The Order of Taxation on Form 1040
Learn how form 1040 is structured so that you can build wealth more efficiently…
Caution: 20-minute read
As the creator of TheWealthIncreaser.com and someone who has created over 700 pages of web content, I have heard from many clients, past clients and visitors to all of the blogging sites that I have created, and a relative constant was that many were unaware in a meaningful way of how the IRS form 1040 was constructed–and many wanted to know how they could better interpret the form and use that interpretation to achieve more.
Well, the wait is over, as the inspiration to create IRS Form 1040 Demystified has occurred–and now you and those who desire to better understand IRS form 1040 as it is currently constructed will have an opportunity to learn more about form 1040 in clear terms than you ever imagined, and more importantly use what you learn to achieve more throughout your lifetime!
And with this being independence day in the United States, isn’t it time that you make a more serious effort toward financial independence for yourself and your family so that you can have more say about how you will live in your future! If it is a good time for you, IRS Form 1040 Demystified is a good starting point to pursue that financial independence that you desire and deserve.
And with all that is happening with the United States economy, it is more important than ever that you get out in front of your finances, and particularly your taxes, at this time–so that you can better manage the adversity that is now in the atmosphere so that you can at the very least, create harmony in your life.
It is important that you are aware of the reduction in government services that are underway as there is a good chance that you will be affected either directly, or indirectly. Whether implicit or explicit in the stated goals, the fact is many agencies and programs that move the economy are being made more difficult to run, eliminated, reduced, or ran in such a manner that frustration, anxiety and reduced services will be the end result for many.
In our previous post many responded positively to the discussion on taxation and that discussion alleviated the tax fears of many, and many found real benefit and solutions to their tax dilemma, therefore the creator of TheWealthIncreaser.com thought it appropriate to continue on that same topic so that you and others can achieve even more in the 2025 tax season and beyond.
Ironically, on the day of this posting it was learned that the “so called” Big, Beautiful Bill had passed in the U. S. Senate and House and is expected to be signed into law today–meaning with tax cuts and other changes in the $3.4 trillion fiscal package that curtails spending on safety-net programs and reverses much of President Joe Biden’s efforts to move the country toward a clean-energy economy–this post will likely need to be updated in short order.
Ok, now that you are ready to engage your mind so that you can achieve more, let’s go to page 1 of IRS form 1040:
Page 1
It is important that you are aware of form 1040 and what goes on the form if you are one who desire to achieve more throughout your lifetime.
Form 1040 includes entries for your name, social security number (and spouse if married), address and the form wants to immediately know if you have digital assets and if someone can claim you or your spouse as a dependent.
The form also allows you to list your dependents and various sources of income including your wages from your W-2(s), wages that you pay to household employees that were not reported on W-2(s), tip income, Medicaid waiver payments not reported on form(s) W-2, taxable dependent care benefits from form 2441, employer provided adoption benefits, wages from form 8919, other earned income and non-taxable combat pay income must all be included and tallied.
Furthermore, tax exempt income, qualified dividends, IRA distributions, pensions, annuities, and social security benefits (taxable portion if any) must all be included in your income.
Capital gain or loss, additional (and adjustable) income from schedule 1 (additional income and adjustments to income that can increase or decrease your income) must also be included in income on page 1.
All of the preceding equals your total income for tax purposes during the tax year!
Your total income minus your income and/or adjustments from schedule 1 (includes additional income and adjustments) equals your AGI or adjusted gross income (line 11 of form 1040).
You then subtract your standard or itemized deductions and your QBI deduction if applicable to determine your TAXABLE INCOME that goes on page 1 of form 1040 (line 15–2024 tax year).
Page 2
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On the first entry of page 2 you would determine your tax based on your taxable income that was calculated on page 1.
You would enter the amount from schedule 2 (includes additional taxes that you may owe based on your tax position such as the AMT, among others–part I of schedule 2) to your total and add to your tax total.
This would increase your total tax.
You would subtract out your child tax credit or credit for other dependent from schedule 8812. The amount from schedule 3 (additional credits and payments), line 8 would also be subtracted out from your total tax if applicable.
These actions have the effect of lowering your overall taxes that you owe or increasing your refund amount.
Other taxes such as self-employment tax from schedule 2 and Social Security/Medicare tax on unreported tips and NIIT among others are “added in” so that you can come up with your total tax that is owed to the IRS based on your marginal and effective tax rate–part II of schedule 2!
Your federal income taxes paid through the year on your W-2(s), 1099 forms, and other forms that had taxes withheld would be subtracted from your total tax to determine if you would get a refund or owe the IRS.
