How to File Your Taxes

Need help filing your taxes by the April 18, 2011 deadline? (Yes, we get a couple of extra days this year). Mahalo's tax expert will walk you through each section of the 1040, the main document used to file your taxes, in 11 steps—from ways to file to how to check your refund status.

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. What materials 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: You'll need these numbers for you, your spouse (if you're filing jointly) and any dependents you claim.
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 Jan. 31. 
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. If you work exclusively for yourself, you'll need to keep up with your earned income yourself and report the total on your return.
4. Receipts: If you plan on deducting any expenses or charitable contributions from your taxable income, you will need to have those receipts; it helps to organize receipts into useful categories like medical expenses, mortgage interest, business-related expenses, etc.http://articles.moneycentral.msn.com/Taxes/PreparationTips/ItWillPayToPrepareForYourTaxPreparer.aspx?page=1 
5. Bank Account Numbers: If you are filing electronically and wish to receive your refund amount by direct deposit, you will need your bank's routing number and your bank account number.
6. Previous Tax Year's Adjusted Gross Income: You will need this number from last year's tax return to accurately complete this year's form.

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 the same manner as your W-2s and 1099s. If it is not, you are responsible for providing it.http://moneycentral.msn.com/content/taxes/p70634.asp 

This additional information may include the following:

• 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.
• Mortgage Interest: Documentation provided by your lender via Form 1098.
• Sale of Your Home: Documentation provided by lender or closing agent via Form 1099-S.
• Moving Expenses
• 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.
• 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 and Other Retirement Plan Contributions
• Medical Expenses
• Receipts and Documentation for All Business-Related Expenses 

You will need your legal name and social security number as well as your address (if you have moved, use your current address).http://www.irs.gov/pub/irs-pdf/i1040.pdf When filing jointly you will need this same info for your spouse too.

While this section seems easy, be sure to double-check every numberhttp://www.irs.gov/taxtopics/tc152.html—common errors that can delay your refund include an incorrect name, address or social security number.

The IRS requires that you identify your tax-filing status in one of the following five ways:

1. Single: If you were unmarried or legally separated on the last day of the tax year, your filing status is "single."http://www.irs.gov/publications/p501/ar02.html#d0e1323 
2. Married Filing Jointly: You and your spouse report your incomes on one tax return. You are both required to sign the return.http://www.irs.gov/publications/p501/ar02.html#d0e1380 
   • Due to the passage of the Federal Defense of Marriage Act in 1996, gay and lesbian couples cannot file joint federal tax returns. Legally married gay couples in Massachusetts and California can file a state return jointly. Other states dictate civil unions and domestic partnerships differently.http://www.youtube.com/watch?v=KXOUhVhBwmM
3. Married Filing Separately: If it reduces your taxes owed, you and your spouse can file separately. You and your spouse are then each responsible for your own taxes.http://www.irs.gov/publications/p501/ar02.html#d0e1652 
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 a child living in your home for more than half the year.http://www.irs.gov/publications/p501/ar02.html#d0e1861 
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.http://www.irs.gov/publications/p501/ar02.html#d0e2299 

Exemptions: Every exemption you are able to claim reduces your taxable income. Personal exemptions include yourself and your spouse; dependent exemptions include your children and qualifying relatives.

Dependents must rely on you for primary support, live with you for most of the year and not be claimed by another individual for tax purposes. Each exemption is multiplied by a specified amount that may change on a yearly basis. For the 2010 tax-filing year, each exemption is worth $3,650.http://www.irs.gov/publications/p501/ar02.html#en_US_2010_publink1000220844 

Now that you've assembled all of your financial documents and have the correct forms in front of you (or have solicited the help of a tax professional or online service), it's time to actually do your taxes. The first step to assessing your taxable income is calculating your gross income.

Your gross income includes all of your income — wages, interest earned on investments, stock dividends, business income, rental income, alimony, prize money and tips. The majority of your income is documented in the various W-2s and 1099s you receive at the beginning of the year.

