A Guide to Filing Your Tax Returns and the Forms Required
Your tax rate and standard deduction depend on your filing status, so you must first determine which filing status applies to you. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er).
Your IncomeNow, let's take a look at all the forms that report your income.
W-2 FormsThis is a form that your employer is required to provide-they report your income for the year and the amount in taxes you have already paid. If you have worked for more than one employer during the year, you will have one form for each employer.
1099 FormsCompanies, mutual funds, banks and other financial institutions where you have investments (or even a savings account) are required to report your income from any financial transactions. The forms they use are as follows.
- Form 1099-INT reports the amount of interest you earned during the year.
- Form 1099-DIV reports dividends you received during the year (mutual funds, brokers, and companies where you have invested will send these to you by the end of January).
- Form 1099-G reports government payments to you, including state tax refunds and unemployment compensation.
- Form 1099-MISC reports royalty income, rental income, and self-employment income.
- Form 1099-R reports distributions from IRAs and other retirement plans.
- Form 1099-SSA reports social security income you received for the year.
Adjusted Gross IncomeYour adjusted gross income (AGI) will be the number at the bottom of the first page of the 1040 form. AGI is calculated by taking gross income minus any adjustments such as contributions to IRAs, alimony payments, etc. The AGI will determine your eligibility for any tax breaks. It is important to maximize all deductions because the AGI minus all exemptions and deductions will determine your taxable income .
You need to itemize (using Schedule A) if you list each deductible item and the amount exceeds the standard deduction. The most common deductions are mortgage interest (reported on Form 1098), real estate taxes, medical and dental bills (only if you spent more than 7.5% of your income on them), donations to charity, and investment expenses such as maintenance fees for IRA accounts.
Other Important Tax Concepts
Filing an ExtensionIf April 15th is here and you are not ready to file your return, you can ask for an extension by filing Form 4868. This will give you an automatic four-month extension. If you are living outside of the country (U.S. and Puerto Rico), an automatic two-month extension is given to you. If you are serving in the U.S. armed forces, you will receive a broad extension to file and pay while you are in service.
Failure to file an extension will result in 9% annual interest and half percent penalty per month (based on the amount shown as due on the return). If you do not file an extension, you will have to pay a late filing penalty of 5% per month to a maximum of 25%.
Keeping Your DocumentsYour return is eligible for an audit for three years, so you must keep your federal tax papers and stock confirmation receipts and records of other securities purchases for at least that amount of time . Other important documents, like those related to your home purchase, you should keep forever.
Electronic FilingYou can take advantage of the IRS efile to submit your report electronically. Federal and State electronic filing is available in most states and the District of Columbia. Using a personal computer, you can buy or download software or prepare your return online. Now you can also pay your taxes electronically by direct debit or credit card.
According to the IRS, the advantages of preparing your taxes using this option are:
- accuracy (only 1% of taxes prepared electronically have any errors)
- faster processing and faster refunding than for paper filers
Estimated PaymentsEstimated payments are necessary to avoid penalties for underpayment. If you will have more than a $1,000 increase in taxes due to profits, capital gains, or dividends, you must make estimated payments for the periods in which this happens.
The amounts depend on your tax bracket; you need to make sure that you are making the necessary payments each period, especially if you have made additional profits that require additional payments. You can avoid making estimated payments by having your employer withhold more taxes from your W-2 wages.
WithholdingWhen you start a new job, you are required to fill out a W-4 form on which you can indicate your filing status and the number of allowances you are claiming. Each of these withholding allowances is an exemption; the more allowances you claim, the less tax is withheld and the bigger your paychecks will be, but remember that this implies that you might need to pay more taxes at the end of the year because you were not paying enough taxes through the year. Exemptions can be made for yourself, your spouse if filing jointly, and any qualifying dependents.
Alternative Minimum TaxAlternative Minimum Tax (AMT) is a parallel taxing system that was created to make sure that high-income taxpayers with a significant amount of deductions pay at least a minimum amount of taxes each year. While it was once only important for a small number of high-income individuals who made extensive use of tax shelters and deductions, more and more people are being affected by it.
The AMT is triggered when there are large numbers of personal exemptions or state and local taxes paid, large numbers of miscellaneous itemized deductions or medical expenses, or with Incentive Stock Option plans.
Here are a few facts about the AMT:
- Medical expenses can be deducted for AMT purposes if they exceed 10% of the adjusted gross income.
- Miscellaneous itemized deductions that are greater than 2% of your adjusted gross income can be deductible for tax purposes but not for AMT purposes.
- Incentive Stock Options can trigger AMT if the difference between the exercise price and the fair market value of the stock on the exercise date is a bargain. If the AMT is larger than the regular tax bill, you will have to pay AMT.
- If you have a municipal bond, the original issue discount is tax-exempt; this interest income is subject to AMT too.