Personal Finance 101 – Income Taxes Made Easy … Well, Easier

By: Brittany Mollica

As a young professional, you may think you’re too busy to learn how your tax return works. Whether you’re new to adulting and filing on your own for the first time or you’ve been filing for a few years and want to actually understand it this time, you don’t need to be intimidated by the 1040.

In this post we will give you an overview of Form 1040, explaining the different sections of the form while also giving you some tips so that filing your taxes can be as smooth and painless as possible. Note that all guidelines and numbers included in this article are based on 2018 rules.

Section 1: This should be the easiest part – listing your personal information. In this section, you identify yourself, your spouse (if married) and your dependents (if you have any) as well as select your filing status:

  • Single - Fairly self-explanatory. Your household is just you – no spouse or dependents.
  • Married Filing Jointly - This filing status combines your and your spouse’s income and deductions. This is generally how most married couples file.
  • Married Filing Separately - This filing status allows you and your spouse to file taxes separately.
  • Head of Household - To file as head of household, you must be single and must be taking care of a qualifying child or dependent. If you fall into this category, it is usually beneficial to file as Head of Household rather than as Single.
  • Qualifying Widow(er) – If your spouse has died and you have a dependent child, you can use this status for the next two years assuming you don’t remarry. This filing status allows you to retain the benefits of the Married Filing Jointly status.

Section 2: Next, you will list all your sources of income from the tax year. Often, the only income to report comes from your job and from your non-retirement investments (i.e. capital gains and any dividends or interest received).

However, there are many other types of income that could be reported in this section, such as taxable distributions from your Traditional IRA or income from a business you started (#girlboss). You may need to use a separate form, Schedule 1, to calculate all the other miscellaneous income you will report. Then, Line 6 of the 1040 will add up ALL the income you list and is your total income for the year - that number is NOT necessarily what you’ll pay taxes on.

Section 3: After calculating your total income, you may be able to report some “above-the-line” deductions on Schedule 1. When you report one of these deductions, it gets subtracted from your total income and the net result is your Adjusted Gross Income (AGI) on line 7. Some examples of above-the-line deductions:

  • Traditional IRA Contribution Deduction
  • Student Loan Interest Deduction - you may be able to deduct interest paid during the year on a qualified student loan, up to $2,500
  • Educator Expenses - if you are an educator, you may be able to deduct out-of-pocket classroom expenses, up to $250

Section 4: Next, you get to decrease your AGI using either the standard deduction OR the itemized deduction, whichever will save you more money. With the recent tax code changes, most taxpayers will probably use the standard deduction.

  • The standard deduction is a flat number based on your filing status - $12,000 for Individual status and $24,000 for Married Filing Jointly.
  • The itemized deduction is the sum of several specific expenses, such as state and local taxes, medical expenses and charitable gifts.

Once you’ve chosen which deduction to use, you now get to subtract it from your AGI. The resulting number is called your Taxable Income (line 10). If you’re in school, working part-time or just started your job, you may have Taxable Income of $0, meaning you won’t owe any taxes for the year.

Section 5: Next, you will calculate your total amount of tax due based on your Taxable Income. To do this, you’ll apply the tax tables found in the instructions for the 1040. This is a little more involved than we can cover in this post, but just know that your top dollar of taxable income is generally taxed at a higher rate than your first dollars.

After you’ve calculated the tax due, you can subtract any applicable tax credits to reduce your bill. Some examples of potential tax credits:

  • Child Tax Credit - if you are taking care of a child who is under age 17, you may be able to use the child tax credit, up to $2,000/child.
  • Education Credit - if you are paying for college or graduate school, you may be able to use the American Opportunity Credit or the Lifetime Learning Credit, up to $2,500/student or $2,000/year respectively.

Then, the remaining amount due will be increased by any other kinds of federal taxes you might owe, such as self-employment tax.

Next, your tax due will be offset by any federal income tax withholdings on your paychecks or any estimated taxes that you paid throughout the year. You may find that you prepaid more than necessary over the course of the year, which means you will get a refund - yay! In the less-fun situations, you might find yourself writing a check to the IRS because you didn’t withhold enough.

Many financial advisors will encourage you to avoid receiving too large a refund because that essentially means that your hard-earned cash was sitting with the federal government all year instead of earning interest for you. On the other hand, you don’t want to substantially underpay during the year, because you could be subject to an underpayment penalty. Try to hit the sweet spot and withhold the right amount.

Lastly, here are a few simple tips to make filing your taxes an easier process:

  1. Do not wait until the last minute to file. It’s never fun to have to do anything in a rush – there’s more room for mistakes, and you could potentially get fined if you file after the deadline.
  2. Keep your tax documents organized. As you receive tax documents from your employer, financial institutions, charities, etc., it’s best practice to organize and store them all together. This helps to ensure that you won’t lose or forget anything.
  3. Work with a tax professional.
    • If you have complexities (e.g. small business or stock awards) or want additional guidance, you should find a local tax advisor. The better tax professionals will help you think more proactively about your tax situation, saving you money and limiting your anxiety.
    • If your situation is simple, you could try one of the online tax filing services such as H&R Block or TurboTax. You can often do this for free or for a small fee. Generally, their software is smart and easy to use and can make filing your taxes much simpler. No need to print out any forms!

As always, we recommend reaching out to your financial advisor and tax advisor to help with income tax planning questions or strategies. But whether you hire a professional or prepare your taxes yourself, you will be able to make better choices if you understand how your bill is calculated.


This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. 

Hilltop Wealth Advisors does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation.