Personal Income Tax Returns
Form 1040
Form 1040 is the personal income tax return where individuals report their income, expenses, credits, and deductions. There used to be simpler (and more limited) alternatives in the 1040A and 1040EZ; however, those were disallowed as of Tax Year 2018.
The only alternative for personal income tax returns is the 1040SR which is for seniors aged 65 or older.
Form 1040 is used to report:
- General income related to employment
- Personal allocation of Net Income from a Partnership
- Personal allocation of Net Income from an LLC
- Personal allocation of Net Income from an S-Corporation
- Dividends received from a C-Corporation or other investments
There are six key parts to the Form 1040:
- Income and Gains (Money or the Monetary Value of Certain Benefits received over the year)
- Deductions (Some income is spent on various expenses that the government considers important. To encourage or assist with those expenses, the government does not tax that income — examples are medical expenses)
- Taxes Due (Tax Rate x [Income — Deductions])
- Credits (Once the tax is calculated, there are some ‘credits’ that decrease that tax owed. Examples include the Child Tax Credit which says that those with Children get a discount on the taxes owed. Some are refundable and will be sent to you as cash once your taxes owed falls to $0.)
- Payments (Taxes are owed as income is earned not at the end of the year; they should be paid throughout as estimated taxes. Employees with a W-2 should see estimated taxes pulled directly from their paycheck and they take home the rest. Other income recipients may have to go to the government to pay the estimated taxes. Prepayments of taxes decrease what is owed at the end of the year. Failure to pay estimated taxes can lead to penalties and interest.
- Final Tax Owed or Tax Refund (Income — Deductions = Taxable Income. Taxable Income x Tax Rate = Initial Tax Due. Tax Due — Credits — Payments = Final Tax Due. If the taxpayer has either overpaid with estimated taxes or if they have credits that are more than the tax due, they may see a tax refund).
Note that Tax Refunds are often not ‘free money.’ They are typically money that was paid to the government in advance in excess of what was due. Thus the ‘refund’ title.
Some credits are ‘refundable’, typically offered to taxpayer(s) in lower income brackets or those who contribute to certain social interests. Where the credit exceeds the tax due, that money is sent to the taxpayer(s). Common examples are the Child Tax Credit, supplied to those who have children and Energy Credits given for instance to those who put in energy saving improvements to a home.
Form 1040SR
Form 1040SR is a personal income tax return that has the same questions, schedules, and instructions as the Form 1040. The only key difference is that it has larger fonts and larger spaces for completing each section. It is primarily designed for seniors and persons with impaired vision, and it is more useful if the taxpayer is completing the return by hand.
This form is available if the taxpayer or spouse is age 65 or older. If only one of them is 65 or older, they must file their return as Married Filing Joint (MFJ).
Form 1040A (NO LONGER ACCEPTED)
Form 1040A was a personal income tax return that served as an alternative to the Form 1040 until Tax Year 2018. Unlike the Form 1040, this return had significant limitations and restricted the deductions and credits that the taxpayer can apply.
It did not permit itemization but did allow certain other deductions (above-the-line) to decrease Taxable Income and thus Taxes.
Form 1040EZ (NO LONGER ACCEPTED)
This was a personal income tax return that served as an alternative to the Form 1040 until Tax Year 2018. Unlike the Form 1040, this return had significant limitations and restricted the deductions and credits that the taxpayer can apply.
It did not permit itemization and the only credit permitted was the Earned Income Tax Credit (EITC).
Business Income Tax Returns
Form 1065
Form 1065 is an informational tax return for partnerships to report their income, expenses, credits, and deductions.
- General Partnerships (GP)
- Limited Partnerships (LP)
- Limited Liability Partnerships (LLP)
- Limited Liability Limited Partnerships (LLLP)
- Religious or Apostolic Organizations deemed tax exempt under 501(d) — could use Form 1120 instead if applicable
- Foreign Partnerships where gross income is effectively connected to US-Sourced Income — may be exempt under certain circumstances
This tax return does not result in a tax owed because Partnerships do not pay taxes as a separate entity.
Instead, the firm is treated as a pass through entity. The net income is allocated to each partner according to their ownership percentage. The partner then reports their personal allocation on their personal income tax return and pays the taxes there. The Form 1065 is merely providing the IRS with the information in summary form and notifying them as to how much was allocated by the firm to each partner.
The IRS will use this form to verify that each partner is accurately reporting the income from the partnership on their personal returns.
After this informational Form 1065 is completed, the firm generates a Schedule K for each partner informing them of their personal allocation of the income, expenses, credits, and deductions based on their ownership rights.
The partner will then report their personal allocation of the income, expenses, credits, and deductions on their Form 1040 (typically on the Schedule C). The net income (loss) will be added to their other income to calculate taxable income.
Form 1120
Form 1120 is a Business income tax return for C-Corporations to report their income, expenses, credits, and deductions.
- C-Corporations
- LLCs electing to be treated as C-Corporations
Corporations are businesses that meet certain requirements and have elected to incorporate as a separate entity. This means they do not operate as a pass through and there is the resulting issue of double taxation — the corporation will pay taxes on all income as it is earned, and then the individual shareholders will pay taxes again on the income that is distributed to them (e.g., as dividends).
Corporations report their income, deductions, credits, and expenses on Form 1120 and calculate the taxes owed. Taxes are owed as the income is earned throughout the year, so the firm will have been making estimated payments each quarter. As they file Form 1120, they will identify any additional taxes owed and pay those.
The Corporation will also send information to the Shareholders regarding their distributions and contributions. The Shareholder will report distributions on their personal returns (1040) as income and pay the relevant taxes.
Form 1120-S
Form 1120-S is an informational tax return for S-Corporations to report their income, expenses, credits, and deductions.
- S-Corporations
- LLCs electing to be treated as S-Corporations
This tax return does not result in a tax owed because S-Corporations do not pay taxes as a separate entity.
Instead, the firm is treated as a pass-through entity. The net income is allocated to each member according to their ownership percentage. The member then reports their personal allocation on their personal income tax return and pays the taxes there. The Form 1120-S is merely providing the IRS with the information in summary form and notifying them as to how much was allocated by the firm to each member.
The IRS will use this form to verify that each member is accurately reporting the income from the S-Corporation on their member returns.
After this informational Form 1120-S is completed, the firm generates a Schedule K for each member informing them of their personal allocation of the income, expenses, credits, and deductions based on their ownership rights.
The member will then report their personal allocation of the income, expenses, credits, and deductions on their Form 1040 (typically on the Schedule C). The net income (loss) will be added to their other income to calculate taxable income.
Form 1041
The Form 1041 is a personal tax return used to calculate certain taxes owed by an individual after their death. It is used for:
- Estates
- Living Trusts
The Form 1041 is used to report income and related expenses generated after the decedent’s death and until bequests are made.
This return is any of the following apply:
- Gross Income > $600
- One + beneficiaries is a Non-Resident Alien
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