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"Understanding your tax return"

Discussion in 'Fred's House of Pancakes' started by cmympg, Dec 11, 2005.

  1. cmympg

    cmympg Who knows? Who cares?

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    Ok, I've been reading many posts on the tax credit vs. tax deduction for the Prius. It appears that many posters are confused about several definitions used in the discussions. I've been doing taxes for over 10 years and teaching tax courses for about 5 so I know my way around a 1040. It might be possible that I can clear up some of these misconceptions/misunderstandings. I sincerely hope that no one believes that I am insulting their intelliegence by posting this information. I am making it very basic in hopes of answering more questions than I am creating. That is assuming that someone reads this post. :)

    If you look at a 2004 Form 1040 (I'm using a 2004 1040 since its the most commonly used form and none of us has completed our 2005), the deduction for a clean fuel vehicle is taken on line 35 (yes, you just write Clean Fuel on the dotted line and take the deduction in the column at the right). The deduction reduces your total income along with things like IRA deductions, educator expenses, student loan interest, 1/2 of SE tax, etc. to arrive at adjusted gross income (AGI). AGI appears on line 36 at the bottom of the first page of the 1040.

    Turning to page 2 of the 1040, the first line is again AGI (just to make it easier for those who don't use software to do the math). Your taxable income appears on line 42. This is the income on which you pay taxes. It is your AGI minus your standard deduction/itemized deductions and personal exemptions.

    Your tax liability based on the regular system of taxes or the amount of taxes you owe the Federal Government based on your income appears on line 43. The amount of AMT that you owe, if you are so unfortunate to do so, is on line 44. If you have no additional liability under AMT that line will be blank. The only time you owe AMT is if the amount you owe under AMT is larger than that owed under the regular tax system. If that is the case then the excess of tax under AMT over the tax on line 43 (regular tax) is entered on line 44.

    As has been mentioned before there are 2 types of credits, refundable and nonrefundable. The non-refundable credits (the ones that are limited to the amount of your tax liability) are on lines 46 thru 54. These reduce your tax liability but cannot reduce your tax liability below zero. Starting on the 2006 Form 1040, the credit we have all been talking about will appear somewhere in this area. I haven't seen a draft of the 2006 form yet, so I don't have any idea if it will have its own line or end up on line 54.

    The people who have entries on lines 57 thur 61 know who they are for the most part and understand what to do on those lines. Line 62 is your total tax or your tax liability minus your non-refundable credits for those of us with no entries on lines 57 thru 61.

    Lines 63 thru 69 are for what the IRS considers as payments made. This is the money that can potentially be refunded to you. The taxes you had withheld (Box 2 of your W-2) and any estimated taxes you paid are entered here. This is also where Earned Income Credit (or EIC one of the most abused credits around) and the additional child tax credit are entered. Because they are refundable credits, the IRS looks like them as payments made on your behalf by the government.

    If the total payments are greater than your tax liability minus non-refundable credits line 62), then you get a refund. If total payments are less than your tax liability minus non-refundable credits (line 62), then you owe money to the Federal Government.

    For 2004, everyone who had an AGI of around $58,000 for married filing jointly and $42,250 for single probably had a tax liability under AMT. The important thing is, that for most of us, the AMT tax is lower than the regular tax so you don't see it on your tax return if you do it by computer or have someone else prepare it.

    Now, if anyone has read this and has any questions, please feel free to ask here or PM me.
     
    #1 cmympg, Dec 11, 2005
  2. fshagan

    fshagan Senior Member

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    Good info, and well presented. But it still almost put me to sleep. No offense. I think its a defense mechanism from spending way too much time each year doing my taxes!

    We need a simplified tax system. A flat tax, or a nearly flat tax and no deductions, and no filing for workers who have payroll deductions for taxes.

    But until then, your post does help. So does TaxCut Software!
     
    #2 fshagan, Dec 12, 2005
  3. cmympg

    cmympg Who knows? Who cares?

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    You are so right, it is boring. Even though it would put me out of a job, I think a flat tax (not a consumption tax or national sales tax) makes a lot of sense. It won't happen in my lifetime because, in my humble opinion, there are way too many special interest groups with strong lobbies who think they would be be hurt by a flat tax.
     
    #3 cmympg, Dec 12, 2005
  4. galaxee

    galaxee mostly benevolent

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    step one: understanding
    step two: coming to terms with having to do taxes in the first place...

    :D
     
    #4 galaxee, Dec 12, 2005
  5. Betelgeuse

    Betelgeuse Active Member

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    Here is an argument against the flat tax (note that this isn't necessarily my opinion, but just what I've heard people say):

    People who make more money are more able to pay more of it in taxes (not always true, but true in general). So, by taxing those people, we can make sure that people who don't make a lot of money don't get taxed into poverty. OK. Yes, it's true that people who make a lot of money would pay more in taxes under a Flat Tax plan (i.e. a fixed percentage of a large number is a large number), but the idea behind the current plan is that the first $XXX (whatever "XXX" is) is needed for basic needs, so we'll tax that at the lowest possible rate (or not at all). Each amount of money above that rate is less and less necessary for basic needs, so we'll tax that less. Oh! But what about people who have kids? More of that money goes to basic needs, so we'll give them a way raise $XXX . . .

    You can see how this rapidly gets complicated, but it's not necessarily true that it's just there for the sake of being complicated (and for satiating special interest groups).
     
    #5 Betelgeuse, Dec 12, 2005
  6. fshagan

    fshagan Senior Member

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    Yep, that's the argument against a flat tax. I think it was Plato that said democracies can't last because the people will vote themselves money out of the treasury. Our economic system is a lot different, as we recognize the engine of the economy isn't just the government. But there is some truth to old Plato's adage (if it was him).

    We tend to use the tax system as a way to moderate behaviour rather than financing our government. I object! Its not the government's business what my behaviour is, unless I'm harming someone else. My taxes shouldn't be higher because I choose to not have children and live with Bruce instead of marrying Brenda. Or rent rather than buy a house. My taxes should be my share of the costs of running the country.

    That being said, I certainly took advantage of child care tax credits, deductions for home mortgage interest, etc. So while my heart is at one place, my practice is to work within the current system.

    Most of the flat tax plans I've read exempt people who earn under a certain level ... $22,000 a year or something. So they aren't truly a flat tax. I happen to believe that everyone should share in paying taxes, even the poor. They shouldn't pay much, but everyone should have the pleasure of being a part of the system.
     
    #6 fshagan, Dec 14, 2005
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