Basic Financial Planning for Newlyweds
Basics of the 1040
Your Initial Financial Plan:
In the more than ten years that I've been practicing as a CPA, I've never once had a client tell me that they'd like to pay more than "their fair share of taxes". As a matter of fact, most clients work pretty hard at minimizing their income tax burden.
The first step towards minimizing your tax bite is to gain a basic understanding of the tax forms that you'll be filing. Obtain a blank Form 1040, and notice that the form contains the following five sections - income, adjustments to income, deductions, taxes and credits, and other taxes.
Not surprisingly, more lines of the tax return are devoted towards the reporting of your income than to any other section of the return. Read through lines 7 through 21 of the Form 1040, and you'll see that there are lines to report various sources of taxable income, including:
Adjustments to Income
There are currently ten deductions allowable as an adjustment to income, including moving expenses, student loan interest, deductible IRAs, and retirement plans for self-employed individuals. The beauty of these adjustments is that they're taken "above the line", which means they'll reduce your Adjustable Gross Income (AGI). Since your AGI is used in determining the deductibility of many items on your tax return, reducing your AGI is one way to help minimize your tax bite.
Each year, you have the option of either claiming the standard deduction or itemizing your deductions. For 2001, the standard deduction for a single person is $4,550 and for a married couple is $7,600.
If your deductions are large enough, itemizing will help cut your tax bill. Allowable itemized deductions include medical expenses, state and local income taxes, real estate taxes, mortgage interest, donations to charities, and unreimbursed business and investment expenses.
Taxes and Credits
One you calculate your taxable income, you go to the tax tables to determine your tax liability on that income. You then determine whether you're eligible to claim any tax credits. Unlike deductions that reduce your taxable income, credits provide a dollar for dollar reduction in your tax liability. Examples of the most commonly claimed credits include the $600 per child credit and the dependent care credit.
In the next to last step, you determine whether you're subject to any additional taxes. If you're a sole proprietor, expect to pay the "self-employment tax", and if you withdrew money from your retirement accounts, you might be hit with the 10% early withdrawal penalty. You should also be aware of the Alternative Minimum Tax, an additional tax that is affecting more taxpayers each year.
Balance Due or Refund
Finally, with your fingers crossed, compare the taxes you paid in during the year with your total tax liability to see if you'll be getting a refund or writing a check.
Looking For a CPA to Help You With Your Taxes?
The income tax rules are complicated, and continue to get more complicated with each tax law change signed into law. Check out our Directory of CPAs to find a CPA in your city who can help you with your taxes and tax planning.
Are You a Do-It-Yourselfer?
Do-it-yourselfers can prepare and electronically file their income tax returns at CompleteTax
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This article was written by Andrew D. Schwartz, CPA for YourWriters.com and had previously been posted on Collegexit.com.