You may or may not receive documentation for income like tips, but you must report all of your income. Bartending, waitressing and other cash-based jobs are red flags to the IRS.http://www.mahalo.com/how-to-file-your-taxes/history/dc1aa8ce0b894ba19f878d6a6c5e984f/#reference_17 

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, and you will need to physically attach your W-2s to this part of the form.

There are certain deducations you can claim to reduce your taxable income, and thus, reduce your tax obligation. Potential deductions include: IRA contributions, moving expenses, student loan interest and, for the self-employed, health insurance. 

When prompted by the software, your accountant or IRS Form 1040, supply the relevant adjustment, deduction, credit and exemption figures. If you are doing your return by hand, you will write these figures into Form 1040 on Lines 23-37.

Add up all of your deductions, then subtract them from your taxable income to arrive at your adjusted gross income, or AGI.

You have a choice when you do your taxes to take the "standard deduction" or "itemize your deductions." 

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, than you can go with the standardized amount.http://www.irs.gov/taxtopics/tc551.html 

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. Here's what qualifies:

• Medical Expenseshttp://www.irs.gov/taxtopics/tc502.html  
• Mortgage Interestmortgage-interest-rates 
• Certain taxes; e.g., State Income Tax, Real Estate Tax and Ad Valorem Taxhttp://www.irs.gov/taxtopics/tc505.html 
• Charitable Contributionshttp://www.irs.gov/taxtopics/tc506.html 
• Casualty and Theft Losseshttp://www.irs.gov/taxtopics/tc515.html 
• Business-Related Expenseshttp://www.irs.gov/taxtopics/tc509.html http://www.irs.gov/taxtopics/tc510.html http://www.irs.gov/taxtopics/tc511.html http://www.irs.gov/taxtopics/tc512.html   
• Educational Expenseshttp://www.irs.gov/taxtopics/tc513.html  
• Miscellaneous Itemized Deductions http://www.irs.gov/taxtopics/tc508.html  

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 must itemize.

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.http://www.irs.gov/taxtopics/tc500.html  

Now that you've determined your taxable income, you can apply your tax rate. This rate is based on your calculated taxable income and your filing status. 

Computerized software programs and online tax preparation services automatically calculate the tax for you, but you may want to confirm the number by running the calculations yourself.

If your taxable income total is $100,000 or less, you can use the the tax tables listed on the 1040 instruction guide on the IRS website. Look for your taxable income total on the chart, then move across the row until to locate your filing method listed at the top of the column. The amount listed at the intersection of your taxable income and filing method is your tax rate. Place this total in line 44 on your 1040.

The IRS will compute your tax for you if you have a basic return and are willing to receive any refund by check. If your taxable income is more than $100,000, you have foreign earned income, lump-sum distributions, alternative minimum tax, qualified adoption expenses or a health savings account, you do not qualify for this tax preparation option. Other restrictions may apply based on your filing needs. Review Publication 967 for complete details.

If you qualify, the IRS will complete the taxes for you for Form 1040EZ, 1040 or 1040A as long as you send in your basic form by the tax deadline. If the IRS calculates that you overpaid, they will send a refund. If you didn't pay enough, they will send you a bill for what you owe.

Credits reduce your taxable income and minimize what you might owe. Generally, these credits are for expenses, investments or specified purchases you made during the tax year. 

Credits also require additional forms to see if you qualify and to what degree, depending on your financial situation. Some credits are income-sensitive with the credit being phased out at higher income levels. Credits change from year to year so it’s best to double-check before you calculate. Here are some common credits:

Child-Related Credits:

If you pay for child or dependent care, you may be eligible for a credit – just complete Form 2441 and transfer the total to line 48 on your 1040. You may also be eligible for the child tax credit based on the number of dependent children you have under 17 years of age. Use the Child Tax Credit Worksheet to determine the amount of credit you should place on line 51 on your 1040.