If you had 2024 estimated tax payments (April, June, September, January) and/or amount applied from your 2023 tax return, that too would be entered. EIC, additional child tax credit (schedule 8812), American Opportunity Credit and the amount from schedule 3, line 15 would be added back–and all combined would be described as your total other payments on page 2 of form 1040.
These payments and credits have the effect of lowering your overall taxes or increasing your refund amount even more.
From the above numbers you can determine if you overpaid and was due a refund or if you underpaid and owed on your taxes on IRS form 1040.
If the amount owed was at a certain number (generally $1,000 or more), you could also face a tax penalty for underpayment of your federal income taxes for the tax year in question. If you owed, you could pay electronically or mail the payment in by the filing deadline, usually April 15th, or you could file for an extension and pay by October 15th to avoid additional failure to file and failure to pay penalties.
Additionally, if you owed over $1,000 dollars you could choose to adjust your W-2, 1099R, 1099-SSA or other 1099 or pay estimated taxes at intervals of April 15, June 15, September 15 and January 15 of the following year by setting up an account and making electronic payments through the EFTPS system.
If you were due a refund, you could elect to have the refund directly deposited in your banking account or have the check mailed to you. If you are due a refund, you must file form 1040 and other required forms within 3 years of the tax deadline or you risk losing your rights (you waive your rights) to the refund according to IRS guidelines, therefore it may be wise to file for an extension even when you are due a refund as that can buy you an additional 6 months (3 years and 6 months to file instead of 3 years to file)–if you were due a refund and failed to file by the initial deadline of April 15th of the tax year in question.
You could also “pay tax provider” (elect to receive a rapid refund) and get all or a part of your refund immediately, however it would normally come at a steep cost (several hundred dollars), therefore it is imperative that you get your finances in order so that you don’t have to take this drastic measure as you are losing financially by doing so.
With the advent of electronic filing, you normally would receive your federal refund within 3 weeks, and you want to get your money management habits to the point where you can operate with patience so that you can make your money work for you–and not against you.
Conclusion
It is important that you try to make some logical sense out of IRS form 1040, even if the form may appear complex on the surface. By doing so you can put yourself on a path to more successful management of your finances and particularly your taxes.
Since the Tax Cuts and Jobs Act changes of 2017, form 1040 continues to include entries from schedule A for itemized deductions which remained from prior tax years, along with schedules 1, 2, and 3, which are new.
A host of other changes went into effect as a result of the act, and it is your responsibility to determine whether you are positively or negatively affected by those changes and other tax changes that occur annually, as “many changes are expected in 2025 and beyond” due to many provisions in the TCJA expiring.
On form 1040 you will have your identifying information that is unique to you–along with your dependents, income from all sources (including income and adjustments from schedule 1) to give you your total income. From there you would subtract out your adjustments to income from schedule 1, subtract out your standard deduction (or itemized deduction from schedule A if you itemize), subtract out your QBI deduction if you had a pass-through business that netted income, to come up with your TAXABLE INCOME that would be unique to you.
These calculations would all be done on page 1 of your IRS form 1040!
Based on your taxable income you would determine your tax on page 2 according to IRS tax tables in effect for the tax year. Even though your taxes are based off of your “taxable income” you can still lower the amount of taxes that you have to pay if on page 2 you have adjustments from schedule 2 (additional income and adjustments), or you qualify for the child tax credit or credit for other dependent on form 8812.
If you had other taxes on schedule 2 such as estimated taxes owed, that would be added to your tax bill so that you could determine your total tax that you would owe the IRS based on all of your income, adjustments, credits, and deductions up to this point.
And even at this point you would still have other ways of lowering your taxes!
Your tax withholding that you did throughout the year that is displayed on your W-2(s), 1099s and other tax withholding forms would come into play here and would help reduce your total tax. Your estimated tax payments (EFTPS system) and amount applied due to a refund of your prior year taxes toward your current year taxes could also help reduce your total tax!
All combined these would be known as your other payments that you made to the IRS throughout the tax year.
If you were eligible for the EIC, child tax credit and/or AOC credit and you had schedule 3 (vast array of additional credits and payments that reduce your taxes dollar for dollar), credits and payments, you could further reduce your total taxes. All combined these would be known as your other credits that you were eligible for during the tax year according to IRS guidelines.
At this point you would total your “other payments” and “other credits” and be able to determine if you would owe on your taxes or if you were due a refund–and at what amount!
You would then subtract out other payments and credits from your total tax, and if the other payments and credits was higher than your total tax, you would be due a refund—if lower than your total tax, you would owe the IRS and payment would be expected by the filing deadline in April, or extension deadline of October 15th, if you timely filed for an extension.
If you owed over $1,000 you could be subject to an “additional penalty” for underpayment of your taxes.
