The United States has a self-reporting income tax system so individuals must tell the government each year about their income and expenses. The majority of taxpayers do so by filling out Form 1040, U.S. Individual Income Tax Return.
Form 1040 has been in use since the income tax began in 1913 (the reason for the particular number of the return is unknown, although several rationales have been offered). Also called the long form to distinguish it from shorter, simpler tax return options for some individuals (Form 1040A and 1040-EZ), Form 1040 is a two-page report filed annually by individuals with income over set amounts as well as those requesting refunds.
At the beginning of the form, the taxpayer enters some basic information (name, address, Social Security number). The taxpayer indicates the filing status (single, married filing jointly or separately, head of household or qualifying widow(er) with a dependent child) and enters the number of exemptions for the taxpayer, spouse and dependents (deductions for these exemptions are taken into account later on the return). (For more, see How Do Tax Exemptions Work In Your Favor?)
Lines 7 through 21 are for entering various types of income, including wages, alimony received and unemployment compensation. Some of the income must also be reported on a separate form or schedule. For example, anyone with interest or dividends of $1,500 or more must complete Schedule B; capital gains and losses are reported on Schedule D and Form 8949.
Miscellaneous income, including jury duty pay and lottery winnings, is reported as “other income” on line 21. The total income is reported on line 22.
Figuring Adjusted Gross Income
Adjusted gross income (AGI) is income reduced by specific deductions (lines 23 through 35). These specific deductions include traditional IRAs, student loan interest, moving expenses and certain deductions for self-employed individuals.
The total amount of these deductions is entered on line 36. The difference between line 22 and line 36 is adjusted gross income. AGI is used for limitations on certain deductions and credits.
Figuring Tax and Credits
Found on page 2, this section begins with a carryover of AGI from the previous page. From this, subtractions are made for exemptions (based on the number reported on page 1) and itemized deductions or the standard deduction to arrive at taxable income. Taxable income is the amount on which tax liability is figured. Some taxpayers may also have to compute the alternative minimum tax (AMT), which is paid instead of the regular tax if the AMT is higher. Any excess advance premium credit for those who purchased health coverage through a government Marketplace is added to this tax liability if any repayment is required (i.e., the amount of the advance credit was more than the amount to which the taxpayer was entitled).
From tax liability, subtract certain tax credits. These include education credits and the child tax credit. The difference between tax liability and the amount of credits claimed in this section of the return is the basic tax liability. However, some taxpayers may owe additional taxes.
This section of the form is used to report additional taxes for certain individuals, including:
- Self-employment tax for self-employed individuals
- Social Security and Medicare taxes on tips if these taxes have not already been reported
- Penalties on IRAs (e.g., distributions taken before age 59½), qualified retirement plans, health savings accounts and certain other tax-advantaged plans
- Employment taxes on household employees (e.g., nannies)
- Penalty for not having minimum essential health coverage if not exempt from the individual shared responsibility
- Various other taxes (such as additional Medicare taxes on earned income and net investment income) indicated on line 62.
The total of these other taxes is added to the tax from the previous section on the form to arrive at total tax.
This section of the form lists payments already made and refundable taxes (which effectively amount to a tax payment because they count even if more than the amount of taxes owed). Tax payments include:
- Taxes that have been withheld from wages as well as other mandatory or voluntary withholding
- Estimated taxes paid for the year
- Any tax payment made with a request for a filing extension
- Excess Social Security taxes (which can result for those who worked for more than one employer)
- Refundable credits (earned income credit, American opportunity credit)
- Certain other credits (federal tax on fuels paid by farmers)
Total payments are recorded on line 74.
Refund or amount owed
If line 74 is greater than line 63, there is a refund. It can be mailed to the taxpayer by check or deposited directly into the taxpayer’s account. The account number and routing number are entered in the Refund section. If the taxpayer wants to split a direct deposit among certain accounts, Form 8888 is used to indicate the amount and information about the accounts.
If line 74 is less than line 63, the taxpayer owes taxes. The tax can be paid with the return (Form 1040-V is a voucher that should accompany a return filed by paper), or paid in other ways (via credit or debit card, electronic transfer from a bank using Direct Pay, or through the Treasury’s Electronic Federal Tax Payment System, or EFTPS. (Owe more than you expected? Here's what to do When You Can't Pay Your Taxes On Time.)
The Bottom Line
Those who file paper returns must sign and date the return. Those filing electronically use an electronic signature. Also provide information if a paid preparer did the return and whether a third party (e.g., the preparer) is authorized to receive tax information from the IRS related to this return. While the U.S. has a self-reporting income tax system, it should be recognized that the information on the form is matched with information reported to the IRS by other sources (e.g., employers, dividend payers, the Social Security Administration). Failure to file a return if income is high enough or to properly report income and expenses can trigger interest and penalties, and time and stress to resolve tax matters.