What Your CPA Wants You to Know
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What Your CPA Wants You to Know
70. Reviewing Your Tax Return: A Skill Everyone Should Know!!!
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Do you know how to read your tax return? Do you review your tax return when your CPA sends it over? Do you know how?
In this episode we explain the numbers on your personal tax return (Form 1040) and how to review your tax return. A skill everyone should have! This episode is perfect for everyone, whether you file your return yourself or pay your CPA to prepare your tax return.
We also explain our progressive tax system, the ins and outs of self-employment taxes, and strategies like S-corp status that could potentially lighten your tax burden. By the end of this episode, you'll be equipped to review tax payments and withholdings with the skill of a seasoned pro, ready for the next tax season without any nasty surprises.
Plus, we tackle the critical step of signing Form 8879 for e-filing, and why aligning the numbers on your tax return with those on the form is not just about accuracy—it's about peace of mind. So, grab your tax return and join us for a session that promises to educate and empower you for future tax seasons.
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Understanding Your Tax Return Form
Speaker 1And just whenever people owe , it's the first thing I always show them , because it will show you specifically , line by line , what your wages were in the previous year , what they were this year and the difference . And those are the three columns it has . Then it will do the same for interest dividends , every single kind of income you have , and it will also do that for the withholding and estimated tax payments . So you can quickly see my wages went up this much , my other income went up this much , my withholding only went up this much and that's why my taxes went up this much . It really helps explain where all the numbers are coming from and why you owe so much this year when you didn't necessarily owe last year . Welcome to what your CPA Wants you To Know .
Speaker 2Tax and accounting help can be expensive , so we've created this podcast to help guide you through it all and make you feel like you have a CPA in your back pocket .
Speaker 1I'm Carson Sands .
Speaker 2And I'm Taryn Sands .
Speaker 1I'm a CPA with over 10 years of experience helping people start and grow their businesses .
Speaker 2And I'm an MBA with a specialization in marketing and entrepreneurship . Taxes suck and we want to make sure you don't pay more than your fair share .
Speaker 1We're here to share everything your CPA wants you to know in a fun and easy to understand way . Let's get started .
Speaker 2Let's do it way . Let's get started . Let's do it . Hello , if you are listening to this episode , then tax season 2024 is officially over . Thank God . Tell us how you really feel about it . Well , we made it through this year . It was probably one of our toughest yet , I think , just trying to juggle spring sports and run a business , but we did it . I think we put some good processes in place , so hopefully next year will be even better .
Speaker 1Thanks to Taryn , our efficiency was better than ever . So , even though our personal lives were much more hectic this tax season than ever before , we were still able to get just as much work done as we ever did before , in even a little bit less time than before . So that gave us time to , you know , take care of our kids and other not that important things like that .
Speaker 2Well , go to all of the different practices and games and all of that that we just haven't always had since we started this business , which we will have an episode coming soon this summer about processes in your business where I'll share things that we do in our business . That is making it a lot easier for us to run everything and balance life with the kids , so be watching out for that . But today we are going to talk about reading a tax return , and the reason we saw that this episode was just really needed was because every time we're e-filing a tax return , which is over and over again during tax season , we have to have our client sign off . So what they're saying is they've reviewed the tax return and they're good for us to file it , and it's very clear that a lot of people just don't know what to look for . They don't know how to read it and make sure , so they're just signing it and saying , okay , I think it looks good . So we want to go through this and just make you feel super confident about looking at your tax return . So we'll try to make this super easy .
Speaker 2We won't go into every single number and bore you , but it is important if you're having someone file your tax return , that you are comfortable with the numbers and you check some very important pieces . So first , just looking at your Form 1040 , which is what you call a personal individual tax return you want to look and make sure your name is correct , so that's the first thing on the page . You want to make sure that your first and last name are spelled correctly . Also you want to make sure that your social security number is correct and sometimes you know two numbers might get backwards or something . Just make sure that those very important pieces of information are correct .