You would have the option of filing your tax return electronically (and signing electronically) and paying electronically or filing your tax return electronically (and signing electronically) and mailing in your payment by the tax deadline along with a payment voucher.
If you were due a refund, you (and spouse if married) and your paid tax professional would sign and date form 1040 on page 2, enter your (and spouse if married) occupation(s) and if you elected to electronically deposit your refund, you would include your banking information. Additionally, you can elect whether you want to allow another person to discuss your return with the IRS. If you elected to obtain an IP PIN for added security of your return, that too would be entered near the bottom of page 2 of IRS form 1040.
Your tax professional would be required to keep an electronic or paper record with your signature if you decided to file electronically at the federal (form 8453) and state (state specific form) level.
You also have the option of mailing in your return upon completion, whether you owe or are due a refund, however in this new age of technological advancement, mailing in of form 1040 tax returns are rarely done, however the option still remains.
By getting out front of your taxes by logically understanding the structure of form 1040, you better prepare yourself and your family for the coming tax seasons and you make your financial planning efforts less burdensome, and your goals that you really desire are more likely to be reached at the time of “your” choosing.
Also realize that form 1040 has many other forms, schedules and attachments that go along with the numerous adjustments, benefits, credits, deductions, exclusions, exceptions, and exemptions that are available in the tax code, and they would normally be included in sequential order after the form 1040 if you were to transmit electronically or mail in your return.
If you failed to include meaningful income, capital gains, overlooked W-2(s), dependents etcetera, or claim an adjustment, credit, deduction, exception, exclusion or exemption when you filed your return, you have the opportunity to correct the situation “proactively” by filing form 1040X, which amends your previously filed return–the form looks backward to your prior tax filing years.
In a similar fashion you may have the opportunity to extend the filing of your 1040 return (looks forward) if you live in an area where a federal disaster was declared or you are in the military and you were in a combat zone during the tax year.
Or you can extend the filing deadline up to October 15th for any reason by filing form 4868 before the filing deadline in April of the tax year.
Form 1040-SR is yet another form that you should be aware of as it is a shorter form that allows seniors (those age 65 and up) to file their taxes in a more efficient manner as it is a shorter form than the 1040.
Form 1040-NR would apply if you were a non-resident alien engaged in a trade or business in the United States (such as a paid student intern from a foreign country receiving income in the U. S.), or you are representing a deceased person or estate/trust that was required to file form 1040-NR.
In addition to additional time to file (pun intended) by utilizing form 4868, you could in addition to extending your time to file, qualify for other credits and deductions as a result of a disaster declaration in your area, or even if deployed in a combat zone during the tax year.
When it comes to your taxes, finances and life in general, your goal should be to go through life in a manner where worry, anxiety, fear, frustration, lack of effort and excuses play a minimum role, as they are all just distractions that will slow down your journey toward your financial success (including tax success) that you desire or need to achieve to make your life more meaningful and significant while you are yet alive and here on planet earth.
By contemplating this post at your highest level, you demystify form 1040 and therefore you will not move about through life aimlessly and without discipline as you are directing your financial moves so that you can open a new door and achieve much more.
In an attempt to inspire, activate, and motivate you even more to pursue your tax and wealth building goals, I leave you with a poem:
Gotta Do It
Gotta do it, do it I gotta
Just as I look up in the sky
And just as I ask why
I can no longer just sit
Now is the time that I pursue my goals, bit by bit
If I fail to act, I deserve what I get
I know that I must move to action as success is not a sure bet
I gotta know that when inspiration comes down, it is in by best interest to act
I will respond positively to inspiration when it is in my best interest to do so, now that’s a fact
Gotta do it, do it, I gotta
I gotta move to action
I gotta gain more traction
I gotta pursue my goals in an unrelenting fashion
I gotta pursue my goals with more passion
Do it, I gotta
It is important that you are on a continuous path to growth and by “demystifying form 1040” you not only put yourself on a path to continuous personal growth, you put yourself on a path to not being a “lazy thinker” or one who does not give “deep thought” to matters that are–or should be important–in your life.
It is critical that you understand the importance of your thoughts on important matters in your life (pun intended) as the “quality of your thoughts” can change your view of how you see yourself and provide you answers that can lead to a more enlightening future for you and your family in all areas of your life.
Additionally, you want to know that a more comprehensive view of your finances will allow you to shine and can provide you the opportunity to have more time to dine.
By comprehending this post, you can be more “intellectually prepared” for the success that you desire or need to achieve, therefore your efforts will not be in vain and you will position yourself to avoid financial pain as you gear your mind and heart up to run like a train, thereby creating you own “unstoppable” lane by using the knowledge that you gain so that you can avoid the rain.
All the best to your IRS 1040, tax, and wealth building success as you deserve nothing less…
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