Understanding Tax Forms and Information Flow in Tax Returns

School: Colorado Technical University - Course: ACCT 225 - Subject: Accounting

Attaching Schedules and Flow of Information There are many forms and schedules that might be necessary in preparing a tax return. Some of these documents are used to compute profit, loss, tax deductions, credits, and eligibility for other benefits. In some cases, supporting schedules and forms also are backed by additional forms and worksheets. This lesson discusses some of the more common forms and schedules and how they interact. This discussion is in the context of a paid tax preparer working with a client, but the information also applies to individual taxpayers filing their own tax returns. The main federal tax document used to compute taxable income and tax liability isForm 1040, which includes sections for reducing taxable income and tax liability. Results of the computations on the additional forms and schedules flow to Form 1040, where they either increase income or reduce tax liability. Forms and Schedules There are numerous Internal Revenue Service (IRS) forms, schedules, and worksheets that may or may not be necessary when completing a tax return. The central form that collects and computes the finalized information is Form 1040. Until recently, taxpayers had to decide whether they would need the main Form 1040 or one of the two shortened versions (Form 1040-A and Form 1040-EZ). This has changed significantly. Most taxpayers use tax software to prepare the forms and file electronically. The tax software will generate Form 1040 automatically or it will generate one of the three Form 1040 versions mentioned. When organizing documents and data for tax preparation, it is important to understand that the data from the various forms and schedules will ultimately flow to Form 1040. In some cases, data are needed from Form 1040 to complete another form or schedule, but Form 1040 is the central tax document. For your purposes, you will be discussing how information flows to and from Form 1040.

Information Flow The following are some examples of the flow of information: Schedule A: oAdjusted gross income (AGI) from Form 1040 may be needed to compute deductions on Schedule A for medical expenses and miscellaneous expenses. The total of the itemized deductions on Schedule A will flow back to Form 1040, line 40. Schedule B: oTotal interest computed on Schedule B part I will flow to line 8a of Form 1040. oTotal dividends computed on Schedule B part II will flow to line 9a of Form 1040. Schedule C: oProfit or loss from Schedule C, line 31, will flow to line 12 of Form 1040. oProfit or loss from Schedule C, line 31, will also flow to line 2 of Schedule SE. Schedule SE (short Form): oSelf-employment tax on line five will flow to line 56 of Form 1040. oDeduction for one-half of self-employment tax will flow to line 27 of Form 1040. Schedule D: oGains and losses flow to line 13 of Form 1040. o(Note: Sales of Capital Assets are listed on Form 8949 then transferred to Schedule D) Schedule E (Supplemental Income): oProfit or loss from Schedule E, line 26, will flow to line 17 of Form 1040. o(Note: Several other possible computations flow to and from this schedule because it is designed for rental real estate, royalties, partnerships, S-corporations, estates, and trusts REMIC, and so on) Schedule F (Farm Profit or Loss): oProfit or loss on Schedule F will flow to line 18 of Form 1040. o(Note: The profit or loss for Schedule F also will flow to the Schedule SE, just like Schedule C to compute self-employment tax, and so on)