How to File Your Taxes

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Categories: How Tos

  • Preparing your taxes can seem like a daunting task, but it doesn't have to be. There are dozens of resources out there to help you through the process, and if you take the time to organize your records before you begin, preparing your taxes can even be fun. (Well, not fun, but it can be relatively painless.)

    How to file your taxes will walk you through the different methods of tax preparation, what you'll need to get started and how to prepare and file your return.

  • Introduction

    • Preparing your taxes basically consists of accounting for how much money you made in a year and subtracting any allowable deductions from that amount. The tax you owe is based on the resulting number. If you already had taxes withheld from your paycheck, you may not owe the government anything at all. They may owe you.
    • Things get complicated when you have varied sources of income and aren't sure what all those "allowable deductions" and tax credits might be. Fortunately, there are plenty of resources out there to help. So, take a deep breath, summon all your organizational skill and remember that you're not alone. It's time to pay the taxman.

  • Tax Preparation Options

    (Photo by Steve Woods)
    • You have several options when it comes to preparing your tax return.
    1. Manually: You can prepare your taxes the old-fashioned way with paper and pencil. You'll need to download the correct forms from the IRS website or pick them up at your local library.
    2. Electronically: You can prepare your taxes using either tax preparation software or an online service such as TurboTax or H&R Block's TaxCut. Prices vary depending on the complexity of your return. If you meet certain income requirements, you can file online for free by using the IRS Free File service.
    3. Tax Professional: You can pay a professional to prepare your taxes for you. You can go to a national tax preparation chain like H&R Block or Jackson Hewitt or enlist the services of an enrolled agent, a certified public accountant or tax attorney. Prices vary depending on the complexity of your return.
      • -Locate an Enrolled Agent through the National Association of Enrolled Agents' Agent Search.
      • -Locate an IRS authorized E-File Provider via the IRS Provider Locator. (This simply means that the tax preparation service is equipped to submit your return directly to the IRS electronically.)

  • Should You Prepare Your Own Taxes?

    • Consider self-filing if any of the following apply to you:
    1. You are generally familiar with the tax-filing process.
    2. You are comfortable researching any questions that may arise as you do your taxes.
    3. You are organized and keep good financial records.
    4. You haven't moved in the past year and have had only one employer.
    5. You are computer literate and won't have trouble following the prompts of an online service like TurboTax.
    1. You are intimidated by the tax-filing process.
    2. You don't have the time to devote to preparing your taxes.
    3. You've had a major change in your life—death of a spouse, started a business—that makes filing this year more complicated.
    4. You are self-employed and have income coming in from multiple sources.
    5. You want the protection of an agent enrolled with the IRS should you be audited. (An enrolled agent, who has passed an IRS-administered exam, can represent you before the IRS in case of an audit.)

  • Advantages to Filing Electronically

    1. Accuracy: Filing electronically increases the accuracy of your return. This is important because inaccuracies are one of the red flags that can trigger an audit.
    2. Simplicity: Online tax services like TurboTax make filing a breeze by literally walking you through every step and preparing whatever schedules and forms are appropriate.
    3. Efficiency: Not only can you file your federal and state returns simultaneously, they'll be filed instantly. You'll receive an immediate receipt for your return, and your refund will be processed within a matter of days.

  • Where to Turn for Help

    • If you can't afford the help of a tax professional and need help preparing your return, there are several free resources available to you:
    1. IRS: The IRS is actually the single best place to turn when you have a tax-related question. In addition to their comprehensive website, they offer both a recorded information service (1.800.829.4477) and a live assistance line (1.800.829.1040).
    1. AARP Tax-Aide: The AARP Tax-Aide program offers free tax counseling and basic income tax return preparation for senior citizens and other qualified individuals. Learn more about the Tax-Aide program via the AARP's website.
    2. VITA: The Volunteer Income Tax Assistance (VITA) program matches certified volunteers with low-to-moderate income individuals who need help preparing their tax returns. To locate the nearest VITA site to you, call 1.800.829.1040.

  • Step 1: Gather Your Tax Records

    • Whether you're preparing your own taxes or having someone prepare them for you, you'll need to collect all of your financial records before you begin.

