Summary

A tax return is a form used to file income taxes with the Internal Revenue Service (IRS). Tax returns repeatedly are formatted in a schedule setup, where the income numbers used to compute the tax obligation are inscribed into the pamphlets themselves. Tax returns should be filed each year for a person or corporation that received revenue in the course of the time, whether through consistent income (salaries), interest, dividends, capital gains, or other returns.

To assist low-income households and people compensate for coverage, the US government decided to offer monetary aid in the type of grants, to counterbalance the cost of scheduled health care insurance payments and out-of-pocket costs. Premium tax credits are accessible, reliant on 2015 family size and income, and insurance status should be stated when filing a tax return.

People use Form 1040, companies use Form 1120 and conglomerates use Form 1065. Venture income is documented on Form 1099. Many big companies and sole proprietors file tax returns periodical, instead of just once yearly. This action makes and retains the tax stability successively as adjacent to $0 as imaginable and evades huge tax bills at the termination of the period.

However, a tax return can be send by the mentioned entities if; they are self-employed, before tax the investment or savings exceed 10,000 and one income is over 100,000. Under the Internal Revenue Code returns can be categorized as either tax returns or information returns. A tax return offers data so that the taxation specialist can be able to evaluate the taxpayer’s computations, or can define the sum of tax payable if the taxpayer is not obligated to compute that amount.

Preliminary Work to Prepare Tax Returns

For a United States citizen or resident alien, the requirements for filing for estate, income, gift tax returns, and paying estimated tax are the same. That is whether the person lives in the country or abroad. Nevertheless, according to the IRS (2016), US citizens, resident aliens and people in the military are offered an automatic two month extension to file returns. U.S citizens and Green card holders living in foreign countries are required to email their returns to;

Department of the Treasury

Internal Revenue Service Center

Austin, TX 73301-0215

USA

But, the estimated tax payments should mailed together with form 1040-ES to:

Internal Revenue Service

P.O. Box 1300

Charlotte, NC 28201-1300

USA

For all taxpayers who are interested in filing, they have to have Taxpayer Identification Number or social security number. IRS (2015) notes one can get a social security number (SSN) by using form SS-5. This is because one is also required to express the amounts he/she wants to report in US dollars.

In January 2016, taxpayers responsibility to make systematic advances would collect their bank transfers form only if they had 12 due dates. The due dates include; 25 January – (due date for prepayment of income tax), 2nd February (due date of the second installment of 2014 back taxes (does not alarm companies), 23rd February (due date for prepayments of income tax), 23rd March, 25th April, 23rd May, 23rd June, 25th July, 23rd August, 5th September (due date for the first installment of real estate tax), 23rd September, 20th October (due date of the second installment of Real estate tax), 24th October, 23rd November, 25th November (due date of the first instalment of unsettled tax for 2015 (alarms other than company taxpayers), and 23rd December

Taxpayer filing status (e.g., Single, head of household)

One of the greatest misinterpreted filing status is one of the head of household, but despite that fact, it is also one of the most significant taxpayer filing status that has to be understood since it comes with abundant profits especially for those who are eligible. For instance, the filing status is of importance to single parents.

IRS (2016) defines head of domiciliary as a filing status for unmarried or single taxpayers, who have a home for eligible people. However, the head of household filing status has some significant benefits over the single filing status. For instance, people who qualify for head of household filing status have low tax rate and standard deductions compared to single filing status. However, for one to qualify to file as a head of household, he/she has to satisfy the following necessities;

Not married (or single, divorced, or legally separated), or at a time of filing one was considered unmarried
During the year of filing, individual waged not less than half the charge of possessing a home
A “Qualifying Person” lived with you in that home for not less than half the year, excluding impermanent nonappearances (a reliant parent is not obliged to live with you).

Nevertheless, for one to file, whether a resident alien or a U.S national, the gross income, age, filing status, and dependency is the determinant of how ought to file. According to IRS Publication 501 (2016), filing requirements apply despite the fact one owes no tax.

Table 1

Filling requirement for many taxpayers
Filing status Status end of 2015 Gross income
Single Under 65, 65 or older 10,300 and 11,850 dollars
Head of household Under 65, 65 or older 13,250, and 14,800 dollars
Married, filing jointly Under 65 (both spouses), 65 or older (one spouses), 65 or older (one spouses) 20,600 dollars

21,850 dollars

23,100 dollars
Married, filing separately Any age 4,000 dollars
Qualifying widow (er) with dependent child Under 65, 65 or older 16,600 dollars

17,850 dollars

IRS Publication 501 (2016)

Foundations of all worldwide taxable and non-taxable income (e.g., interest, wages, business, sales of assets, bonuses, rental income, flow-through entities, alimony received)

In this section, we determine what constitutes sources of income

This includes salary, wages, and deferred payments like pensions, as well as fees earned by self-employed people. In order to determine the source of these incomes, IRS (2015) notes the determining factor is characteristically where the services are executed. In U.S, return which is earned from services performed physically is seen as a source income. This is irrespective of who the boss is and what payroll the salary is compensated from. Similarly, payments for services which are executed away from the US physically are also considered foreign source of income.

