Do you know the anatomical parts of your body? Your personal income tax return has specific parts too! For example, the first page of IRS Form 1040, also known as the "long form", has a section detailing your "diverse" sources of Income (wages, contractor fees, interest, dividends, etc.) and then a section called Adjustments. Our present tax code allows you to deduct "exceptional" expenses such as interest paid for educational loans, money "put away" for retirement funds, moving costs, alimony payments, and a part of self-employment tax. These reductions to your total reported income leave you with Adjusted Gross Income or AGI at the bottom of the first page on line 37 of your IRS Form 1040.
On the second page of Form 1040, we use your AGI, copied from the preceding page, in a new series of calculations. Additional assumptions are made about how you filed (filing status) this tax year and whether or not you supported other people in your "household". Federal tax authorities calculate a general "expense profile" that covers the entire tax year. This "profile" differs depending on your filing status (single, married filing jointly or qualified widow, married filing separately, head of household, or the special Dependent child). The general profile is listed on line 40a and called a standard deduction. It is further subdivided into basic and additional standard deduction (added for age, blindness, or both), represents the average yearly "living expense" for members of the different filing status groups. Once again, in the interest of fairness, some tax filers might NOT have life experiences that "fit" the standard "profile". For example, people who pay a mortgage for a house will typically have more expenses during the year. If a tax payer can prove (claim) that their "living expenses" exceed the amount of the standard deduction they would routinely receive, they can complete additional documentation that itemizes or lists those deductions and substitute this larger number as itemized deductions (living expenses) applied against the AGI. An adjustment for the number of people financially supported by the tax payer is yet another amount that reduces the AGI; this is separate from the standard or itemized "living expenses". Thus, a "general living expense" which includes household expenses and a supplemental amount for the number of people in the household unit reduces AGI. In other words, the number of personal exemptions is multiplied by some specific allowance ($3,650 in 2009/2010) and also deducted from the AGI to finally arrive at a Taxable Income.
There are only two events in contemporary life that a person can count on doing; paying taxes and dying. Human anatomy identifies parts of the body; bones, brain, stomach, and heart. The real story however, is in how these body parts interrelate; how, for example, a body walks, talks, eats, and, finally dies! Thus, it is true that just as anatomy is only half the story without physiology; so too is calculating taxable income, similarly, only half the process of filing a personal income tax return. We need many pages describing physiology to optimize our health and help us better understand death. We will also need many pages of tax code regulations and explanations to truly understand the best (cheapest!) ways to file our personal income tax return! Since both are inevitable; cultivating knowledge of either topic is never a waste of personal time.
Information here is offered for educational purposes; seek specific tax advice from a professional. As a freelance technical author and consultant, Phillip Schein specializes in areas that are critical for successfully running a home-based or small business. Phil has spent over 15 years in various levels of management with a background in both accounting and information technology. He has published several technical books. Originally from New York, Phil now lives in Las Vegas, Nevada because he enjoys the warm weather. One of his current business websites is http://www.sohotaxtips.com. Please contact him through his business website http://www.rainorshinesoftware.com.
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