  • The Basics

    Pull together your records before you begin. (Photo by Sophie)
    • What you need to do your taxes will depend on how you make your money, the types of investments you have, whether you intend to itemize your deductions and a number of other factors. The following is a list of the basic information you'll need to start your tax return:
    1. Social Security Numbers: For you, your spouse (if you're filing jointly) and any dependents.
    2. W-2 Forms: You will receive a W-2 form, a statement of the wages you earned for the year, from your employer. You should receive your W-2 by January 31st. If you have not received your W-2 by then, contact your employer. If you are filing jointly with your spouse, you will need to collect the W-2 forms from both of your employers.
    3. 1099 Forms: 1099s are forms you receive for dividends, retirement accounts, scholarships and other forms of income. If you are self-employed, you will receive 1099s from the companies you worked for in the past year reporting any money you earned as an independent contractor.
    4. Receipts: If you plan on deducting any expenses or charitable contributions from your taxable income, you will need to have those receipts on hand.
    5. Bank Account Numbers: If you are filing electronically and wish to receive any refund you might be due by direct deposit, you will need your bank's routing number and your bank account number.
    6. Adjusted Gross Income from the Previous Tax Year: You will need last year's tax return to accurately complete this year's.

  • Beyond the Basics: Additional Financial Records

    • Won big in Vegas? You'll have to report that, too. (Creative Commons photo by Mark Hardie)
    • Depending on your financial situation, you may need to collect additional documentation related to your income and expenses for the year in order to complete your tax return.
    • Some of this documentation will be sent to you in much the same way your W-2s and 1099s are. If it is not, you are responsible for providing it.
    • The following is a partial list. For a more complete list of the documentation you may need to complete your tax return, visit MSN Money's What You Really Need to Do Your Taxes.

  • Employment & Income Data

    • Partnership and Trust Income
    • Pensions and Annuities
    • Alimony Received
    • Jury Duty Pay
    • Gambling and Lottery Winnings: Documentation provided by the casino or lottery authority via Form W-2G.
    • Scholarships and Fellowships: Documentation provided by the administrators of these programs via Form 1099-MISC.

  • Homeowner Data

    • Mortgage Interest: Documentation provided by your lender via Form 1098.
    • Sale of Your Home: Documentation provided by your lender or closing agent via Form 1099-S.
    • Moving Expenses

  • Financial Assets and Liabilities

    • Interest Income Statements: Documentation provided by financial institution via Form 1099-INT or 1099-OID.
    • Dividend Income Statements: Documentation provided by company paying dividends via Form 1099-DIV.
    • Tax Refunds & Unemployment Compensation: Documentation provided by agency via Form 1099-G.
    • Student Loan Interest Paid: Documentation provided by lender via Form 1098-E.
    • Early Withdrawal Penalties on Time Deposits: Documentation provided by financial institutions.

  • Deduction-Related Documents

    • Gifts to Charity: Documentation provided by charity for single donations of $250 or more.
    • Unreimbursed Expenses related to Volunteer Work or Your Job
    • Education Expenses
    • Child Care or Adoption Expenses
    • IRA, Keogh & Other Retirement Plan Contributions
    • Medical Expenses

  • Self-Employment Documents

    • Receipts and Documentation for all Business-Related Expenses

  • Step 2: Determine Your Filing Status

    Have kids? You may be able to file as "head of household". (Photo by Asif Akbar)
    • The IRS requires that you identify your tax status in one of the following five ways:
    1. Single: If, on the last day of the tax year, you were unmarried or legally separated, your filing status is "single." [1]
    2. Married Filing Jointly: You and your spouse report your incomes on one tax return. You are both required to sign the return. [2]
      • Due to the passage of the Federal Defense of Marriage Act in 1996, gay and lesbian couples cannot file joint federal tax returns. However, legally-married couples in Massachusetts can file a state return jointly. Other states dictate civil unions and domestic partnerships differently. Consult About.com's Tax Tips for Gays, Lesbians and Same-Sex Couples for state-by-state rulings on joint filing.
    3. Married Filing Separately: If it reduces your tax bill, you and your spouse can file separately. You and your spouse are then each responsible for your own taxes. [3]
    4. Head of Household: Head of Household is a special status, which entitles you to a lower tax rate. You may be able to file as "head of household" if you are single, paid more than half the cost of keeping up a home and have a "qualifying person" such as child living in your home for more than half the year. [4]
    5. Qualifying Widow(er) with Dependent Child: This status may apply to you if your spouse died in either of the two preceding tax years and you have a dependent child. [5]

