?

Answer 21

It doesn’t show up on Schedule D. For those details you need Form 8949.

Form 8949 - Sales and Other Dispositions of Capital Assets

Form 8949 feeds into Schedule D and Schedule D feeds back into Form 1040

Question 22

How do you decide whether to go for Standard Deduction or Itemized Deduction?

Answer 22

The greater of Standard Deduction or Itemized Deduction (Whichever is greater)

Question 23

If the client is going for Itemized Deductions, which schedule should he attach?

Answer 23

Schedule A

Question 24

If you come across a Schedule A in a tax return, then what can you imply?

Answer 24

They took the Itemized Deductions

Question 25

How does Tax credits and deductions work?

Answer 25

1. Deductions can reduce the amount of your income before you calculate the tax you owe.
2. Credits can reduce the amount of tax you owe or increase your tax refund, and some credits may give you a refund even if you don’t owe any tax.

Question 26

The self-employment tax rules apply no matter how old you are and even if you are already receiving Social Security or Medicare. True/False

Answer 26

True

Question 27

What is Self-Employment Tax?

Answer 27

Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves.

Question 28

Self Employment tax consists of an employer contribution and employee contribution. Can you deduct any part of it in arriving at the AGI?

Answer 28

You can deduct the employer-equivalent portion of your SE tax in figuring your adjusted gross income. But Wage earners(those on W2) cannot deduct Social Security and Medicare taxes.

Question 29

Self-Employment Tax Rate

Answer 29

The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

Question 30

What is Estimated Taxes

Answer 30

Estimated tax is the method used to pay tax on income that is not subject to withholding.

This income includes earnings from self-employment, interest, dividends, rents, and alimony. Taxpayers who do not choose to have taxes withheld from other taxable income should also make estimated tax payments.

This other income includes unemployment compensation and the taxable part of Social Security benefits.

Question 31

Estimated taxes are usually paid on a _______________ basis.

Answer 31

Quarterly

Question 32

Explain the quarters involved in Estimated taxes and when are these payments due

Answer 32

The first quarter is the three calendar months (Jan. 1 to March 31). The second “quarter” is only two months long (April 1 to May 31). The third is the next three months (June 1 to Aug. 31), and the fourth covers the final four months of the year.

These installment payments are generally due on April 15, June 15, and Sept. 15 of the current year and on Jan. 15 of the following year

Question 33

How is estimated taxes taken into consideration when the taxpayer files his annual tax return?

Answer 33

The Internal Revenue Service (IRS) requires quarterly estimated tax payments to be filed by those who have income that is not subject to automatic withholding.

The taxpayer then files the usual tax paperwork for the full year and pays the balance due or requests reimbursement for an overpayment.

Question 34

____________ reduces your tax, dollar for dollar

(a) Tax Deductions
(b) Tax Credit

Answer 34

Tax Credit

Question 35

How can a self employed individual collect Social Security ?

Answer 35

A self employed pays into Social Security and Medicare through the Self-Employment Tax

Question 36

The Social Security tax withheld and Medicare tax withheld on the W2- Where does it come to play on the 1040

Answer 36

Social Security tax withheld and Medicare tax withheld on the W2 has NO impact on the 1040

Question 37

Self employment tax is calculated on which amount

Answer 37

Its calculated on the net profit on Schedule C

Question 38

What is Schedule 2 of 1040?

Answer 38

Additional taxes (we put the self employment taxes here along with other taxes).

Then the total is carried over to the 1040

Question 39

A sample calculation of tax credits on 1040

Answer 39

Tax to be paid
-  Non refundable child tax credit
\+  Self employment tax
- Federal income tax withheld
-Estimated taxes
= Refund or Payment

Federal Income tax withheld and estimated taxes are payments made during the year.

Usually the taxpayer applies the overpayment to next year’s estimated taxes instead of claiming a refund.

Question 40

Employee pays 1/2 of Social Security and Medicare taxes. Rest is matched by the employer.

Self Employed has to pay 100% of Social Security and Medicare taxes but gets a deduction of 50% on Schedule 1 part II.

So does this mean that the employee and Self employed pays in the same amount of Social Security and Medicare given the same amount of income?

Answer 40

Self employed pays more. This is a deduction and not a credit. If it were a credit, then we can say both paid in the same.

A deduction is only as good as your tax rate is.