Speaker 1Of course you also want to double check your address , and sometimes your CPA doesn't know that you moved , so make sure that you have the correct address on file .
Speaker 2Yes , that's a big one . That actually happens . A lot People say , like the next year , oh my gosh , my address was wrong on the last one . So just make sure that the address that you're currently at is on there . If , for some reason , your last year's return got filed with an old address , that's fine . Just move forward and tell your CPA that you want to update it . So make sure the address , name and social are all right , which is on the top part of the first page of your tax return . So , moving along to the middle of the page , if you have dependents , you want to make sure that all of them are listed . Now , what happens here sometimes is that someone had a new baby during the year and they forgot to let them know , so it's not added and that's a big credit . So you want to make sure that everyone's listed and , once again , that everyone's social security numbers are correct .
Speaker 1You don't want to miss out on that $2,000 extra in child tax credits .
Speaker 2Exactly . So now we get to the numbers , which I think is where a lot of people just say oh I'm , I think it's fine , I don't even know what I'm looking at . I think they're probably doing it fine . So the first one is going to be all of your total W-2 wages . Now you just want to make sure that this number is relatively correct . So just review it like this If you know that you and your spouse make $100,000 about together , make sure that that number is about $100,000 . What happens sometimes is that people forget to give one or two W-2s . So maybe you switch jobs or something that's not something your CPA would know , so maybe you forgot to give it . Make sure those wages are about what you know you made .
Speaker 1Right . And if you want to get really nerdy about it and make sure it's exact , you could actually grab the calculator and add up box one of all of your W-2s , yours and your spouse's , and the total of that should exactly equal what's in box 1A of the 1040 . So that's kind of easy . After 1A there's many other kinds of earned income and types of wages that might be on there . Most of them don't really apply to most people . But I will point out box one E . If you see something there , that's where they put dependent care benefits . But that's only if they're taxable . So that's if , if your company gives you dependent care benefits but you don't use them , you don't send your kid to daycare , well then that's just more wages for you . That's very rare . Most people don't get those unless if they're actually sending their kid to some kind of childcare . So if you see something there , then that might mean that you didn't give your tax preparer the childcare provider information or just your daycare statement showing what you spent on that . So go back and double check that .
Speaker 1Now , if you have a good CPA , they would never put income on that line unless if they asked you first to make sure that's correct . But if you're using someone else , it's not that great . You might see a box there . This is your chance to say hey , wait a second , that shouldn't be income . I do have daycare expenses . I just forgot to give them to you . So that's pretty much everything for the line ones , one through Z basically . So the next thing that you'll see on there is the interest .
Speaker 2So we're just working our way down that first page which is going to summarize all of your income . So it's going to summarize all of it so that they know how much you owe in taxes . So what's the next thing on the list ?
Speaker 1The next thing is interest . On line two and that's real simple . If you get 1099-INT those are interest statements from your bank or your investment advisors that it will show your interest income and if you add up the total of all those it's going to equal that line to be of the tax return where the interest income is reported . And on that same note , the next line , which is line three , will show the total dividends that you'll have from all of the 1099-DIV forms . That's pretty self-explanatory as well . Same kind of thing .
Speaker 2You won't have a number there if you don't have that type of income .
Speaker 1Right . And then after that we get down to the IRA distributions and pension amounts on line four and line five so those are pretty basic as well . You'll get a 1099-R for either one of those , and if it's an IRA or if it's a 401k distribution and you're in retirement age , then that's where you'll see the total of that . There's a box for taxable amount and a box for non-taxable amount , which is just because you could have a Roth IRA or Roth 401k , in which case those distributions are not taxable . And then , right after that , more retirement income , social Security on line six that's very self-explanatory . You'll get an SSA-1099 and the amount you see there will be the total of yours and your spouse's social security income for the year .
