How to Do Your Own Return

So you've decided to prepare your own return. Good for you! Many bright and talented people don't have the stomach for it. Stomach is all it takes. If you go step by step, it really isn't that hard. And the IRS actually gives pretty good instructions with its forms.

The real problem is fear -- fear of getting it wrong -- and a bewilderment over where to start. (IRS instructions may be good, but there are a lot of them.) I am here to say "never fear" and to tell you where to start and how to end.

The first thing to do is to find your records, and get them organized. Last year's return is critical. Getting these records together is half the battle. If you do that, the rest of your work will go smoothly.

Now, I'm going to tell you how to approach this task manually. Tax preparation software has automated the process and it might be worthwhile to go this route. If so, follow the routines in the program. But read on to understand the process.

Read the instructions carefully
Each line on your 1040 is numbered. As you go through it, if you have any doubt about what is called for, read the instructions for that line. The 1040 comes with an instruction booklet, which can be helpful if read carefully. Don't read it cover to cover, though. Find the form and line number you need, and follow it through. (The 1040 booklet covers more than just the 1040, so make sure you are on the right page.)

Use the 1040 as a checklist
Before you begin filling in your return, go through the 1040, noting the items of income, deductions, and credits that apply to you. Last year's return can be a big help (and the IRS does look to see if you are consistent from year to year). Although there are more than a hundred lines and boxes you could fill out on the form, you will end up leaving most of them blank or entering a zero. Realizing this simplifies things a whole lot.

It also helps to know the basic plan of the form. So here it is: 1. Identifying information 2. Information about your family (marital status and dependents) 3. The tax equation:

  Income - Adjustments = Adjusted Gross Income - Deductions = Taxable Income x Tax Rate = Basic Tax - Tax credits + Other taxes - What you've paid
= Refund (or Amount You Owe)

It may take one line or many, or it may take so much additional information that the IRS has decided to move part of the computation to another form or "schedule." So, when you review the 1040, note the schedules that may apply to you and have them ready before you start.

Do "schedules" first (if any apply)
It doesn't look it, but the IRS designed its forms to be as simple as possible for the greatest number of people. If you are in the majority category, you can go straight through your 1040 without pausing to fill in any extra schedules. If not, when you get to a line that calls for a separate schedule, stop and fill it out first, before you go on with the rest of the 1040.

Here's a list of the common situations that call for separate schedules:
Schedule A Itemized deductions if the total of your deductions for medical, taxes, interest, contributions, casualty and theft, job or investment expenses, etc. exceeds the standard deduction. For 2001, they will be higher than these figures, but to give you an idea, here are the 2000 numbers:
  • Married filing jointly* ($7,350)
  • Married filing separately* ($3,675)
  • Single ($4,400)
  • Head of household** ($6,450)
* Includes recent widow(er). ** Single with dependents (check to see if you qualify).

Many people need the deductions related to owning a home to be able to itemize.

Schedule C Schedule C-EZ Income from a business you own (and not reported on Schedule E or F). Income from a business you own (and not reported on Schedule E or F).
Schedule E Income from rental real estate, royalties, partnerships, trusts, S corporations, etc.
Schedule F Income from farming.
Schedule SE Self-employment tax (to compute your Social Security contribution if you don't have an employer who does it for you.)
Schedule B Interest or dividends if either exceeds $400.
Schedule D Capital gains or losses.
Form 3903 Moving expenses.
Form 2441 Credit for child care expenses (to enable you to go to work)
Schedule R Credit for elderly (65 and up) or disabled (for lower income levels)
Form Alternative minimum tax (for higher income people with lots of deductions)
Schedule H Household employment tax (to pay employment tax for a nanny or similar employee.)

Complete the return in order
It is normally best to work on your return in order. Sometimes a line in the middle or end of the return asks for a figure you computed earlier in the return. For example, your eligibility for the earned income credit (page two) depends on your adjusted gross income (page one).

Sometimes you might not know if you need to add a schedule or do a computation until you try it. Do it both ways. If the figure comes out one way, you might skip the schedule on the final return; another way, you'll include it. Itemized deductions are a good example of this. You may not know if the total exceeds your standard deduction until you try it. If it doesn't, take the standard deduction and throw your draft Schedule A into your notes file.

Check it, sign it and mail it
It is critical that you copy your numbers carefully and do your math accurately. The IRS will check these things, even if it doesn't do a full audit. It's easy to make a mistake with the tax table when you look up your basic tax amount, so double-check it. When you are done, check the whole return again. Is it correct? Did you miss anything? Once you are satisfied, sign the return, date it and mail it (with a check, if necessary).