In order to conclude the source of interest revenue, the dwelling of the client is the determining factor. For instance, in US, interest that is compensated by the inhabitants, business, or conglomerate, it is seen as source of income. Other source of interest income is Interest remunerated on debts delivered by the U.S. administration or by other civil sector in the U.S like a state government. However, interest salaried by an overseas entity (company, conglomerate, person, government) is categorized as distant source income.

Just like the sources of interest income, dividend income source is based on the residence of company compensating the extra. In case the dividend is compensated by a U.S. company it is considered to be U.S. source revenue. Equally, dividends salaried by an overseas company are believed to be overseas source revenue.

Rental and royalty income

The source of rental and royalty income rests on the site of the assets that produces the revenue. If the assets is positioned in the US, the rental or royalty imbursement is considered to be U.S. source. For assets which is situated beyond the U.S., the rental or royalty imbursement is pickled as overseas source revenue.

Income from sale of personal property

Income produced from the sale of personal property is obtained bestowing to the dwelling of the vendor. Personal property comprises properties like shares, securities, vehicles, apparatus, and fittings. Habitation for this determination is centered on the “tax household” model. Normally, achievement from the sale of personal property by a U.S. vacationing will not be deliberated U.S. source income.

Sources of applicable exclusions and adjustments to gross income (e.g., foreign earned income exclusion, retirement plans, HSAs, alimony paid, health insurance, self-employment tax)

Foreign earned income exclusion

Foreign earned income exclusion is based on foreign earned income (income one receives after rendering services in an overseas nation during a period which a person’s tax home is in an overseas nation and through which the person meets either the bona fide abode test or the fleshly existence test. According to IRS (2016), the source of foreign received revenue is the place where one renders service and earns income.

According to IRS (2015), there are many sources of retirement income. The most common source is social security. IRS has depicted that many workers rely on IRA, 401(k) plans, and other retirement accounts as their source of retirement income. Other sources include; pensions, stocks, part time jobs, annuities, home equity, inheritance, royalties and rent, and savings accounts.

Health savings account (HSA) is a tax-exemption trust or custodial account one opens with a competent HSA executor to recompense or pay back particular health expenditures he/she incurs (IRS Publication 969, 2016). No approval or endorsement from the IRS is essential to create an HSA. One has to open up an HSA with an executor. A competent HSA executor can be a bank, an assurance firm, or anybody already permitted by the IRS to be an executor of single retirement provisions (IRAs) or Archer MSAs.

Sources of applicable deductions (e.g., itemized, standard)

This deduction is always fixed, and it is applicable to all taxpayers. The deduction is seen as performing a social wellbeing purpose which was presented with the least standard deduction in the Revenue Act of 1964 (P.L. 88-272). Over time, standard deduction has changed; for instance, in 1944, it was equal to 10% of AGI (maximum of 1,000 dollars), in 1964, a minimum standard deduction was announced as a fixed worth of $200 and $100 for every exemption with a ceiling of $1,000 if married filing jointly. With the Tax Reform Act of 1986 (TRA86; P.L. 99-514), the standard deduction has increased.

For the 2014 tax year (2015 filing season), the inflation-adjusted standard deductions are as follows:

$12,400 married filing jointly or surviving spouses,
$6,200 for single tax filers and married filing separately, and
$9,100 for tax filers who qualify as the head of a household.10

For the 2015 tax year (2016 filing season), the inflation-adjusted standard deductions are as follows:

$12,600 married filing jointly or surviving spouses,
$6,300 for single tax filers and married filing separately, and
$9,250 for tax filers who qualify as the head of a household
Itemized deduction

A taxpayer filing for itemized deduction has to do so separately. The Revenue Act of 1913 (P.L. 63-16) allowed tax filers to be able to itemize their deductions. Itemized deductions have been abridged or restricted in suitability, most remarkably with TRA86. For instance, TRA86 eradicated deductions for customer interest and passed more multifaceted instructions for subtracting investment interest. Some itemized deductions are considered miscellaneous, others can only be claimed if they meet the threshold amount, and others are subject to a cap.

Sources of applicable credits (e.g., education, foreign tax, retirement, dependent care)

Appropriate acclaims states to those delivery or undesirable expenses kinds of trades which function to counterbalance or diminish straight or F&A charge objects.

According to IRS, these tax credits helps reduce the cost of education. Some of the learning acclaims comprise the American Chance, and Lifetime Education Credit, and are deductible from federal income tax. Publication 970 detailed the benefits of education credit including reducing student loan interest, reducing tuition and fees for education, allows parents to take early distributions from any form of IRA, and allows parents to receive tax free educational benefits from their bosses.

One is allowed to make or modify their choice to have privilege of a foreign tax deduction credit at any time throughout the period within 10 years from the regular due date for filing the return (minus respect to any addition of interval to file) for the tax year in which the taxes were really remunerated or accumulated. Tax treaties have been established in the U.S to prevent double taxation. Some treaties allow for an additional credit to part of the tax.

