Income Tax Preparation

Every person who receives income of one kind or the other has to pay income tax to the government. Tax preparation involves a lot of calculation and prior planning. There are forms to be filled and submitted, and refunds claimed from the IRS (the Internal Revenue Service).

The first step in income tax preparation is to choose the right form. There are several kinds of forms depending on the kind of income. The basic form 1040 (or 1040EZ or 1040A) has to be filled by everyone, apart from any other forms. Form 1040 is meant for all kinds of incomes, if the annual income is more than $50,000. This form is also used for itemizing deductions when not applying the standard deduction. 1040EZ is for single people, or when married and filing jointly. The applicant should not have any dependents, should be less than 65, not blind, and have taxable income (from certain sources) of less than $50,000, with earned interest of less than $400, and no itemized deductions. Form 1040A is for people who have annual income of less than $50,000, but have itemized deductions.

There are certain schedules generally used with 1040: Schedule A (itemize deductions); Schedule B (report taxable interest or dividends in excess of $400); Schedule C or C-EZ (report profit or loss from a business), Schedule D (report capital gains and losses); Schedule E (report supplemental income and losses) and Schedule EIC (claim earned income tax credit).

The forms can be obtained from the public library or IRS. After selecting the right form, prepare the return using W-2s (wage and tax settlements given by the employer), 1099s (dividend and interest forms given by banks, mutual funds and other investments), and other receipts. Attach all the required documents to the form, including the payment voucher form 1040-V (if required). Make sure that you sign the form, and the social security number on the form is correct.

The main information required for income tax preparation is: personal data (social security number, alimony paid and child care provider); employment and income data (W-2 form, unemployment compensation, miscellaneous income, pensions/annuities, jury duty pay, alimonies received, prizes/awards/lotteries/scholarships/fellowships received, state and local income tax refunds); home owner/rental data; financial assets, financial liabilities, expenses and self-employment data (if applicable).

You can take the help of a professional income tax preparer if: the tax preparation is too complex, the IRS questions you about something, or you want to save time and effort. However, check for the preparer?s credentials. Any certified public accountant (CPA), certified financial planner (CFP), or enrolled agent (EA) would be able to help. The National Association of Tax Professionals (NATP) is a good source for finding a good Income Tax Preparer.

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