Anatomy of a Tax Return: 1040 Series Part 1
Filing a tax return is scary for many people. When I talk to friends about my profession, people often respond with something along the lines of "oh I just let my spouse do the return and hope we don't go to jail." My clients often have a similar attitude.
The Internet is full of memes and videos about the failure of our education systems to prepare them for the world. We all know the mitochondria is the powerhouse of the cell, but no one knows how to clean the dryer vent or maintain their dishwasher, or file taxes. That's why I, at age 36, still struggle with #adulting.
So I thought I would do a series on how to fill out a tax return for those who don't know anything about tax returns. This is basic stuff here, but I thought it would be a good place to start.
Tax software solutions, especially those marketed to the public, are designed to gather the information needed without ever looking at the actual tax form. In fact, as a tax professional, one of the hardest things for us to teach our staff is to look at the actual forms they are preparing, rather than the inputs to the forms.
The IRS designs the forms very carefully so that they can be completed by nonprofessionals and come out with the right amounts. Although they may seem overly complicated, once you understand what they are doing, they can actually give you insight into what the IRS is looking for and how they are interpreting tax laws and tax regulations.
So don't be scared of the actual tax forms. I'm going to go through and break them down so it won't be scary to complete your return all on your own, or to understand what your form says before you sign it, even if you already have a trusted tax advisor to prepare it for you.
So let's start with the easiest part of the return: the name block.
This is where you enter your name, your spouse's name, your current home address, and your social security numbers.
This is really fairly simple. The only things to note are to make sure you use the same spelling on your name and spouse's name each year, and to use your current home address, even if it is not where you lived in the prior year. For example, if lived in Tennessee in 2021 and moved to Nevada in January of 2022, I would enter my Nevada address on the form even though the form is for 2021. This is the address the IRS will use to mail your refund and to send any correspondence to you.
The social security numbers need to be correct, so make sure there are no typos there. The IRS efile system will automatically check these numbers against their records and reject the return if it doesn't match or if a return has already been filed with that social security number.
Scammers often try to claim fraudulent refunds by filing hundreds of tax returns using random or stolen social security numbers and claiming refundable tax credits like the earned income credit. The IRS automatically sends out the refunds to the scammers, and then the actual taxpayer can't efile their return or claim their actual refund. In addition to the automatic check on social security numbers, the IRS has also implemented an identity protection PIN system. If the IRS suspects your social security number has been compromised, they will issue you a PIN. This number comes in the mail each year and must be included on your tax return in order to efile your tax return.
If you suspect your social security number has been compromised, you can request an identity protection PIN by following the steps here: https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin
Also part of this section is the Presidential Election Campaign election. If you want to do so, you can designate $3 of your tax to go to this fund.
If you check the box, $3 of the tax on your income will go to the Presidential Election Campaign fund. The money in this fund is used to provide public funding for elections and is used equally for the Democratic and Republican nominees, as well as qualifying third party candidates. Some of the fund is also used for pediatric medical research. Checking the box does not increase your tax. Very few of my clients choose this option, but it is available.
Now for the only tricky part of this section: Filing Status.
Although it seems like a simple question, many people get this wrong. Especially in instances of divorce or separation, choosing the right status can be tricky. But for most of us, it is straightforward and stays the same from year to year.
For most people, you will fall into one of the three main categories: single, married filing jointly (MFJ), and married filing separately (MFS).
For tax purposes, the question of whether you are married means your marital status on December 31 of the tax year. So if we are filing a 2021 tax return, were you legally married on December 31 of 2021?
If you are married, you must choose MFJ or MFS status. There are a couple of instances where you can be "considered unmarried" for tax purposes, which I will address under Head of Household status later, but for now, if you are legally married, those are the two options.
In general, most of the time filing a joint return with your spouse will result in a lower tax. There are some situations which may turn out differently, but those are less common. It is usually easy for tax professionals to run projections to show the difference between joint and separate returns. For those of us who live in community property states, filing separate returns requires some additional analysis, since community property rules require the spouses to share all community property income equally, even if it is earned by one spouse. The IRS has a form to make sure the income is allocated correctly, but they haven't developed a successful way to track it and they often get it wrong.
Usually when spouses want to file separate returns, it is not for tax reasons. Sometimes, spouses just want to keep all of their finances completely separate. One thing for spouses to keep in mind is that both spouses are responsible for the full amount of tax due on a joint return. If you suspect your spouse is doing some fraud, you may want to file separate returns. You may also want to consider whether you want to be married to that person, but that's not really a tax issue.
If you are not married on December 31, not a head of household, and not a qualifying widow(er), congratulations, you are single! Check this box so that the IRS can laugh at how lonely you are and also give you a lower standard deduction.
This was a little longer than I expected, so I'll cover head of household and qualifying widow(er) in the next post.
Thanks for reading! If you want me to talk about a tax thing, send me the questions. I like writing about taxes because I'm a huge nerd!