Federal Income Tax Filing
Basics for Landlords

Landlords who understand income tax filing basics can take advantage of numerous tax benefits and deductions that are allowed under U.S. tax law. And for residential rental property owners, these benefits are quite substantial.

While the overall federal tax code in the United States can seem as complicated as the mysteries of the universe, its underlying concepts are actually not too difficult to learn.

Income Tax Filing Basics for Individual Taxpayers

The federal government's "bread-and-butter" tax form for individual taxpayers is Form 1040. This form is comprised of several sections which, when taken as a whole, determine whether or not a taxpayer will owe money or receive a refund from the federal government.

The individual sections of Form 1040 are described as follows…

1.) Filing Status - While this section may at first seem trivial, an individual's filing status can have a large impact on the amount of income tax they owe. This is because an individual's filing status directly influences the marginal tax rate , or tax bracket that applies to them based on their taxable income.

2.) Exemptions - An exemption can be claimed for yourself, your spouse, and any dependents. For the 2006 tax year, the total number of exemptions claimed is multiplied by $3,300. For most taxpayers, this new figure ($3,300, $6,600, $9,900, etc.) is then subtracted from their income (i.e., it reduces their taxable income). However, in specific cases involving higher income taxpayers, the allowable personal exemptions may be reduced or even eliminated.

3.) Income - This section lists income from all sources (gross income). However, it excludes certain income from sources such as tax-exempt bonds, employer paid health insurance premiums, and other sources that Congress has deemed excludable. The total of all income in this section is "gross income". For landlords, their Schedule E income or loss generated by a rental property directly influences their gross income.

4.) Adjusted Gross Income - The gross income from above is then reduced by certain allowable tax deductions such as moving expenses, IRA deduction, self-employed health insurance, etc. The net result is the taxpayer's AGI, or adjusted gross income.

5.) Tax and Credits - This section determines "taxable income", which is AGI less (1) Schedule A itemized deductions or the standard deduction, whichever is larger, and (2) a deduction for the personal exemptions of section 2 above. Income tax is figured from the tax tables for the taxable income. Added to this tax is any alternative minimum tax (AMT) that may be due. Finally, any allowable tax credits are subtracted to yield a "preliminary" bottom-line tax. Tax credits lower any tax owed on a "dollar-for-dollar" basis.

6.) Other Taxes - This section adds (to the preliminary tax determined in step 5 above) other specific taxes that may be owed such as self-employment tax. This results in the "total tax" that is owed by the taxpayer.

7.) Payments - This section includes the taxpayer's federal income tax payments for the tax year that were previously withheld from W-2 forms and 1099's. If these payments exceed the total tax owed in step 6, then the taxpayer can receive a tax refund that is equal to the amount that was overpaid.

But, if the total tax owed exceeds the income tax that was withheld, then the taxpayer must write a check to the IRS that equals the amount that was underpaid. And this must be done before the tax filing deadline or else penalties and interest may accrue.

So, that's the federal income tax filing basics for individuals in a nutshell. It cuts through a lot of the confusion and gets to the heart of the matter.

Please note: The above information on income tax filing basics is general in nature and should not be considered tax or accounting advice. It should not be relied upon for your own particular circumstances. For tax advice, please consult the services of a qualified accountant or tax attorney.

For more in-depth information on federal income tax filing basics, please visit The Landlord's Library book collection. It's a great "one-stop" resource for helping you pave the path to your landlording success.

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Federal Income Tax Filing