Pour Yourself a Drink—Wealth Club Walks You Through Your Tax Forms Wealth Club Walks You Through Your Tax Forms Pour Yourself a Drink—Wealth Club Walks You Through Your Tax Forms Wealth Club Walks You Through Your Tax Forms
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Pour Yourself a Drink—Wealth Club Walks You Through Your Tax Forms Wealth Club Walks You Through Your Tax Forms

by Michael Fleck

February 20, 2012


Hopefully, you can handle your name, address and social security number. Next, you’ll be asked how you’re filing. Since misery loves company, I’m going to assume all my lovely readers will be filing as single (Happy belated Valentine’s Day) and have no children, which makes the Exemptions section easy. An exemption is given for every person, including yourself, that you are responsible for. Each exemption decreases your taxable income by $3,700 for 2011. We’ll factor these exemptions back into the equation next week; we have other work to do first. For now I’m going to break apart the 1040 into four easy-to-assemble parts, and look at the first two today.

Just as you used W-2s and a series of 1099s to sum up your income, now you get to adjust your income downward. Don’t get this confused with your deductions—we’re not there yet. What I’m about to break down are referred to as ‘above the line’ adjustments, meaning they’re utilized before the final calculation of your AGI. These are especially advantageous because they can be taken regardless of whether you’re taking the standard deduction or itemizing (again, this is something I’ll get to next week). Furthermore, they don’t phase out for wealthier taxpayers, like many ‘below the line’ items. Here’s what you can expect:

·       Line 23 – Educator expenses. If you’re a K-12 teacher, instructor, counselor, principal or aide, you can deduct up to $250 for qualified expenses. 

·       Line 25 – Health Savings Account deduction.  You’ll know if you have an HSA, a savings account specifically for medical purposes. Contributions are not subject to federal income tax at the time of the deposit and therefore can be deducted.

·       Line 26 – Moving Expenses. As long as your move is job-related, consider it the government’s way of fostering your adventurous side. To claim this, the distance between your new job and your old home must be 50 or more miles more than the distance between your old job and your old home.        

·       Lines 27, 28 & 29 – Self-Employment. If you’re self-employed, I suggest you read here for more information. There are very specific definitions, and it can be very involved.   

·       Line 30 – Penalty on Early Withdrawal of Savings. For example, you cashed out a 401(k) worth $10,000. Not only do you have to pay ordinary income tax on that $10,000, but also a 10 percent penalty (which is why you need to think very carefully before ditching an IRA).  However, the penalty itself is tax deductible. The penalty is $1,000, but if you’re in the 15 percent tax bracket, you’ll essentially get $150 back by claiming this adjustment.  

·       Line 32 – IRA Contributions. Money you put into a traditional IRA is tax deductible. That’s not the case with Roth IRAs, which I’ve previously advocated for. The overall tax treatment of the Roth is eventually nicer, but since Traditional IRAs are funded with pre-tax dollars, you’re allowed to reduce your income by the amount you contributed to a traditional IRA.

·       Line 33 – Student Loan Interest Deduction.  If you paid interest on student loans in 2011, your student loan administrator (e.g. Sallie Mae) will give you 1098-E that tells you what to put here.

·       Line 34 – Tuition and Fees. This can reduce your income by up to $4,000 depending on whether or not your expenses qualify.  Beware, though. There are some pretty rockin’ tax credits for going to school, and you cannot take both a credit and this deduction. I’ll explain the distinction further next week, but the key is you would only take the Tuition and Fees deduction if you didn’t qualify for one of the credits.

·       Line 37 – Your Adjusted Gross Income!

What a journey this has been. I hope you have a sense of the types of situations that will increase and decrease your income and get you to your AGI.  We’re about halfway through the 1040. When I round out this tax trilogy next week, we’ll dissect the remainder of the 1040 and get to the finish line, where, with any luck, you’ll have both a refund to look forward to and a broad sense of how this whole damn thing works.   

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Pour Yourself a Drink—Wealth Club Walks You Through Your Tax Forms Wealth Club Walks You Through Your Tax Forms