Education Credits:

Students or parents paying for higher education may qualify for the American Opportunity Credit. The credit is only available to taxpayers whose adjusted gross income is less than $80,000 for a single filer or $160,000 for married filing jointly filers. A lifetime learning credit may also reduce taxable income by up to $2,000—complete Form 8863 and transfer line 23 to line 49 on your 1040 to claim education credits.

Other Credits:

Other potential tax credit opportunities include a foreign tax credit (see Form 1116), a retirement savings contributions credit (see Form 8880) and a residential energy credit (see Form 5695). 

The "Other Taxes" section on your 1040 doesn’t apply to most taxpayers.

It focuses on taxes due from self-employment, early IRA distributions and unreported Social Security or Medicare taxes.

Business owners or independent contractors who receive 1099-MISC forms rather than W-2s typically fall in to this category.

Those who are self-employed don’t have an employer contributing to Medicare and Social Security taxes, so they must to pay the "employer" and “employee” portions of these taxes. See Schedule SE to determine your Medicare and Social Security tax obligation. 

If you receive a standard W-2 form, but your employer doesn’t withhold Medicare or Social Security taxes on your earnings, complete Form 8919. 

Other examples: If you received tips that were not reported through your employer's payroll system, you likely have unreported Social Security or Medicare taxes due (See Form 4137).

Also if you have taken out funds from your Individual Retirement Accounts, or IRA, prematurely, you might owe taxes – see From 5329.

The "Payments" section on a 1040 form summarizes any tax payments you made throughout the year as well as any credits you may receive. This section affects the amount of taxes you may owe based on what you have already paid.

The "Payment" section also outlines a variety of credits that stem from legislative initiatives designed to help the economy, assist lower-income workers or first time-home buyers. Additional credits may apply based on your specific financial and spending totals over the prior year. Many of the additional credits require the completion of supplemental forms to calculate the amount of money you may be able to take off of your tax obligation.

Summarize Taxes Paid: If you were paid wages as an employee of a company, you likely had taxes withheld from your paychecks that were automatically forwarded to the IRS. The total tax payments should be noted on your W-2 forms and potentially on a 1099. If you were self-employed and paid estimated taxes, summarize the total amount you paid during the tax year on line 62 of your 1040. Since these figures represent taxes you have already paid, they will be deducted from any amount that you may owe for the year.

Work Credit: If you were employed during the tax year, you may qualify for some special tax credits. The temporary "Making Work Pay" credit is calculated on Schedule M and may grant you up to a $400 credit, depending on your income level.

EIC Credit: Another work-related credit is the Earned Income Credit. The EIC offers tax relief for lower-income individuals who have dependent children and is calculated on Schedule EIC.

Nontaxable Combat Pay Credit: This relates only to military personnel. 

Other Payment Credits: Besides work-related credits, you may qualify for other credits that are calculated on external forms.

See if you qualify for an additional child tax credit by completing Form 8812.

The American Opportunity Credit is an education-related credit that requires the completion of Form 8863.

If you purchased a home during 2008, 2009 or 2010, you may be eligible for up $8,000 in tax credits. Complete Form 5405 for potential credit totals.

If you applied for an extension through Form 2868 and made a tax payment, you will need to note the amount on your final 1040 filing.

For purchased fuel used for business purposes other than highway driving, complete Form 4136 for potential reimbursement of fuel taxes.

This section calculates if you’re getting a refund or if you owe taxes. Here’s how:

Look at your total payments on line 72 of your 1040 and your total tax on line 60. If your total payments are larger than your total tax, subtract the tax total from your payments for the refund amount you’re due. If the payments are less than the total tax amount, subtract the payment amount from the total tax for the amount of money you owe.

You can opt to have your refund sent via a check in the mail or choose the typically faster option: direct deposit.

You can review the status of your refund via the Where's My Refund section on the IRS website or by calling the Refund Hotline at 800-829-1954.

If you owe taxes, there are several ways to pay: by check (review the IRS website for the appropriate IRS processing center for your state) or through an electronic payment on the IRS website. 

If you can’t pay the full amount due, pay as much as you can by the tax-filing deadline—any amount you do not pay is subject to interest and failure to pay penalties.