Speaker 1Now , moving further down line seven , we have capital gains . That's pretty self-explanatory as well . You'll see that on stock sales , but you'll also see if you sell real estate or pretty much any asset that has capital gains on it . This is where you'll see the total of all that kind of income . After that you'll get into the other income line . This is where it gets a little bit more complicated , because this is just a summary of everything from Schedule 1 . Schedule 1 is a form we get to later in the tax return that summarizes all of your income from Schedule C , businesses , schedule F , farms , schedule E for rental or royalty income and even any flow-through income from partnerships and escorts will all be summarized on Schedule 1 and then lumped into one single amount and put on that line 8 .
Speaker 2So line 8 is where you're going to see the income or loss shown from any business income . If you have like a business tax return or anything like that , it has a lot of things that would show up on line eight .
Speaker 1Right , it won't mean much , unless if it's only coming from one source , and then it might make sense . But other than that you'll need to go deeper into the schedules to see what numbers are making up that number . That is the conclusion of the income section of the tax return . The next line after that is just the total of all the income lines we just talked about , and after that we get into the adjustments or the things that you get to deduct from your income so that you don't have to pay quite as much in taxes .
Speaker 2You do want to look at the total income and make sure that number also looks correct to you . So if you look at that line and it looks way off , then you definitely want to investigate that and make sure you're not missing something or something wasn't put in there that shouldn't have been .
Speaker 1That's true , and it's really easy to see if it's double what you think it should be . Well then that's when you start going line by line to figure out wait a second what's wrong here
Understanding Tax Deductions and Brackets
Speaker 1. So after you have your total income , we have the adjustments to income . Those would be things like student loan interest deductions , educator expenses for teachers and IRA contributions and HSA contributions and several other items that are deductions from your income . We call those above the line deductions because they're not itemized deductions . They're something that you get regardless of whether you take the standard deduction or the itemized deductions .
Speaker 2So we are going to talk a lot about the standard deduction on this when we're reviewing the tax return , whether you're using the standard or itemizing . If you're not familiar with that and a lot of people aren't and you just want a little bit more information , everybody should understand this . But we do have a quick podcast episode . It's episode number 58 . And that explains exactly what the standard deduction is , how it's used and what all goes into that , so that you can know if you're going to itemize or use the standard deduction .
Speaker 2Well , I think sometimes people get confused because we just say standard deduction . Standard deduction is just like something that accountants and CPAs say , but if you really think about it , it is very simple . It is a deduction that every person gets , so it's reducing your income and they just made a standard amount . They change that from year to year based on inflation and things . But if you're married , filing jointly , you're going to get a deduction that's this amount . If you're single , you're going to get a deduction , that's this amount . So it's just a standard amount that they're letting every single person apply across the board .
Speaker 1Right . For example , in 2023 , the standard deduction is $13,850 . So if you total up all your income and then all your above the line deductions , then you either get to take that standard deduction or if your itemized deductions are more than $13,850 , you would deduct those . Instead . You only get to pick one . But I think it's kind of the IRS's way of saying look , if you only make $13,850 , you don't pay tax . You know that's kind of a minimum and after that it's still a really low tax rate of 10% . But if you have that much or less , you do not even have to pay tax .
Speaker 2Right , so everyone's going to be using one of those .
Speaker 1After that we have the qualified business income deduction . We might do an episode on that . It's more complicated , but basically it's been around since the Tax Cut and Jobs Act and if you have any kind of self-employment income or even an S-corp , then you're going to have a deduction from that if those businesses are profitable , and it just helps business owners save on their taxes .
Speaker 2Okay , so make sure you have that deduction listed on there if you have a business .
Speaker 1And that's it . Then we get down to the bottom of the page one , which is line 15 , and that is your total taxable income . After all adjustments are factored in .
Speaker 2That's a fun number right there .
Speaker 1Now , when you get to page two , this is where we calculate the tax , and right there , first line , line 16 , there's the tax . There's some other things that go into account there . There's self-employment tax , which is calculated for the below on line 23 , along with other taxes they might add on , like if you have early withdrawals from your IRA , and there's penalty taxes and things like that . And there's also the credits , which are calculated on line 19 for the child tax credit and the dependent care credit . So that's what you're going to see at the top of that second page .
