Doing Your Own Taxes is as Easy as 1, 2, 3.

benefits

1 Understanding Your Tax Return

Preparing your own taxes is not as daunting a task as many of you might perceive it to be. As a matter of fact, doing your own taxes can be as easy as 1, 2, 3. Also, if you decide to do your own taxes, you could probably end up saving thousands of dollars in the process.

Most individuals earning income in the U.S. must file a tax return. This is the law. Most individuals file a tax return using Form 1040, U.S. Individual Income Tax Return. At first glance, the Form 1040 will typically be perceived to be a very complex government form, which can only be completed by trained tax professionals. This is a great misconception, although your tax professional might want you to think this way. That is true only to a small extent, because in actual fact, if you were to take some time to peruse this form in detail, you would probably discover that more than 90% of what’s on the form will be totally irrelevant to you. Typically, after identifying the lines that are relevant to you, you will be pleasantly surprised to discover just how easy it is to do your own taxes.

Some individuals, depending on their circumstances, may be able to file Form 1040A, a modified version of Form 1040, or Form 1040EZ, Income Tax Return for Single and Joint Filers with No Dependents, instead of Form 1040. Both these forms are shorter versions of Form 1040, and can be used in the following situations:

You can use Form 1040A if your taxable income is below $100,000 and you take the standard deduction instead of itemizing deductions.

You can use Form 1040EZ if: (a) you have no dependents, (b) your taxable income is below $100,000, and (c) you take the standard deduction instead of itemizing deductions.

The 1040 Tax Return

In this chapter, we will concentrate on Form 1040, which is the more commonly used one. This form is comprised of a number of sections, and we shall proceed to review each section in detail, to provide an overview of the structure of the U.S. individual tax return.

The Information Section

Tax year

For most individuals this will be the calendar year (January 1 to December 31, 2013). If your tax year ends other than on December 31, 2013, you must report it here.

Name, address, and Social Security number

You enter your name, address, and Social Security number in this section. If you are married you must enter the Social Security number of your spouse also, even if you are not filing a joint return. If you receive a preprinted label provided by the IRS, you may use that label here.

Filing Status and Exemptions

Filing Status

You must identify your filing status from the five options contained in this section, by checking the appropriate box. You can check only one box. Your filing status determines a number of things, such as:

Whether you must file a return.

Your standard deduction.

Your tax rate.

Your eligibility for certain deductions and credits.

Exemptions

Each taxpayer is entitled to a certain number of tax exemptions, depending on their particular circumstances. You claim all your exemptions in this section of the form. Your exemptions reduce the amount of your income that is taxed. In figuring the total number of exemptions that you are entitled to, you should list yourself (unless someone else is claiming you as a dependent on their return), your spouse (if any), and any dependents you are claiming. Each dependent must have a valid Social Security number or an individual taxpayer identification number (ITIN) if you are to claim this person as a dependent. You must check the appropriate boxes, and report your total exemptions on line 6d.

The Income Section

Most income that you receive is taxable. You report your income from all sources on lines 7 through 21, in this section of the form. Some income must be figured first on other forms and schedules (which we shall see later) before taken to the income section. Also, some income is nontaxable, and is usually not reported (for example, child support). You report your total taxable income on line 22.

Adjusted Gross Income

You list all your eligible adjustments to your gross income on lines 23 through 35 of this section. Adjustments are subtracted from the total income reported on line 22, thus reducing your taxable income, and ultimately your tax liability. Examples of adjustments to gross income include; penalty on early withdrawal of savings, IRA deduction, student loan interest deduction, tuition and fees deduction, moving expenses, alimony paid, etc.

Your Adjusted Gross Income (AGI) is figured on line 37, by subtracting your total adjustments on line 36 from your total income on line 22.

Tax and Credits

If you are over 65, and/or blind, you are entitled to a higher standard deduction. Therefore, on line 39a, you should check the appropriate boxes if you or your spouse were born before January 2, 1949. If either you or your spouse is blind, you should also check the appropriate boxes. Checking any of these boxes will entitle you to a higher standard deduction.

On line 40, you enter either your standard deduction or your itemized deductions, but not both. The amount of your standard deduction is determined by your filing status, your age, and whether you are legally blind. Your itemized deductions consist of certain qualifying expenditure you incur, that the IRS will allow you to deduct in place of your standard deduction, if they are in excess of your standard deduction. If you are married and you are filing a separate return from your spouse, you must check line 39b if your spouse itemizes deductions.

