If anxiety over doing your taxes has reached a fever pitch, you’re not alone. The vast majority of taxpayers wait until dangerously close to midnight on April 15 to file (*due to COVID-19, the 2020 tax date has been pushed back to July 15th, 2020). And one of the biggest contributors to this procrastination is a lack of understanding around exactly which form to file. We can’t necessarily making filling out your tax forms any less boring but we can give you the information you need. Here is a summary of the forms you will most likely need and what each form reports.
The most commonly used tax forms are 1040, 1040A and 1040EZ. The individual income tax return form 1040 is a standard; it is used across the board whether you make $20,000, $150,000 or more in annual income. Form 1040 is used to report wages, salaries, filing status, exemptions and itemized deductions. Form 1040A is similar to 1040 except it does not report items such as alimony received, business income, rental real estate, royalty income and other taxes such as unreported social security and Medicare tax. 1040EZ is the most basic tax return; it is primarily for single and joint filers with no dependents. The Internal Revenue Service website is the best and most reliable place to obtain all the tax related information you need. It has all the forms you need to properly file your taxes. Publication 17 is the best resource provided by the IRS to assist tax preparers. The publication summarizes important tax changes that took affect within the last year and discusses these changes in detail. Another publication that details tax law changes is Publication 553, Highlights of 2008 Tax Changes. Both of these publications can be obtained through the IRS.
W-2’s are the tax forms most of us receive. These come from our employers and report wages, tips, social security, Medicare, withheld income taxes, severance pay and other types of compensation. For the lucky ones who have won the lottery or received any type of gambling winnings of $600 ($1,200 from bingo or slot machines) or more in the past year, they will receive Form W-2G from the place that awarded the funds. Form 1099-MISC reports other forms of income such as rent or royalty payments of $10.00 or more. It also reports prizes and awards from TV and radio of $600 or more. The form can be used to report payments made to physicians or other types of medically related expenses or income from contract or freelance work. If you made any donations to a charity throughout the year you should receive a statement from the charity stating the date of the donation and the amount you contributed. This will be used as proof for your tax deduction. If you don’t receive any statement from the charity, make sure you have a canceled check or a copy of one with the name of the charity, the date and the amount donated.
Companies paying out dividends report dividend and distributions such as capital gain distributions or non-taxable distribution for those who have investments on Form 1099-DIV. Interest obtained from bank savings, checking or other interest bearing accounts is reported on Form 1099-INT which is provided by your financial institution. Commonly used schedules which are attached to tax returns are Schedules A and B (reports itemized deductions, interest and ordinary dividends), Schedule C (reports profit and loss from a business), Schedule D (reports capital gains and losses) and Form 2441 (for child and dependent care expenses).
This year, there are additional tax credits you may be eligible for. The Recovery Rebate Credit is for people who did not get a Stimulus Payment or if other circumstances changed during the previous year. If it was your first time or you will be buying a home between April 8, 2008 and July 1, 2009, you may qualify for the First-Time Homeowners credit. Also, if you earned less than $41,646 in 2008, you may qualify for the Earned Income Tax Credit. Find out more on the IRS website or talk to your accountant to see whether you qualify.
If you are the type who likes to do your own taxes, you can start by signing up for Mint.com. Mint.com automatically categorizes your transactions and allows you to tag expenses and income as tax related. Don’t forget to tag health care expenses, unreimbursed business and any interest you’ve earned. Mint.com can export your transactions so they can be imported into a spreadsheet that you can use to estimate your taxes.
Three popular software programs for doing your taxes are TaxCut from H&R Block, TaxAct, and TurboTax from Intuit. TaxCut is more for people who are already comfortable filing their own taxes or are familiar with concepts such as tax-exempt dividends and cost basis. TaxACT handles both simple and complex returns, offers a free deduction examiner, and lets you prepare, print and file your federal tax return for free. TurboTax is perhaps the most comprehensive, with easy to understand explanations that help clarify over 350 possible deductions and credits. The IRS also provides a Free File service. It allows those who earned $56,000 or less in 2008 to use their tax software and e-filing for free in either English or Spanish.
If you feel more comfortable having someone else prepare your taxes, make sure you select someone you trust professionally. This is a long-term relationship and one that is nearly as important as choosing a doctor or a lawyer. You’ll want someone who has a few years under their belt preparing tax returns for people in your particular situation. Be leery of any tax preparer who guarantees a certain amount of refund or who bases fees on a percentage of the amount of the refund. These types of tax practitioners are not working for your best interest. As the taxpayer, you will ultimately be responsible for what is on the tax return, it is extremely important to select the right person. Researching an individual through your local Better Business Bureau will reveal whether the person has had any questionable history or complaints filed against them. You can also look for individuals who are Enrolled Agents (EA), Certified Public Accountants (CPA) or Tax Attorney’s. These professionals provide tax preparation, representation before the IRS, tax planning and other financial services. For individuals who are 60 years of age or older, trained volunteers from non-profit organizations provide free tax counseling and basic income tax return preparation through the Tax Counseling for the Elderly Program (TCE), sponsored by the IRS. AARP also offers an IRS sponsored tax aid counseling program for seniors. The Volunteer Income Tax Assistance Program (VITA) also offers free tax help to low- to moderate-income (generally, $42,000 and below) people who cannot prepare their own tax returns.
Armed with this information, you can make this year the year you won’t stress out at the mere mention of tax returns. Let this year be the one where you will have all your paperwork ready, file your return early or on time and keep a smile on your face as you await a hefty refund.