David Bakke writes about taxes, money management, and retirement planning tips on?Money Crashers Personal Finance. He lives in Atlanta with his young son and enjoys keeping up to date on electronics and small business news.
You?ve probably received your W-2 forms by now, so?why not consider preparing your own federal tax return this year? You can work at your own pace and will not have to go through the arduous task of schooling an accountant in your personal financial situation ? after all, no one knows your overall financial picture better than you.
If you choose to file your taxes unaided, there is a great deal of help available to you through the various?tax preparation software programs. I first prepared my own taxes several years ago and have never looked back. However, there are some basic terms you should know before you get started.
What You Should Know
Adjusted Gross Income
Your gross income includes wages and salaries, bonuses, interest, dividends, and income tax refunds. Once these figures are totaled, you will subtract your deductions, which then yields your adjusted gross income, or AGI. If you prepare your return utilizing online software, it will ask you all the questions needed in order to accurately determine your AGI.
Tax Deductions
A tax deduction is something that reduces the amount of your income that is subject to tax. These include (but are not limited to) medical expenses, property taxes, mortgage loan interest paid, and charitable donations.
It?s easy to inadvertently neglect an eligible personal tax deduction, and the best way to avoid this is to create and maintain an accurate filing system throughout the year. Note the payments you are certain are deductions, as well as anything you think?might?be a deduction. You can always research questionable items at tax-time to see if they are indeed deductible. Once you become more adept at preparing your taxes, you?ll have a clearer idea of which receipts and statements to save.
Tax Credits
Tax credits?are items that directly reduce the amount of tax that you owe. There are a number of tax credits that you may be eligible for, including education expenses and child and dependent care expenses, as well as some portions of the Energy Star credit for energy-efficient appliances. Also, in some instances, low-income workers who start saving for retirement with a 401K or an IRA can earn a credit of up to $1,000 for single filers and up to $2,000 for couples.
There are two types of tax credits: refundable and non-refundable. A non-refundable tax credit can reduce your overall tax liability to zero (but not below), whereas a refundable tax credit can reduce your liability to below zero ? which means you get a refund.
Commonly Used Forms
- W-2. First off, you?ll need all of your W-2 forms. If you changed jobs in the previous year, be sure to follow up with your former employer. Forms are required by law to be mailed out by the end of January, but if you?ve relocated in the past year, they may not find you.
- 1099-MISC. The 1099-MISC form will typically include any sort of miscellaneous income you had for the previous year, including, but not limited to, fees, commissions, rents or royalties paid, payments for prizes and awards, and any income earned by independent contractors.
- 1099-INT. This form includes any interest you earned throughout the year through checking and savings accounts, among others.
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As there are more than 1,000 forms provided by the IRS, this is just a basic list. Depending on?the complexity of your finances, there may be other forms needed.
What You?ll Need
Besides all the forms listed above, you?ll need all receipts regarding job-related expenses and job search expenses, which make up your miscellaneous deductions. However, your total miscellaneous deductions must exceed 2% of your AGI in order to claim them.
You?ll also want detailed documentation of any charitable contributions you made, as well as all records regarding non-reimbursed medical expenses, which can be deducted if they total more than 7.5% of your AGI.
Which Form to File
You have three choices here, depending on your income and whether you choose to?itemize your deductions.
- 1040EZ. The 1040EZ?is the simplest form to use. You can generally file with this form if you have no dependents, are younger than 65, earned less than $100,000 in the previous year, and don?t plan on itemizing.
- 1040A. This is an expanded version of the EZ. You can still make adjustments to your income through standard deductions and credits, but you can?t itemize. You must earn less than $100,000 to use this form, and you cannot use this form if you had any self-employment income.
- 1040. The 1040 is what you would use if neither the 1040EZ nor the 1040A can be used. If you made more than $100,000, plan to itemize, or had self-employment income, this is the form to use
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Final Thoughts
A key way to minimize?the time you spend preparing your taxes is to understand the difference between itemizing and simply submitting a 1040EZ, where you just take the standard deduction. The amount of the standard deduction for each year depends upon your filing status. If you think your deductions will be less than the standard, file the EZ.
I suggest quickly going through the process with a free online software tool like?TurboTax?to identify which option is most beneficial to your particular situation. Though it may seem daunting at first, filing your taxes on your own can be a simple, organized, and streamlined process once you get your feet wet, and can save you money.
What are your thoughts on preparing taxes on your own?
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