You figure your total exemption amount by multiplying the total number of exemptions you claim on line 6d by $3,900. You are entitled to one exemption amount for each dependent, plus the exemption amounts for yourself, and for your spouse, if you are filing a joint return.

To figure your taxable income, you subtract your standard deduction (or itemized deductions) plus your exemptions, from your AGI. You report your taxable income on line 43. At this stage of the return, you figure your tax by using the tax tables, and you report the amount of tax figured on line 44.

Depending on your particular circumstances, you might be eligible for some tax credits. Some of the tax credits for which you might be eligible for are reported on lines 47 through 53. These credits are termed nonrefundable credits, and are deducted from your tax figured on line 44, thus ultimately increasing your tax refund, or reducing your tax liability, if one exists. Nonrefundable tax credits include the following:

Foreign tax credit.

Credit for child and dependent care expenses.

Some education credits.

Retirement savings contribution credit.

Child tax credit.

Residential energy credit.

You total these credits on line 54, subtract them from your tax on line 46, and enter the result on line 55.

It is very important to understand that the credits in this section are all non-refundable credits, meaning that if they exceed the amount of the tax, you cannot receive a refund for the unused part of these credits, if any. These credits can only reduce your tax to zero, and that’s where they stop.

Other Taxes

There are some other taxes that you may be liable for, depending on your circumstances, and these taxes include the following:

Self-employed tax.

Unreported Social Security and Medicare tax.

Additional tax on IRAs.

Household employment taxes.

First-time homebuyer credit repayment.

You report these other taxes on lines 56 through 60, and they must be added to the amount on line 55, to figure your total tax, which you report on line 61.

Payments

Your payments include all federal tax payments you have already made during the year, and include the following:

Taxes withheld from your salary by your employer. This is reported to you on Form W-2.

Any tax withheld from amounts paid to you by any other payer.

Any estimated tax payments that you made directly to the IRS during the tax year.

Certain other credits that you might be eligible for are also included in the payments section of the form. These credits are termed refundable credits, and are also classified as payments. Refundable credits include the following:

Earned income credit.

Additional child tax credit.

American opportunity credit.

Credit for federal tax on fuels.

Excess Social Security and tier 1 RRTA tax withheld.

Refundable credits are added together with your payments, and this total is entered on line 72.

In contrast to nonrefundable credits, refundable credits will result in a tax refund if they exceed your total tax (see below).

Refund/Amount You Owe

Refund

If the total of your payments and refundable credits (line 72) exceed your total tax (line 61), this represents an overpayment of taxes on your part, and is reported on line 73. If you have an amount on line 73, this means you are entitled to a tax refund of this amount from the IRS. If you wish, you can choose to have your refund deposited directly into your bank account by filling in the appropriate boxes with your bank’s routing and account number.

If you figure that you might be owing taxes in the next year, you can choose to have all or a part of your refund applied to your next year’s estimated tax, by entering that amount on line 75. The amount to be refunded to you will now be the difference between the amount on line 73 and the amount on line 75, and you enter that amount on line 74a.

Amount you owe

If the total tax (line 61) exceeds your total payments and refundable credits (line 72), this means that there was an underpayment of taxes on your part. This underpayment is reported on line 76, and this means that you owe the IRS this amount. Generally, you must send a payment for the amount you owe when you file your taxes, and you may also be charged a penalty.

The Signatures Section

Third party designee

You can allow the IRS to discuss your return with any person you choose, by checking the Yes box and completing the requested information.

Taxpayer’s signature

You are required to sign your return, and state your occupation. If you are married and are filing a joint return, your spouse must also sign the return in the designated area.

Paid preparer’s signature

Your paid preparer will sign in the section designated to him or her.

Filing Requirements

Not all individuals will be required to file a tax return. Some lower income individuals may not meet the minimum requirements to file. Whether you are required to file a tax return depends primarily on your gross income, your age, and also on your filing status. For tax year 2013, you are required to file a tax return if your gross income was at least the amount shown on the following chart.

Regardless of your earnings, the following situations will still require you to file a tax return:

If you are a self-employed individual, you will be required to file a tax return if you have net earnings from self-employment of more than $400.