Speaker 2Another line that we often talk about at the top of page two is line 23 , which is other taxes , which is your self-employment tax . So if that number is really high , that's when we usually suggest people switching to an S-corp so that they're reducing those self-employment taxes . So if you've been listening to our podcast , you know we have a lot of episodes about the S-corp . So if you are reviewing your tax return and going , oh , wow , that number is really high and you've been thinking about the S-corp . So if you are reviewing your tax return and going , oh , wow , that number is really high and you've been thinking about the S-corp , that's where you're going to see where those savings would come from . And then your favorite number 24 , which is going to be your total tax that you owe .
Speaker 1Exactly that's what you owe , before any withholding or other credits are taken into account . The other credits I'm talking about are refundable type tax credits , and so those are further down the list after the total tax is calculated .
Speaker 2You'll see . On part two of page two it says payments . That's where you're going to see all of the tax that you've already paid in for the year . So whatever you withheld on your W-2 or any 1099 , things like that , that's what you did pay in . And that's also a good number to look at , because sometimes people don't realize that maybe that withholding is just like way too low based on our tax rates , or it's really high . That's why they're getting a refund .
Speaker 2So that is a good number to pay attention to and make sure that , one , it matches what you think you've been paying in all year and two , does it need to be adjusted ? And that is one thing I did want to bring up in this episode is to make sure that we explain how our tax system works , because when people talk about the tax brackets , they often make it sound like that if you are making this amount of money , you just fall into this tax bracket , and that's not exactly how it works . So do you want to explain how our tax system works so that we can clear that up ?
Speaker 1Sure . So the tax brackets move every year . So I won't go into the specifics on the numbers . But , as an example , after you have your $13,850 standard deduction , all the money you make after that will be in the first tax bracket , which currently is 10% , and that will be up to a certain amount . Let's just say it's the next $10,000 you make . Well , then after that you're in the 12% tax bracket . So does that mean that all the money you make is going to be taxed at 12% ? No , because then it wouldn't even make sense to make more money . You'll end up paying more in tax than the extra money you made .
Speaker 1So the first 10,000 after your standard deduction is still taxed at 10% . And then , if you made 11,000 , that next 1,000 would be taxed at 12% and that's the only money that would be taxed at the higher rate . And it works that way all the way up to the next tax bracket , which is 22% . So you'll pay 12% on all the income you make , from 11,000 up to the next number let's say it's 50,000 . And then anything above 50,000 , you'll pay 22% until you get to 150,000 , and then you'll pay 24 percent all the way up until the top tax bracket of 37 percent . So don't ever think that you're just going to make one extra dollar and that's going to make you actually make less , because now , all of a sudden , your tax rate is higher . That's not how it works .
Speaker 2No , and it's important to realize that every person , no matter what tax bracket you are , you could be on the highest tax bracket . Your first dollar you're paying taxes on is all in that lower tax bracket . And then the more money you make , more of your income , is taxed at different brackets .
Speaker 1Exactly .
Speaker 2Do you want to start your own business but have no idea where to start ? Does the tax and accounting part of business ownership scare you ? Or maybe you just don't have the budget for CPA services right now ? If this sounds like you , listen up . We've created a new business guide to help you through every step of the process so you feel confident and supported when starting your business . Our guide will help make sure you don't miss any important steps and educate you on the tax and accounting side of things . The best part is that it's priced for less than one meeting with the CPA , so don't ignore this part of the process . Use our guide to educate and empower yourself without the hefty cost of multiple meetings of the process . Use our guide to educate and empower yourself without the hefty cost of multiple meetings with the CPA . We will guide you through the initial steps , provide yearly checklists and give you things to put on your radar for the future as your business grows . And just for being a podcast listener , you get a discount . Find the link in the show notes to purchase the guide and use code podcast at checkout to use that discount .
