Knowing which Tax Form to Use
The Internal Revenue Service prepares numerous tax forms that taxpayers rely upon to report income, claim credits and deductions and report their tax liability. Which forms you use, and the tax breaks you might claim on them depend in large measure on your employment status, whether you’re self-employed or work for someone else and whether you’re reporting transactions for your tax preparation or use by others.
Though there are many, we profile here some generally common tax forms you might need.
The W-2 reports your wages and salaries amounts withheld for federal, state and local income taxes and Medicare and Social Security. This form also carries significance beyond tax law, specifically in employment disputes or when an employer is charged based on an employee’s actions. If the employer defends on the grounds that there is no employer-employee relationship, the existence of a W-2 represents strong proof of such a relationship.
Banks and other financial institutions use this form to tell the IRS how much interest your accounts earned in the year. The interest from U.S. Savings Bonds and other tax-exempt bond issuers, such as local or state governments, also appears on the form. If the interest on an account does not exceed $10, though, you won’t get a Form 1099-INT.
Get Acquainted with Form 1040
By default, the IRS gives you a “Standard Deduction” from taxable income. You may claim itemized deductions as an alternative to the Standard Deduction, and Schedule A affords the mechanism for calculating and claiming them. On Schedule A, you have categories such as charitable deductions, state and local government taxes, employee business expenses, medical expenses, unreimbursed property losses, and mortgage interest.
To figure some of the deductions, you need the adjusted gross income from the Form 1040. For instance, you can deduct medical and dental expenses only to the extent that they exceed 7.5 percent of your adjusted gross income. As a result, you must first multiply your adjusted gross income from Form 1040 by 7.5 percent, or 0.075. You then subtract this figure from your total dental and medical expenses.
If you own or run a business as a sole proprietor, Schedule C allows you to report revenues, expenses and the profits or losses. In a sole proprietorship, a single person owns a business and operates it in his or her name. For a business, you run under a corporate name, use a Form 1120 to report the corporate income and deductions.
On Schedule C, deductible expenses include advertising, office expenses, payments in connection with employee benefits, depreciation, any business or similar licenses, fees and taxes; wages and utilities. You may also write off certain expenses for businesses operated from your home.
Schedule D reports gains or losses you have from stocks and other investments or assets you sell. If you owned the particular asset for more than a year, your sale results in a long-term capital gain or loss. Short-term gains and losses apply were you hold the assets for less than a year.
If you own rental property, use Schedule E to indicate your gains or losses. Here, you would list for each of your rental properties the amount of rent you received. The expenses include advertising or marketing the rentals, any cleaning or maintenance, mortgage interest related to the rentals, any property taxes, supplies and the cost of legal or other Professional Services.
Beyond rentals, the Schedule E also reports income or losses from your interest in partnerships, S corporations, estates, and trusts.
Form 2441 allows you to claim has tax credits your expenses for childcare. To take advantage, however, you must have “earned income.”
On the form, you include as earned income wages, salaries or earnings you have from self-employment. This means you cannot count unemployment benefits, Social Security retirement, pensions, interest, capital gains or dividends in determining your eligibility for the credit.
Also, the expenses can be only for those of your dependents who are younger than age 13 or those dependents who cannot take care of themselves mentally or physically. You can list as eligible daycare providers not only a daycare facility but anyone who is at least age 19 years old, even if they are related to you.
The Premium Tax Credit constitutes one of the tax aspects of the Affordable Care Act. If you purchased health insurance under an exchange or marketplace created by the Act, you could qualify for this credit. Form 8962 is the method by which you can claim this credit. If you have purchased insurance through a marketplace, you will get a Form 1095-A. It tells you your enrollment dates and how much you paid in monthly premiums.
This form provides the basis of determining how much is withheld from your wages and salaries. When you start a job, or at other times, you fill out the W-4 to list the number of allowances you claim. You may request these for yourself and others based on how you file. Some allowances depend on whether you may be eligible for credits. The more contributions you claim, the less is withheld from your earnings for income taxes. However, if you are not careful in using these allowances and deductions, you may find that you owe at the end of the year.
Those who owe or will pay you money request that you complete a Form W-9. On this form, you provide your name, address and social security number or taxpayer ID number if the payment is for business. With this information, the person paying you money then can prepare a Form 1099 or other appropriate informational return to submit to the IRS.
When a creditor cancels or forgives a debt, that creates taxable income. This is because you no longer have to repay what you borrowed. The Form 1099-C reflects the amount of the canceled or forgiven the debt. If you get a discharge in a Bankruptcy case, the canceled debt does not count as taxable income.
State or local governments issue Form 1099-Gs for tax refunds and other government payments such as unemployment benefits. If you itemize, you can deduct the income taxes you pay or are withheld for taxes to state and local governments. As a partial trade-off, you must report as income the state or local government tax refunds.
The Form 1099-MISC generally signifies that you’re an independent contractor. That is, unlike an employee, you control how you perform your services. With the 1099-MISC, those for whom you perform services report how much they paid you. The threshold for any payor to complete one stands at $600 per year. In addition to recipients of services, those who award you prizes or pay rent and royalties for the use of your music or literary works also issue 1099-MISCs.
Banks, mortgage companies and other lenders issue Form 1098s to taxpayers who paid at least $600 per year in interest. It states the amount of interest on a home mortgage, along with any premiums you paid on mortgage insurance or fees to get a lower interest rate. Use the information from it to claim your mortgage interest deduction if you itemize tax deductions.