  • Step 3: Choose the Correct Forms

    • If you're having a pro or an online service like TurboTax prepare your return, you won't need to download any forms from the IRS or pick them up at the library. In fact, these services will automatically determine which forms you need to file. If you're going the paper and pencil route, however, you're on your own. Here's a rundown of the basic IRS forms to get you started:

  • Form 1040

    • Everyone must fill out a 1040, 1040EZ or 1040A. This is where you calculate and report your taxable income. Which version of the 1040 you fill out will depend on a few different factors:
    • 1040: The most commonly used form, and the one you'll likely be using. You must use this form if your taxable income is more than $100,000 or you plan on itemizing your deductions. You should also use this form if you have self-employment income. [1]
    • 1040EZ: Use the 1040EZ if you have no dependents, are under 65 and not blind, earned less than $100,000 last year and do not itemize your deductions. [1]
    • 1040A: Use the 1040A if your taxable income is less than $100,000 and do not itemize deductions, but do have some adjustments such as a retirement contribution or child tax credit. [1]
    • Consult IRS Tax Topic: Which Form - 1040, 104A or 1040EZ? (352) for more information.

  • Additional Commonly-Used Tax Forms

    • Depending on your income and how you've acquired it, you may need to fill out one of the following forms. For a complete list of forms, visit the Forms and Publications page of the IRS website.
    • Schedule A: For Itemized Deductions, Mortgage Interest, etc.
    • Schedule B: Report Taxable Interest or Dividends in Excess of $1,500
    • Schedule C or C-EZ: Report Profit or Loss from a Business
    • Schedule D: Report Capital Gains and Losses, Sales from Stock, etc.
    • Schedule E: Report Supplemental Income and Losses
    • Schedule SE: Calculate Self-Employment Tax
    • Form 1040V: Voucher for Submitting Payments by Mail
    • IRS forms and publications are available at your local library and via the IRS website.

  • State Income Tax Forms

    • Don't forget that you're not just filing a federal income tax return; you need to file your state income tax return as well. To find the correct tax return forms for your state, visit your official state tax authority's website.
    • TurboTax and Kiplinger have aggregated links to every state's site here.
    • The IRS also maintains a guide to every state's important tax-related sites here.

  • Step 4: Calculate Your Gross Income

  • What is Gross Income?

  • How to Calculate Gross Income

    • The forms provided by the IRS, your tax preparation software or the person preparing your taxes will actually walk you through calculating your gross income.
    1. When prompted by the software, your accountant or IRS Form 1040, supply the income figures documented on your W-2s, 1099s and any other applicable documents.
      • If you are doing your return by hand, you will write these figures into Form 1040 on Lines 7-22.
    2. If you are doing your return by hand, you will need to physically attach your W-2s to this part of the form.

  • Step 5: Calculate Your Adjusted Gross and Taxable Income

    • Now that you've figured out your gross income, you get to figure out how much the government will let you knock off that figure to arrive at your "taxable income." That "taxable income" figure is the number against which your tax is calculated, and your "tax" is—no surprise—what you owe the government.
    • To figure out your "taxable income," you will first need to figure out your "adjusted gross income" or AGI. Your AGI is simply your gross income minus certain "adjustments" the government allows you to make to that figure whether you're itemizing your deductions or not.
    • You then take your AGI and subtract any allowable credits and additional deductions from it to arrive at your "taxable income."
    • The difference between "above the line" adjustments, credits, exemptions and itemized deductions is described at the end of this Step.

