Tax returns can be simple, but tax returns can also be exceedingly complicated. Most people handling their own tax returns plug numbers into the software they are using, barely review the final product, and e-file their returns. I have seen many cases where individuals have, thanks to this data-entry approach and a lack of critically thinking about their returns, either significantly underreported or overreported the amount of tax that they owed. If people would take a step back and try to understand their returns, it would go a long way in helping them catch these larger mistakes, and it would help them more accurately determine whether it is worthwhile to hire a tax professional or to prepare their own return.
My goal with this series of blog articles is to explain your tax filing obligations to you in plain language. The problem with nearly all of the topics that I’m going to cover is that there are a nearly endless number of rules and exceptions that can modify the reporting obligations and the tax consequences in specific situations. I’m going to try to go through the most common of these issues, but, this isn’t going to be an exhaustive guide. I’m writing this for the non-tax professionals that want a better understanding of their filing obligations, whether they self-prepare or just want to have more meaningful discussions about their tax returns and tax planning concerns with their tax preparer or tax advisor.
I think that everyone is better served by cultivating a basic understanding of their tax filings. Of course, I appreciate every client that just wants to trust us to prepare their returns accurately and entirely put their tax concerns out of their minds, but you can easily imagine how this could result in serious problems for individuals who put their faith in the wrong person to prepare their returns. A perfect example of this is the individual who relies on their parents to prepare their returns for them. I have seen many individuals who, blindly relying on mom or dad, have badly mishandled their taxes. There are also some very unethical tax preparers out there, preparers who try to charge you based on the refund you receive and who deliberately incorrectly prepare your return to increase their fee; I assure you that preparer will not be there to help you two years later when the IRS finally identifies the issues with the return.
I don’t want to get too preachy about it, but I believe that we all have a responsibility to accurately file our taxes, a responsibility that you can satisfy by vetting a tax professional and trusting them to prepare your returns (make sure you are asking any potential preparer questions and receiving answers that inspire confidence in that professional) or by developing a better understanding and self-preparing your filings.
In this series, there are going to be some articles focused on providing an overview and there are going to be more articles focused on the actual forms that drive your filing obligations. On the top right of each form, right below the year of the form, the is an Attachment Sequence Number. I’m going to start with the 1040 and work through the attachment sequence numbers in order. A lot of these schedules and forms are going to be entirely irrelevant to your situation and are only relevant to a very small percentage of people (I’m talking about you, farmers,) but I’m going to cover these forms as well, because it’s my goal to enable everyone to be able to understand their returns (and honestly it will be a useful exercise to review some of these more obscure forms that I may not have seen in years.) I’m going to try to work in images of the forms (that I’m going to hack up in paint, because I’m no graphic designer) to try to more clearly explain what you should expect to find on your returns.
I’m also going to try to start every article/topic with a broad strokes review and then move into specifics, test cases, exceptions, and international tax concerns. At the end of this series, it is my hope that nearly everyone will be able to take the basic understanding they have acquired to review their tax returns with a much higher degree of confidence. Everytime you ask your tax preparer a specific question about your return and the response is something like ‘well, the tax software calculated that’, if you don’t have a running understanding of the expected outcome of that calculation, you’re putting blind faith in the preparer’s software to correctly compute the outcome (and believe me, software programs make mistakes a lot more often than preparers would like to admit) and blind faith in your preparer to have correctly input the data (which is actually a lot more complicated than you would expect because robust software programs have a surprising amount of input options for the nearly identical pieces of data based on the nuances of that particular tax item.)
There is no doubt in my mind that your highschool failed you by not having a course that covered your tax filing obligations. I hope that this series of articles can help to fill that gap.
This cover article is going to be maintained weekly with links to all of the articles in this series. I will also try to provide an outline of some of the upcoming content.
Articles and articles coming soon in the A Practical Guide to Your Tax Return Series
Do I Need a Tax Return?
What is and what is not Income?
Line by Line Overview of Form 1040. Income, Adjusted Gross Income(AGI), Taxable Income, and Tax Brackets Explained.
Form 1040 Line 1: Wages, Salaries, tips, etc
Form 1040 Line 2: Interest
Form 1040 Line 3: Dividends
Form 1040 Line 4: IRA Distributions, Pensions, and Annuities
Form 1040 Line 5: Social Security Benefits
Form 1040 Line 6: Capital Gains
Form 1040 Line 7: Other Income
Form 1040 Line 8: Adjustments to Income from Schedule 1
Form 1040 Line 9: Standard Deduction or Itemized Deductions
Form 1040 Line 10: Qualified Business Income Deduction (QBI)
Form 1040 Line 13: Child Tax Credit and Credit for Other Dependents
Form 1040 Line 15: Other Taxes - Self-employment, Net Investment Income Tax, Alternative Minimum Tax and More
Form 1040 Line 17: Withholding (taxes taken out of your income before you receive the income)
Form 1040 Line 18: Other Payments and Refundable Credits
Signing Your Return(don’t trust any preparer that writes “Self-Prepared” on the return) and the Impact of Designating a 3rd Party Designee
Schedule 1: Additional Income and Adjustments to Income
Schedule 2: Additional Taxes
Schedule 3: Additional Credits and Payments
Schedule A: Itemized Deductions
Schedule B: Interest and Ordinary Dividends
Schedule C: Profit or Loss From Business
Schedule D: Capital Gains and Losses
Schedule E: Supplemental Income
Schedule F: Profit or Loss From Farming
More to come...