Speaker 2Now back to the show . So we have a tiered system . I think it's really important to understand . I like this episode , not because it's super fun and like really exciting information . It's just that everyone should feel at least this comfortable with our tax system and reading and reviewing their tax return .
Speaker 1Okay , after you're withholding , what you'll see is line 26 estimated tax payments and amount applied from prior year tax return , and all that means is , if you paid in estimated payments or quarterly payments throughout the year , this is where you'll see those . Or if you had an overpayment in the previous year and you decided to apply it instead of getting it refunded to you , you'll also see that amount in this line .
Speaker 2Those are two important ones to check , because a lot of times people will make their estimated payments , not tell us , and then when they get their tax return , they are surprised by the amount that is due and they said did you apply those estimated payments ?
Speaker 2Like I can't believe I owe that much and I made estimated payments and we're like actually no , you didn't tell us about those payments you made . So make sure that , one , you tell your CPA about those and two , that you check those to make sure , if either of those apply to you , that they are on your tax return .
Tax Credits and Refunds Explanation
Speaker 1After that you have line 27 , the earned income credit , and this is just a number that's calculated based on if your income's on the lower side , and that number , where that cutoff is , depends a lot on whether you're married or not and how many kids you have . But if you fall under a certain threshold but you still have some earned income , you can qualify for a credit and that's where the number goes . It goes right there and the reason it's down here in the payment section is because it's what we call a refundable tax credit . All the other credits that aren't refundable can only reduce your tax to zero and then if you have withholding , you can get your withholding back , but you're not going to get more than your withholding back . But A refundable credit means , even if you didn't have withholding or estimated tax payments , you could still get a refund of money you didn't even pay in , because this is a refundable tax credit . So that's why it's down in the payments .
Speaker 2And that's not super common , especially if you're using a CPA because you have businesses and stuff like that . We're not going to see that a lot .
Speaker 1Right after that there's the additional child tax credit . That one's just there because only a portion of the child tax credit is refundable . So the actual child tax credit is $2,000 . And if you have enough tax then you'll get the full 2,000 per kid to reduce your tax down to zero . Now if you reduce your tax to zero then you only get $1,400 of that tax credit . That's refundable and so they're not going to send you back the full $2,000 per kid . You'll only get up to maybe $1,400 per kid .
Speaker 1After that we have the American Opportunity Credit , which is an education credit for college . It's a very specific one . It's a little bit better than the Lifetime Learning Credit , for one reason because it's refundable , or at least partially refundable , and for another reason because it's a little bit bigger . As long as you qualify , you don't make too much money and you actually spent enough money on education to get the credit . So that one's complicated . But if you have a 1098-T from your college or if you paid tuition , make sure you go get a 1098-T . Then your tax preparer will know what to do with that . Or you can plug that information into your own tax software and that will get calculated for you .
Speaker 1And then line 30 , reserve for future use . Yeah , that's . The IRS is saving that spot in case another credit comes out that they need to have a line for . And then line 31 , amount from schedule three , line 15 . So that is , schedule three is where a lot of credits that aren't specifically listed on the 1040 are all kind of summarized and added together and the total gets put here . There's a lot of different credits that go there Residential energy credits , electric vehicle credits . There are several different kinds of credits that go there that would total up and help you reduce your taxes . So that's pretty much it for the payments and credits . You get down to the total of payments and credits on line 33 . And then I'm afraid this is getting a little too boring , so let's quickly go through the rest .
Speaker 1Yes , let's so the next is the refund , or what you owe , and so the refund will be calculated in line 34 , and 35 and 36 are other things related to your refund . They're pretty self-explanatory . Line 37 is where they put the amount if you owe something . Line 38 is your estimated tax penalty . That's an important one to look at , because if that's pretty big , you might consider making sure that you make your estimated tax payments , because that is increasing , how much you owe every year .