  • How to Calculate your Adjusted Gross and Taxable Income

    • The forms provided by the IRS, your tax preparation software or the person preparing your taxes will actually walk you through calculating this number.
    1. When prompted by the software, your accountant or IRS Form 1040, supply the relevant adjustment, deduction, credit and exemption figures. (The difference between these types of adjustments is described below.)
      • If you are doing you return by hand, you will write these figures into Form 1040 on Lines 23-43.
    2. Subtract your adjustments, credits and deductions from your gross income to arrive at your taxable income. (Line 43 on Form 1040.)
    • The following describes the types of adjustments you can make to arrive at your taxable income:

  • Tax Credits

    • Unlike deductions which only reduce your taxes by a marginal rate of 25%, credits give you a dollar-for-dollar reduction in your taxes. (If you had a $100 deduction, you'd only get to take $25 off your taxes. If you have a $100 credit, you get to take $100 off your taxes.)
    • There are different types of tax credits—child tax credits, adoption tax credits, retirement savings contribution tax credits, etc. To figure out if any tax credits apply to you, consult IRS Tax Topics: Tax Credits (600).

  • Standard or Itemized Deductions

    • Work from home? Consider itemizing. (Creative Commons photo by Fernanda Mancini)
    • You have a choice when you do your taxes. You can either take the "standard deduction" or "itemize your deductions." What does that mean, and which should you choose?
    • The "standard deduction" is a set amount that the government allows you to subtract from your gross income to arrive at your AGI.That figure allows you to avoid all the accounting necessary to itemize your deductions and, if you don't think you have many expenses that qualify as deductible anyway, than you're just as well off going with the standardized amount.
    • However, if you believe you'll be able to take more money off your gross income by itemizing and subtracting all your qualifying expenses, than you should consider itemizing. What qualifies as a legitimate deductible expense?
    • Medical Expenses (IRS Tax Topic 502)
    • Interest (IRS Tax Topic 505)
    • Charitable Contributions (IRS Tax Topic 506)
    • Casualty and Theft Losses (IRS Tax Topic 515)
    • Business-Related Expenses (IRS Tax Topic 509, 510, 511, 512)
    • Educational Expenses (IRS Tax Topic 513)
    • Miscellaneous Itemized Deductions (IRS Tax Topic 508)
    • But, this is where things get tricky. The rules that apply to each deduction can be difficult to interpret. What actually qualifies as a deductible "miscellaneous" expense? What percentage of that expense can you actually deduct?
    • This is why people use tools like TurboTax or seek professional help. Being an expert on these rules, which change from year to year, is a full-time job. So, be cautious if you wish to itemize. Don't claim anything dubious. Have documentation for every penny you deduct. And, seek help from a tax professional if you need it.
    • Consult IRS Tax Topic: Itemized Deductions (500) for more information on allowable itemized deductions.

  • Should You Itemize?

    • The rule of thumb is that you should itemize if your allowable itemized deductions equal a greater amount than the standard deduction. (The only time you are required to itemize is if you and your spouse file separately. If one of you itemizes, you both have to itemize.)
    • But, how do you tell which is greater without going to all the trouble itemizing in the first place? One way to find out is to estimate with the help of an online calculator like TurboTax's Deduction Finder. If you're self-employed, you may also find it advantageous to itemize because your business-related expenses can be written off as deductions, which can help off-set the fact that taxes are not automatically withheld from the income you receive as an independent contractor.
    • For more information on whether or not you should itemize, consult IRS Tax Topic: Should I Itemize (501).

  • Step 6: Calculate Your Tax

    • It's time to figure out whether you owe the government, or the government owes you.
    • If you're using a program like TurboTax or have made friends with your local H&R Block representative, you won't have to calculate your tax on your own. The program or the pro will do it for you. If you have decided to go it alone, you'll be using the IRS Tax Table, which starts on page 63 of the Form 1040 Instruction booklet.
    • Form 1040 (Opens as a PDF document.)
    • Form 1040 Instructions (Opens as a PDF document.)