If you had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes.

Also, if you are owed a refund for taxes paid, or if you are eligible for a refundable credit, it would be to your benefit to file a return, because you won’t be able to receive the refund unless you file.

Even if you are a dependent on another person’s tax return, you might be required to file a tax return. You MUST file a tax return if any of the following apply:

You had unearned income of more than $950.

You had earned income of more than $5,950.

You are married and have income of at least $5, and your spouse files a separate return and itemizes deductions.

Nonresident aliens might also be required to file a tax return if any of the following conditions apply:

They engage, or are considered to be engaged in a trade or business in the United States during the tax year.

They had U.S. income on which the tax liability was not satisfied by the withholding of tax at source.

They are a fiduciary for a nonresident alien or estate.

Nonresident aliens are required to file an income tax return using Form 1040NR.

Tax Rates for the 2013 Tax Year

The amount of tax an individual is liable for is a factor of, (a) the individual’s taxable income, and (b) a specified tax rate that is determined by the individual’s total taxable income. Basically, the greater your taxable income; the higher the rate of tax.

The tax rates for 2013 are as follows for the following filing statuses:

Single

10% on taxable income from $0 to $8,925, plus

15% on taxable income over $8,925 to $36,250, plus

25% on taxable income over $36,250 to $87,850, plus

28% on taxable income over $87,850 to $183,250, plus

33% on taxable income over $183,250 to $398,350, plus

35% on taxable income over $398,350 to $400,000, plus

39.6% on taxable income over $400,000.

Married Filing Jointly or Qualifying Widow(er)

10% on taxable income from $0 to $17,850, plus

15% on taxable income over $17,850 to $72,500, plus

25% on taxable income over $72,500 to $146,400, plus

28% on taxable income over $146,400 to $223,050, plus

33% on taxable income over $223,050 to $398,350, plus

35% on taxable income over $398,350 to $450,000, plus

39.6% on taxable income over $450,000.

Married Filing Separately

10% on taxable income from $0 to $8,925, plus

15% on taxable income over $8,925 to $36,250, plus

25% on taxable income over $36,250 to $73,200, plus

28% on taxable income over $73,200 to $111,525, plus

33% on taxable income over $111,525 to $199,175, plus

35% on taxable income over $199,175 to $225,000, plus

39.6% on taxable income over $225,000.

Head of Household

10% on taxable income from $0 to $12,750, plus

15% on taxable income over $12,750 to $48,600, plus

25% on taxable income over $48,600 to $125,450, plus

28% on taxable income over $125,450 to $203,150, plus

33% on taxable income over $198,050 to $398,350, plus

35% on taxable income over $398,350 to $425,000, plus

39.6% on taxable income over $425,000.

2 Choosing Your Filing Status

An individual’s tax refund or tax liability depends primarily upon two variables: the individual’s filing status and the taxable income. Choosing the correct filing status, therefore, is very important, and is really the first step that you take in ensuring that you will end up with an accurately prepared tax return. You need to appreciate this, because your filing status determines a number of very important things, such as; filing requirements, tax deductions, tax credits, tax rate, and ultimately, your correct tax refund or tax liability. In general, filing status depends on whether a taxpayer is considered unmarried or married, and this is determined based on your marital on the last day of the tax year. For federal tax purposes, a marriage means only a legal union between a man and a woman as husband and wife. The word spouse means a person of the opposite sex who is a husband or a wife.

You must choose from one of five filing statuses, and you must know which one is correct for you. The five filing statuses are: (a) Single, (b) Married Filing Jointly, (c) Married Filing Separately, (d) Head of Household, and (e) Qualifying Widow/Widower. If you discover that more than one filing status applies to you, you may choose the one that gives you the lowest tax rate.

Single

You are required to file Single if any of the following conditions apply to you:

You are unmarried on the last day of the tax year.

You are divorced or legally separated under a separate maintenance decree on the last day of the tax year.

You are widowed before the first day of the tax year and have not remarried during the tax year.

You normally file Single if you do not qualify for any other filing status, but there are some exceptions to the above (see below), if you provide for a child living with you, or if you are a surviving spouse. In these cases you will not be required to file Single, as long as certain other conditions are met.

Filing Single generally attracts a higher tax rate and has a lower standard deduction than some of the other filing statuses.

