Money Essentials

1040 tax form explained

The lowdown on 1099s, AGI, exemptions, deductions and credits.


In January of every year, you will receive a host of tax statements -- the information you'll need to fill out your return.

Any information you receive will also have been sent to the IRS, so look them over carefully and be sure to report their data accurately on your return.

- Your W-2 form reports how much money you made at your job and how much tax you paid for the year.

- The 1099-G reports unemployment compensation or state tax refunds.

- The 1099-R reports retirement-plan income.

- The 1099-MISC reports income if you're an independent contractor, collected rent, or received royalties.

- Other 1099s, such as the 1099-B, 1099-DIV, and 1099-INT, report income from financial transactions (in this case, capital gains, dividends and interest income, respectively).

- Many of your 1099 forms get reported on the schedules that round out your 1040. For instance, if you're self-employed, you may need to file Schedule C and Schedule SE. If you received rent or royalties, you may need to file Schedule E. Capital gains get reported on Schedule D. Interest and dividends, if they exceed a certain amount, get reported on Schedule B.

By simply going through the 1040 line by line you'll see what schedules you need.

The number at the bottom of the first page of the 1040 is your adjusted gross income (AGI) -- your total income minus certain adjustments, such as IRA deductions, alimony payments, and medical savings account contributions.

Your AGI determines whether or not you're eligible for tax breaks and also determines whether you're eligible to make deductible IRA contributions or to open a Roth IRA.

Your AGI minus all other exemptions and deductions to which you're entitled equals your taxable income. Say your AGI is $70,000 and you can subtract $7,850 in deductions plus another $6,800 for personal exemptions. Your taxable income is $55,350.

The more exemptions and deductions you take, the lower your taxable income.

You're entitled to take a personal exemption for yourself, a spouse, and each dependent.

Everyone is also given a standard deduction, which is inflation-adjusted; for tax year 2012 it is $5,950 for singles, $11,900 for married couples filing jointly and $8,700 for heads of households.

But you might be better off itemizing your deductions if you add up everything that you're permitted to deduct, such as mortgage interest, charitable contributions, and state taxes -- and that amount exceeds the standard deduction. If that's the case, list all your deductions on Schedule A and attach it to your 1040.

Tax credits

Unlike deductions and exemptions, which lower your taxable income, tax credits are dollar-for-dollar reductions of the taxes you owe and are worth more than a deduction or exemption of the same amount.

Say you're in the 28% bracket and owe $1,000 in taxes. If you can take a $100 tax credit, you'll only have to pay $900 in tax ($1,000 minus $900). A $100 deduction, by contrast, only reduces your tax liability by $28 ($100 multiplied by 0.28), which means you'll pay $972 in taxes.

There are lots of books to help you sort through your annual return and give you a basic understanding of taxes. Three favorites that you'll find in any bookstore: "J.K. Lasser's Tax Guide, Ernst and Young Tax Guide," and "The Wall Street Journal Guide to Understanding Your Taxes."

You also can find online sources of help by checking out the CNNMoney Tax Center. If you need federal forms and instructions, go to the IRS website.

glossary
Glossary
take the test
Take
the test
more lessons
More Money Essentials
lessons
Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
For sale: Steve McQueen's 1967 Ferrari The red 1967 sports car is expected to fetch millions at auction. More
The 13 most WTF gadgets From the weird to the gross, these 13 gadgets will make you wonder why they even exist. More
Best-loved cars in America These cars and trucks topped J.D. Power's APEAL survey, which measures how much owners like their new vehicles. More

Updated 11/23/2011 with SEO tweaks - abell
Updated 7/27/2012 content changes - aross
Updated 7/30/2012 content changes - aross
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.