Taxes Made Simple

Many people opt to pay a pro to prepare their tax returns for them. Others like to use software. Call me old-fashioned, but I think that preparing one's own return using the actual forms is an excellent experience for most people. If you've never done it before, you can't help but learn something in the process. Here, I take a look at preparing a Form 1040:

Step 1: Download the Form.

Step 2: Fill-in your personal information.

(Click on any of the images to enlarge.) 

The top of the form simply asks for some basic information such as your name, SSN, address, etc. It also asks for your filing status. For the majority of people, this is either "Single" or "Married Filing Jointly." If you're unmarried and paying to support a dependent, you may be able to file as "Head of Household," which will give you some additional benefits. [See this post for more info about filing status.]

Step 3: Determine How Many Exemptions You're Eligible For.

Generally, you are entitled to one exemption for yourself, one for your spouse, and one for each of your dependents. In 2008, each exemption reduces your taxable income by $3,500.

Step 4: Lines 7-22: (Income)

• For Lines 7-21, list each of your types of income on the appropriate line. Most of this information can be gathered from documents that have already been provided to you. For example, Line 7: Wages, Salaries, and Tips is taken from the W-2 provided to you by your employer.
• Sum up all of the amounts entered on Lines 7-21, and enter the total on Line 22. This is your "Total Income."

Step 5: Lines 23-37 (Deductions to Arrive at Your "Adjusted Gross Income")

• On Lines 23-35, you'll enter any of your "above the line" deductions. (Common above the line deductions include the deduction for contributions to a Traditional IRA, the Tution and Fees Deduction, and the deduction for contributions to a Health Savings Account.)
• These above the line deductions are particularly valuable, because they save you money regardless of whether or not you choose to itemize your deductions. (More on this in the next section.)
• On Line 36, enter the sum of all amounts entered on Lines 23-35.
• Subtract Line 36 from Line 22. Enter the difference on Line 37. This is known as your Adjusted Gross Income. (When people reference above the line and below the line deductions, Line 37--Adjusted Gross Income is "the line" that they're referring to.)

Step 6: Lines 38-56 (Tax and Credits)

• For Line 38 (at the top of Page 2) just carry over your Adjusted Gross Income from Line 37.
• On Line 40, enter the greater of the sum of your itemized deductions (such as home mortgage interest and charitable contributions) or your Standard Deduction. (The amount for your Standard Deduction depends upon your Filing Status and is listed in the left margin of the form.)
• Subtract the amount on Line 410 from the amount on Line 38. Enter the difference on Line 41.
• Multiply the amount of exemptions you claimed (on Line 6d) by $3,500. Enter the total on Line 42.
• Subtract Line 42 from Line 41. Enter the difference on Line 43. This amount is known as your Taxable Income.
• You then use the tax tables in the instruction booklet to determine the corresponding amount of tax for your taxable income. Enter this amount on Line 44.
• If you're subject to the Alternative Minimum Tax, enter your AMT amount on Line 45.
• On Lines 47-54, enter any credits for which you're eligible. Common credits include the education credits (specifically, the Hope Credit and Lifetime Learning Credit), the Retirement Savings Contribution Credit, and the Credit for child or dependent care expenses.
• Total your credits, and enter the amount on Line 55.
• Now subtract Line 55 (Total Credits) from Line 46 (Total Tax). This is the total amount of income tax that you're responsible for over the course of the year. [Note: As you can see, credits are particularly valuable because they reduce your tax on a dollar-for-dollar basis.]

Step 7: Lines 57-61 (Other Taxes)

In this section, you enter any other taxes for which you're responsible. (Things such as Self-Employment Tax and the additional 10% tax for early withdrawals from an IRA go here.)

Step 8: Lines 62-76 (Payments, and Refund/Amount Owed)

• On Lines 62-70, you'll enter any payments you have already made toward your tax liability for the year. (Most commonly, these payments are in the form of withholding from your wages, or in the form of quarterly estimated tax payments.)
• If you qualify for the Earned Income Credit, enter your EIC on Line 64a.
• Sum all of your payments, and enter the total on Line 71.
• If the sum of your payments was greater than your total tax, enter the difference on Lines 72 and 73a. This will be the amount of your refund.
• If the sum of your payments was less than your total tax, write the difference on Line 75. This is the amount you still owe. (So go ahead and get out the checkbook. There's no sense in waiting.)

Step 9: Sign Your Return

Now just sign your return, and you're all done! Nice job. 

For more information, take a look at my most recent book: Taxes Made Simple: Income Taxes Explained in 100 Pages or Less.

American Express made the move yesterday to become a bank holding company, rather than an independent credit card company. Why the change? As a bank holding company, American Express is now eligible for low cost financing from the Fed as a result of the bailout package. What makes this situation unique is that Amex wasn't in danger of collapse. They're just doing it to take advantage of low-interest money in order to increase their profits.

This move has garnered its share of criticism. Pundits are saying that Amex is taking advantage of the American people. For example, over the The Money Hawk, Kevin says he's outraged. He urges people to stop using their Amex Cards, and businesses to stop accepting them as a form protest.

I'm a big fan of Kevin's blog. And I see where he's coming from. American Express is using taxpayer dollars in order to jack up their profits. He's right.

My question is this: Can we blame them?

The way I see it, Amex management has a responsibility to the shareholders to do what it can to maximize profits. (I know, I know. There are limits to this responsibility. For example, physicallly harming someone in order to improve profits is still not warranted.)

The argument that Kevin makes is that we, the taxpayers, lose out. We foot the bill. And yes, we do.

But how is that any different from a business claiming a perfectly legitimate business deduction? In that situation, the business's tax bill is decreased, leaving the rest of the American public to pay a higher percentage of the bill for the services our government provides.

As far as I can tell, this situation is exactly the same: A business's management is taking an entirely legal action to lower its operating costs. This is precisely what they're paid to do! Even when it means that somebody else ends up having to pay more.

If we want to point the finger...

Let's point it at ourselves. We (or more precisely, our elected representatives) are the ones who made this sort of thing legal. If we don't want businesses do to something, let's not pass a law that explicitly says they can do it.