Tom and Jean Jones wonder whether they can complete their tax return on their own or must hire a consultant to do so. Both turn 70 1/2 this year. Tom receives a pension from his former employer. Jean and Tom both receive monthly Social Security benefits. Jean receives contract labor income working two days a week for a health care company. They receive royalties on an oil and gas lease. Their investments include a brokerage account and CDs, some in IRAs, some not. They have carryover short-term capital losses from generated from their stock portfolio in the 2008 financial crisis.
The Joneses are typical of many seniors. They have a computer. Thus, they can Google www.freefilefillableforms.com and obtain the forms from the IRS. The site allows them to create an account with an ID and password, pull up the 1040 form and all the additional forms and instructions they need to complete and e-file their own tax returns themselves without even the assistance of a service like TurboTax. In fact, some find using Free File Fillable Forms and instructions easier to use than TurboTax. The Joneses can complete a portion of the return, save it and re-access it as necessary. Many calculations are computed automatically.
1. Taxable Interest
The Joneses must post the taxable interest and dividends not included in their IRAs using Schedule B. They can determine this amount from the 1099-R sent to them from the banks, credit unions and brokerage houses holding these CDs and stocks. The schedule instructions show where to report the taxable interest on their 1040.
2. Profit and Loss from Business
Jean must report the income from her part-time work in the 1099-MISC that the company she is contracted has sent to her. If she has incurred expenses related to her work, she will report these on Schedule C. For instance, she can calculate the number of miles that she has used the car for work, based on her records, and determine the method to report this. The easy way is to figure the standard allowance per mile. She can compute and report any expenses she has incurred for office supplies, dues, etc. and deduct these from her gross income. Schedule C instructs her where to report on the 1040.
3. Short-Term Capital Losses
Tom and Jean will report their short-term capital loss on Schedule D. The form and its instructions tell how to calculate this. Had they had short or long-term gains or losses, they would report these on Schedule D, as well. This schedule instructs where and what to report on the 1040.
4. IRA Distributions
Since Tom and Jean are 70 ½ this year, they must take the required minimum distributions (RMD) from their IRAs. Many administrators of IRAs (generally the brokerage firms or banks) provide notification of the amount they are required to withdraw. If their administrator(s) have not done so, they can obtain that figure by requesting it. They must then report the amounts of these distributions on their tax return as income.
5. Pensions and Annuities
Tom must report the gross and taxable amounts of his pension as reflected on 1099-R his former employer has provided. He will need to attach this form to the tax return when it is filed.
The Joneses must report the royalties they received from the oil and gas lease. For this they will prepare and attach Schedule E to their return using the 1099-MISC the leasing company has provided. This contains the gross amount paid, the taxes and other expenses associated with it. They will include these amounts on Schedule E and follow the instructions for placing on the appropriate line on the 1040.
7. Social Security Benefits
The Joneses must report their Social Security benefits. SSA will have provided an SSA-1099 which shows the gross benefits paid, including any Medicare Part B premiums deducted. The Joneses will use the Social Security Benefits Worksheet provided with the 1040 instructions to figure the taxable portion of those benefits.
8. Self-Employment Tax
Jean will figure the self-employment tax from her earnings and the deductible amount on Schedule SE. Again, IRS provides instructions for completing this form and applying the amount to the 1040 appropriately.
9. Tax and Credits
Once the entries are made, the fillable form will calculate the taxable income. Then the Joneses will calculate their exemptions and deductions, most likely taking the standard deduction of a married couple filing jointly rather than itemizing and deduct these. The Joneses will consult the schedules to determine the tax they must pay based on the resulting amount.
Tom’s former employer withheld a portion of his pension for taxes. Jean paid in quarterly estimated tax payments based upon her income. The Joneses will insert these amounts and subtract them from the tax according to the schedule to determine whether they owe additional tax or are entitled to a refund.
Sandra W. Reed is an attorney with Katten & Benson, an Elder Law firm in Fort Worth. She lives in beautiful Somervell County, near Chalk Mountai