  • How to Read a Tax Table

    1. Find your taxable income's range on the lefthand side of the table. ("At least X, but less than X.")
    2. Read across the table to the amount indicated in the column which represents your filing status (single, married filing jointly, etc.)
    3. That amount is your tax for the year.
    IRS Tax Table (Screenshot by Mahalo)
    • Whether or not you owe the government money or can expect a fat refund check in the mail all depends on how much tax you had withheld from your paychecks throughout the year.
    • The amount that's been withheld will be indicated on your W-2(s). Your 1040, tax preparation software or accountant will ask you for that number and subtract it from the amount of tax you owe. If the resultant number is negative, you're owed a refund. If it's not, time to pay the piper.

  • Step 7: File Your Tax Return

    Mail or e-file your return by April 15th. (Creative Commons photo by David Goehring)
    • Now that you have your forms filled out and your tax calculated, it's time to file your return and pay your taxes.

  • Mailing Your Return

    1. Be sure that you have filled out all the necessary forms and related schedules.
    2. Check the forms for accuracy, and remember that you must have documentation on file for any deduction you claim.
    3. Sign and date your return.
    4. Attach all the required documents to your tax return including your W-2s.
    5. Make a copy of the return for your records.
    6. Download or obtain IRS Payment Voucher Form 1040V.
    7. Complete Form 1040V specifying a method of payment, if you owe the IRS money.
    8. Mail Form 1040V, your tax return and any related documents to the IRS via certified mail.
      • The correct mailing address can be obtained by consulting the last page of the Form 1040 instruction booklet provided by the IRS.
    9. Using the numbers you generated on your federal return, you must now complete and file your state return according to your state's tax laws.

  • E-Filing Your Return

    1. Be sure that you have entered all of the necessary information into the program.
    2. Preview the tax forms you will be electronically submitting.
    3. Check the forms for accuracy, and remember that you must have documentation on file for any deduction you claim.
    4. If you owe the government money, you will be prompted to enter a credit card or bank account number to pay your taxes. If you are owed a refund, you will be asked for a bank acccunt and routing number so that a refund can be issued to you via direct deposit.
    5. Using the eletronic signature option, e-sign your return. (This will typically consist of choosing a unique PIN number.)
    6. Print out a copy of your completed tax return for your records.
    7. Electronically file your return.

  • Filing as a Sole Proprietor or LLC

    • If you're self-employed, you have some special issues to take into consideration come tax time. Meet Schedule C and its friend Schedule SE. You're about to become very familiar with them.

  • Schedule C and Schedule SE

    • Just like someone employed by a business which withholds taxes from his or her paycheck, you will need to file a 1040. But, because you are considered a "sole proprietor," you will need to report your business income and losses on a Schedule C. This schedule is considered part of your personal tax return. (Technically, the IRS calls this "pass-through" taxation. Your business profits "pass through the business to be taxed on your personal return." [1])
    • Where will you find your business' income figures? Well, hopefully you were keeping track, but your clients should have sent you 1099s reporting your income for the year. If you're missing one or more 1099s, get on your client's accounting department for the numbers.
    • What about expenses? What can you deduct from your business' taxable income? You may be able to write off your home office expenses, business-related travel and meals, retirement plan contributions and health insurance premiums. For a full list of deductible business expenses, consult an accountant or read IRS Publication 535: Business Expenses (PDF).
    • Then, there's the self-employment tax. Unfortunately, because self-employed individuals aren't having taxes withheld by a company or organization, they're responsible for both the employer and employee's share of social security and medicare taxes. (This totals 15.3% of an independent contractor's net income versus the 7.65% owed by employees. [1]) So, if you earned more than $400 from your home business or freelance work, you will have to file a Schedule SE in addition to your Schedule C and 1040. Schedule SE calculates how much self-employment tax you owe.
    • IRS: Tax Guide for Small Businesses
    • IRS: Schedule C: Profit or Loss from Business (PDF)
    • IRS: Schedule SE: Self-Employment Tax (PDF)
    • IRS: Schedule C-EZ: Net Profit from Business (PDF)
    • If you are not claiming a home office deduction and your business incurred $5,000 or less in losses, you can file a Schedule C-EZ in place of the longer Schedule C.

  • What's the Difference between a Sole Proprietorship and an LLC?