Sources of tax payments and refundable credits (e.g., withholding, estimated payments, earned income tax credit)

All employers are obligated to withhold revenue levy from their employees pay. Levy can also be withheld from – pensions, commissions, bonuses, and gambling winnings (IRS, 2015). Nevertheless, the amount withheld is paid by the employers to IRS but in the name of the person who the income tax has been withheld from.

Failure for one to pay tax either through withholding or inadequate payment of tax, one is subjected to estimated taxes. However, business entrepreneurships follows the estimated method to pay their taxes. For people who receive income like interest, capital gains, dividends, royalties, and rent, they pay their taxes through estimated tax. Hence, estimated tax is used to recompense for self-employment tax, income tax, and alternative minimum tax (IRS, 2015).

Office of taxpayer correspondence (OTC) was established to centralize service wide responsibility for taxpayer correspondence. In other words, OTC is an IRS heart, for all-inclusive correspondence services, from enterprise and growth to assessing efficiency. OTC analyses new and current taxpayer correspondence for reliability and simplicity. OTC creates and revises taxpayer correspondence products, collects and evaluates correspondence data, coordinates services, forecasts and measures downstream impact of correspondence products, and implements taxpayer correspondence standards (IRS, part 25, chap 13).

Additional required returns filed and taxes paid (e.g., employment, gifts, and information returns)

Some of the employment taxes paid for are social security, centralized revenue tax, federal unemployment tax (FUTA), and Medicare taxes. One is required to pay federal income tax suspended as well as the employee and employer Medicare taxes and social security (IRS, 2016).

Any person affianced in an occupation or trade, comprising a company, conglomerate, people, estate, and trust, who creates reportable dealings during the course of the calendar year is required to file information returns to report those dealings to the IRS. IRC and associated regulations mandate the requirement to file information returns.

Special filing requirements (e.g. foreign income, presidentially declared disaster areas, Form 1040-NR)

For U.S citizens, who are Green card holder or travel outside the country, their age, income, and filing status determine if the people have to file for tax returns. However, the amount filed for should be expressed in US dollars. Nonetheless, in order to file the return, the gross income according to IRS it has to be at least equal to the amount indicated in the filing status.

Foreign account and asset reporting (e.g., FBAR, Form 8938)

To file a foreign bank and financial accounts (FBAR) in the U.S, one has to have financial interest in or signature authority over at least one financial account located outside of the United States; and the collective value of all overseas financial accounts surpass $10,000 at any time during the calendar year reported. U.S people comprise of U.S. residents; U.S. citizens; bodies, plus but not restricted to, companies, conglomerates, or limited liability corporations, formed or systematized in the U.S or under the rules of the U.S; and trusts or estates designed under the same laws.

Minor children’s unearned income (Kiddie tax)

Kiddie tax is the amount of tax that is applied to one’s kid for the sum that surpasses 2,100 dollars. The tax rate is one’s marginal tax rate, and it could be as high as 39.6%. Kiddie tax was established to dismay parents who wanted to lessen their taxes by fluctuating their funds over to their children. The tax got its name kiddie tax as at one point it used to apply only to kids under the age of 14. Kids cannot be subjected to kiddie tax if they are filing jointly.

References

IRS (2015). 2. Filing Status. Retrieved from https://www.irs.gov/publications/p17/ch02.html

IRS (2015). Part 25. Special Topics, Chapter 13. Taxpayer Correspondence, Section 1. Taxpayer Correspondence Services. Retrieved from https://www.irs.gov/irm/part25/irm_25-013-001.html

IRS (2015). Report of Foreign Bank and Financial Accounts (FBAR). Retrieved from https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-FBAR

IRS (2015). Tax Withholding. Retrieved from https://www.irs.gov/Individuals/Employees/Tax-Withholding

IRS (2015). U.S. Citizens and Resident Aliens Abroad. Retrieved from https://www.irs.gov/Individuals/International-Taxpayers/U.S.-Citizens-and-Resident-Aliens-Abroad

IRS (2016). Educational Credit. Retrieved from https://www.irs.gov/Individuals/Education-Credits

IRS (2016). Employment taxes. Retrieved from https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employment-Taxes-2

IRS (2016). Foreign Earned Income Exclusion – What is Foreign Earned Income. Retrieved from https://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion—What-is-Foreign-Earned-Income

IRS (2016). IRS Head of Household Filing Status. Retrieved from http://www.efile.com/irs-head-of-household-tax-filing-status/

IRS Publication 501 (2016). Publication 501 – Main Content. Retrieved from https://www.irs.gov/publications/p501/ar02.html

IRS Publication 969 (2015). Publication 969 – Main Content. Retrieved from https://www.irs.gov/publications/p969/ar02.html

Publication 970 (2010). Tax benefits of education. Retrieved from https://www.irs.gov/pub/irs-pdf/p970.pdf
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Posted on May 11, 2016Author TutorCategories Question, Questions