Married Filing Jointly (MFJ)

Marital status is decided based on a person’s marital status on December 31. If a couple is married on December 31 of the tax year; that couple may file a joint return for the year, regardless of when in the year they got married. Consequently, you can file Married Filing Jointly if you and your spouse meet any one of the following tests:

You are married and living together as husband and wife, on the last day of the tax year.

You are married on the last day of the tax year and living apart, but are not legally separated under a decree of divorce or separate maintenance.

Your spouse died during the year and you did not remarry during the year.

You are living together in a common law union that is recognized by the state where you live, or in the state where the common law union began.

In order to file a joint return, both spouses are required to:

Include all their income, exemptions, and deductions on the joint return, and

Use the same accounting period.

The MFJ filing status generally has the lowest rate of tax, and is the more favorable filing status for married couples.

If your spouse died during the tax year, and you remarried during the year, you may file MFJ with your new spouse. You deceased spouse’s filing status, however, would have to be Married Filing Separately.

Note however, that a married couple is not required to file jointly; this is a matter of choice; they can file separate returns if they wish.

Note also, that to file MFJ, both spouses do not need to have income to file jointly, however, both spouses are responsible for the joint return, and both must sign the return.

Nonresident and Dual-Status Aliens

Generally, a joint return cannot be filed if either spouse was a nonresident alien at any time during the year. However, if at the end of the year one spouse was a nonresident alien or dual-status alien married to a U.S. citizen or resident, both spouses may choose to file a joint return. In this case, both spouses will be taxed as U.S. citizens and residents for the entire year, and the nonresident spouse must report all income (both domestic and foreign).

Annulled Marriages

If one spouse obtains a court decree of annulment (which holds that no valid marriage ever existed), both spouses must file amended returns claiming a filing status of Single or Head of Household, whichever applies, for all prior tax years affected by the annulment that are not closed by the statute of limitations.

Divorced Taxpayers

In the case of divorce, both spouses may be held jointly and individually responsible for any tax, interest, and penalties due on a joint return before the divorce. This responsibility applies even if the divorce decree states that only one spouse will be responsible for any amounts due on previously filed joint returns.

Married Filing Separately (MFS)

If you are married and decide not to file a joint return with your spouse, you must file Married Filing Separately.

There is, however, one exception to this rule: A married taxpayer can be considered unmarried by law, if he/she maintains a household for a child, and the spouse was not a member of the household for the last six months of the taxable year. Such a taxpayer would not be required to file MFS, but will be able to file as Head of Household (see below).

Although filing a joint return generally produces lower taxes, the opposite is sometimes the case, and to maximize the tax advantage in such circumstances, married couples may decide to file separately for a particular year. Married taxpayers, therefore, have the option of filing Married Filing Separately, and can consider this option if:

Each spouse wants to be responsible for his/her taxes only.

Both spouses agree not to file a joint return.

When you file MFS, you report only your own income, exemptions, credits, and deductions.

You should consider carefully before choosing this option, because Filing MFS usually puts you at a disadvantaged position, and usually means paying more taxes than filing MFJ. This is so because MFS has the highest tax rate. Filing MFS also disqualifies you from most of the credits/deductions that are available for the other filing statuses (see below).

If you file MFS, you are required to enter your spouse’s full name on line 3 of Form 1040, and also your spouse’s Social Security number in the heading section of Form 1040.

You can change a MFS return to a MFJ return within three years, by filing an amended return. You cannot change from MFJ to MFS however.

The Disadvantages of Filing Married Filing Separately

There are some distinct disadvantages if you choose the MFS filing status, and these are as follows:

You cannot claim the standard deduction if your spouse itemizes; in this case, you must itemize also. This means then, that you could lose out on a substantial deduction if the expenses that you have to itemize are less than the amount of the standard deduction.

You cannot claim the credit for child and dependent care expenses in most cases.

You cannot claim the education credits, the deduction for student loan interest, or the tuition and fees deduction.

You cannot claim the earned income credit.

You cannot exclude from income any interest earned from Series EE U.S. Savings Bonds that was used for higher education expenses.

You cannot claim the credit for adoption expenses in most cases.

You may have a smaller child tax credit than if you filed jointly.

Your capital loss deduction is limited to $1,500 (instead of $3,000 for all other filing statuses).

Also, if