    • You will hear the terms "sole proprietor" and "limited liability company" (LLC) used when referring to businesses which have the IRS "pass-through" taxation status, meaning that your business income is reported on your personal return using the above-described Schedules C and SE. However, there are some types of LLCs that do require you to have a separate Federal Tax ID number and report and pay employment taxes on employees. It's helpful to understand the difference.
    • IRS: FAQ: Sole Proprietor, Partnership, LLC, Corporation
    • Sole Proprietorships
    • A sole proprietorship means that one person is doing business in his or her name. The business does not have a separate existence outside its owner. A freelance writer would, for instance, fall into this category. According to NOLO, for taxation purposes:
    • As a sole proprietor you must report all business income or losses on your personal income tax return; the business itself is not taxed separately.
    • IRS: Sole Proprietorships
    • NOLO: How Sole Proprietors Are Taxed
    • Limited Liability Company (LLC)
    • A LLC, which you must fill out an operating agreement to create, combines a "corporation's protection from personal liability from business debts with the pass-through tax structure of a sole proprietorship." [1] If you are the sole owner of the LLC, than the IRS treats your business like a sole proprietorship for taxation purposes. If, however, the LLC has multiple owners (partnership) or is incorporated, it is treated differently. Owners must file a Schedule E as well as a 1040 and have a Federal Tax ID number separate from their personal social security numbers. Consult the IRS or an accountant directly for more information.
    • IRS: FAQ: LLC
    • NOLO: LLC Basics
    • NOLO: How LLCs Are Taxed
    • NOLO: Creating an LLC Operating Agreement

  • Decreasing Your Chance of Being Audited

    Don't end up like Willie. Be honest with the IRS. (Creative Commons photo by thetripwirenyc)
    1. Cash Businesses: The IRS knows that many people in "cash businesses" don't declare their full income. So, if you're a bartender, waiter or hairdresser, you should report all of your earnings. Your occupation is a red flag to the IRS. [1]
    2. Doctors, Lawyers and Accountants: These types of professionals typically run their own businesses and do their own bookkeeping. The IRS may want to see documentation of all deductions and expenses. [2]
    3. Large Deductions: The IRS will carefully examine the returns of people taking unusually large deductions or who are involved in questionable investments. [3]
    1. Medical and Casualty Deductions: Because tax law mandates that certain deductions must exceed a minimum percentage of your income before you can claim them, only a small number of people actually qualify for them. If you claim these types of deductions, keep careful records backing them up. [4]
    2. Charitable Contributions: If you deduct more than the statistical norm for this type of deduction, you may be audited. Be sure that you keep a a canceled check or letter from the charity on file documenting any single donation of $250 or more. [5]
    3. Home Office Deductions: Keep incredibly accurate records of any home office deductions you claim. Just because you check your work email from home does not make it a home office. [6]
    • There's no way to absolutely ensure that you won't be audited as some filers are chosen at random for the honor. However, you can ensure that any interactions you have with the IRS are above board and stress-free:
    1. Don't Rush: Take your time filling out your tax return, get professional help and check your return for accuracy.
    2. Be Honest: Report all of your income. Don't take questionable deductions.
    3. Keep Good Records: The burden of proof in an audit is on you. Keep immaculate records. You should have a receipt for every deduction you claim.
    4. Ask for Help: If you are itemizing, are self-employed or just don't have a head for numbers, get help from a professional when preparing your taxes. Enrolled agents can represent you in an audit, and online services like TurboTax offer audit-related services.

  • Step 8: Plan for Next Year

    • Once you've put this year's tax return to bed, it's time to start planning for next year. Keeping your receipts organized not only makes completing your return easier, it could also save you money if you ever decide to itemize and will protect you in case of an audit.
    • Many organizational gurus swear by the "envelope" or "shoebox" system. You dump all your receipts into one shoebox as you collect them, and once a month, organize them into envelopes according to possible deductions. So, your envelopes might read "Business Meals," "Business Travel," "Medical," etc.
    • The following sites provide some tips for organizing your receipts:
    • Lifehacker: How Do You Organize Your Tax Receipts?
    • MSN Money: Prepare for Your Tax Preparer: Putting the Envelope System to Work
    • Expert Village: How to Organize Receipts for Tax Deductions
    • Envelopes are your friend. (Creative Commons photo by SocialBreakfast)

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