Speaker 2And if you missed our episode about that , we have an episode about the new penalty for not making those estimated tax payments . We used to tell everyone that it wasn't really significant enough . So if you want to pay all of your taxes at the end of the year , that's completely fine , but that has changed . So if you want more information on that , it's episode 51 . And it does explain how the penalty has increased . So now we're telling everyone something different Make sure you make those estimated tax payments , so that will give you more information if you are one of those people who owed a large sum and got some penalties this year . So that's the whole 1040 first two pages . Now we could go into so much more detail in all of this and it would be an extremely , extremely boring episode , but those are the things that you really wanna check and that everybody should just have a base knowledge on , because everybody files a tax return .
Speaker 2Now one other thing that if you have someone preparing your tax return , you are required to sign Form 8879 . And that's simply a form that says , hey , I'm okay with my tax preparer filing my tax return with the IRS . So that allows us to e-file a tax return . Now you want to review that form also . So it's saying that you have reviewed your tax return and you're comfortable with it and then you sign that . So you'll review your tax return and then you'll pull up your 8879 and you will also review the top of that and sign it and send it back to your CPA . So the 8879 form is a very simple form . You just want to review the top of it because it's going to show are you paying something , do you owe the IRS or are you getting a refund , and you want to make sure that that matches what you saw on your tax return .
Speaker 1So , looking specifically at the form , if you look at line one , that will show your total adjusted gross income . Line two will show you your total tax and line four will show your refund . If you have a refund or if you owe , then line five will show that amount . So those are things you can just look at real quick , because when you sign that form then that is you saying that you looked at those numbers at the top and you agree with those . So make sure you do agree with them .
Speaker 2And those are all the most important numbers . Looking at that , is that what you think your income should be , and do you think that your refund or what you owe looks corrupt ? So the 8879 is going to have all the important numbers . So once you sign that , send it back to your CPA . Then they're allowed to e-file your tax return with the IRS .
Speaker 1Now , if you made it this far , there's one bonus report I want to talk about . Kind of wish . I would have talked about it at the beginning of the episode , because I'm afraid some people might've fallen asleep .
Speaker 2For sure .
Speaker 1For sure . But this one is actually more interesting . I think it's called the two-year comparison report and just whenever people owe , it's the first thing I always show them , because it will show you specifically , line by line , what your wages were in the previous year , what they were this year and the difference . And those are the three columns it has . Then it will do the same for interest , dividends , every single kind of income you have , and it will also do that for the withholding and estimated tax payments . So you can quickly see my wages went up this much , my other income went up this much , my withholding only went up this much and that's why my taxes went up this much . It really helps explain where all the numbers are coming from and why you owe so much this year when you didn't necessarily owe last year .
Speaker 2Yeah , I think that's what I pull up whenever someone's confused about why it changed so much . Someone might say I've gotten a refund for five years and it was this much , and then this year my refund's only this much , or this year I owed $500 . You can easily see and it's usually a matter of withholding that something happened . Maybe they changed jobs or something and their withholding was a lot less , or someone got a big raise , like . It's just very easy to see the changes on that form .
Speaker 1And when you get a big raise , they never withhold enough . You need to double check that right away when you start getting your new paycheck , and it's probably not going to be enough .
Speaker 2That's true .
Tax Return Education Podcast Episode
Speaker 2Okay , I know this was a hard episode to sit through , but it will be super helpful if you were able to check your tax return out and make sure everything looks good to you , and you'll feel more confident filing your tax return if you just know this little bit of information about the tax return , how it works and how our tax system works . Now , if you haven't fallen asleep yet , we wanted to make sure if there were any episodes that you would find helpful , like this one , where we can explain something that maybe doesn't make sense to you , please just send us a message on Instagram and we'll make sure to put that on our list of episodes for 2024 .
Speaker 1Well , that's all we have for today , so thank you so much for listening to .
Speaker 2What your CPA Wants you To Know . Podcast .
Speaker 1This podcast is intended to provide accounting and tax information for educational purposes only . All tax situations are unique and should be handled with the assistance of a tax professional .