We’re in the middle of the “No-Stress Guide to Filing Your Taxes”. Today we are going to cover tax schedules.
- Your tax document checklist: A guide to get you started
- Choosing the best method to file your return
- Tax software: When to use and how to choose
- Tax schedules (itemizing, capital gains, business income, etc.)
- Don’t miss…a credit and deduction checklist
- Special situations (audit avoidance, extentions, payment plans, and estimated payments)
Today, we’ll talk about some of the more common “advanced” schedules you may encounter doing your tax return. Even if you use tax software to prepare your return, it’s important to understand the basics of tax schedules—your software will add up all the numbers correctly, but it may not stop you from missing deductions or making other errors that could cost you.
What’s a Tax Schedule?
If you’re completely clueless to taxes, all those “schedules” that you’re always hearing about are basically extensions of your overall tax return (also known as, your 1040 form). You could think of these schedules as supporting documentation for your tax return.
In fact, it’s probably important to at least start on these schedules before your 1040 form, as most of the final amounts on the schedules are carried over to the 1040. (You’ll sometimes need your AGI in these forms, so you won’t be able to complete them without this information, which comes from your 1040.)
When I get tax questions, it’s usually about one of three things:
- Itemized Deductions
- Business Income or Loss
- Capital Gain or Loss
Theoretically, reporting these items is as easy as filling out each of their schedules, which are:
- Schedule A (Itemized Deductions)
- Schedule C and Schedule SE (Business Income or Loss)
- Schedule D (Capital Gain or Loss)
If you’re a first-timer, pull up the Instructions for each schedule as you work through these schedules. Here’s a high-level overview on how to prepare Schedule A, C, D, and SE.
SCHEDULE A: ITEMIZED DEDUCTIONS
Everyone gets to choose whether they’ll receive the standard deduction or itemized deductions. The standard deduction is nice for those just starting out because you probably don’t have many expenses eligible for itemizing, so it’s preferable to choose the standard deduction on your return.
However, if you have enough expenses that are eligible for itemizing—mortgage interest, state/local taxes, property taxes, and charitable contributions being the main qualifiers—you could save big bucks on your tax bill.
For example, for a single taxpayer for 2014, the standard deduction is $6,200. If you spent more than $6,200 on qualifying itemizable expenses, you should choose to itemize instead of the standard deduction. In 2015, the standard deduction for a single taxpayer is $6,300.
A general rule of thumb is that, if you’re a homeowner, you should probably itemize on your tax return.
Essentially, Schedule A is a long list of large expenses you paid throughout the year that the government will reward you for in the form of lower income taxes.
Schedule A has six main expense sections:
- Casualty/Theft Losses
- Miscellaneous Expenses
The heavy-hitters on this list are, as I already mentioned, mortgage interest, property tax, state and local income tax, and charitable contributions.
This is why you always hear to keep your tax files organized and to save, save, save all receipts and documentation. You need proof that you incurred these expenses – the IRS isn’t going to just take your word for it.
Filing out the form is as simple as filling in your expenses in the respected boxes. Some expenses come with limitations that you should know about and here are the biggies:
- Medical expenses are only allowed in the amount the exceed 7.5% of your Adjusted Gross Income. People will chronic or major illnesses will be most likely to deduct these expenses. Don’t forget about major surgery or fertility procedures. Overall, though, normal, healthy people will have trouble reaching the amount to qualify for this deduction. Which is a good thing – it means you’re healthy!
- Charitable contributions are limited once they reach 50% of your AGI. Luckily, this is a pretty hard feat to achieve, but it’s good to know.
- Miscellaneous deductions are limited to the amount that exceeds 2% of your AGI. There’s that AGI again! What this means is that you can only include certain miscellaneous expenses if they EXCEED 2% of your AGI. For example, if your AGI is $10,000, that means your 2% threshold is $200. The first $200 of miscellaneous expenses are thrown out; anything above that can be included.
- Miscellaneous expenses include tax preparation fees and unreimbursed employee expenses like union dues, work clothes or tools and job search fees.
Be sure to include any copies of receipts or documentation (from a charity, for example) proving that you incurred these expenses with your final return. You’ll also need to include your 1098 form proving your mortgage interest expenses if you plan to include that expense in your list of deductions.
SCHEDULE C: BUSINESS INCOME OR LOSS
If you’re reporting self-employment income from a sole proprietorship, it’s important to know that you’ll need to fill out BOTH Schedule C and Schedule SE. You should start with Schedule C because the total from Schedule C will carry over to SE.
There are two main sections of your Schedule C schedule:
The number that is calculated on your Schedule C is your total profit and loss from your business. You’ll include the final number from this form in your Taxable Income, which is in section 1 of your 1040 form.
Once you have your final profit or loss number, you’ll carry that number over to the Schedule SE.
Schedule SE is the schedule that most often confuses people. After all, since you’ve already included your profit/loss on your 1040 form, what else is there to do, right?
Well, that’s the tricky thing about working for yourself. You don’t have an employer to deduct payroll taxes from your regular paychecks, so you have to do it yourself. Things like Social Security tax, Medicaid, and Medicare.
This is what self-employment tax is (totally different than income tax on your 1040) and that’s what the Schedule SE calculates.
The good news is that you’re always eligible to use half of your self-employment tax as an adjustment from taxable income on your 1040 form. Whew! Don’t worry, if you follow the step-by-step instructions for the Schedule SE from the IRS website, you won’t miss this stuff.
SCHEDULE D: CAPITAL GAIN AND LOSS
Before we even start, you will NEVER have pay capital gains tax on investments or stocks UNLESS you sell those stocks. As you hold those stocks, and as they go up or down in value, you won’t pay tax on the increase or decrease. Once you sell your stocks, then you will need to pay capital gains tax (or take a loss, if that’s the case).
I know that the word “capital” sounds scary, but it’s really not. Capital basically refers to a “capital asset”. For those non-accountants out there, an asset is basically something you own that holds value—for example, stocks or property.
When you earn income from these assets, it’s not just yours free to keep; the IRS wants you pay taxes on those gains.
Like everything else in tax preparation, paying taxes on capital gains or losses requires the use of an additional form, which is the Schedule D.
Because there are so many different rules with capital gains and losses (things like personal or non-personal assets, short-term versus long-term, etc.), I’m going to use the sale of a stock that you held for less than one year for an example.
Let’s say you held ABC Stock for 2 months during 2011. When you sold it, the total was $10.00 more than you paid for it—you had a $10.00 gain. You’ll need to include this gain in Part 1 of Section D.
If you sold the stock at a loss of $10.00, you’d still need to include this amount in Part 1 of Schedule D. The good news it that you’ll be able to deduct this loss on your taxes. That bad news is that you can only deduct $3,000 in personal losses per year, but you can carry the leftover amount to future tax years indefinitely. So, if you lost a bunch of money in the stock market, all is not lost—at least when it comes to your taxes!
Sooner or later, you’ll be doing your taxes and realize that preparing this year’s return will be a tad more complex than last year. Perhaps you bought a home and want to deduct mortgage interest—you’ll need Schedule A for itemized deductions. Maybe you started freelancing and want to deduct expenses you incurred working for clients; you’ll need to use Schedule C for business income and expenses. Or, maybe you sold some stock and had gains or losses; you’ll need to use Schedule D to report these.
Even if you use tax software, understanding what these schedules are for will make it easier when you go to file.
What do you want to know? Post your questions about itemized deductions, business expenses, or capital gains, and we’ll try to help!
Next in the No-Stress Guide to Filing Your Taxes: Tax Breaks That Can Save You Money.