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13 Steps to Completing Tax Form 1040: An Easy-To-Follow Guide

13 Steps to Completing Tax Form 1040: An Easy-To-Follow Guide

Form 1040 is an IRS-issued form that is used by U.S. taxpayers to file their annual income tax return.

The form consists of various sections used to report income, expenses, exemptions and other items that ultimately determines how much tax needs to be paid or, alternatively, how much is to be received as a refund. 

The form also compiles information such as identity, tax filing status and tax dependents.

Completing the 1040 Tax Form might seem like a heavy task, but with the right documents, some patience, and an easy-to-follow resource (like this!) you can polish it off with ease and peace of mind.

NOTE(!):

Step 1: Determine if the 1040 Tax Form is the Correct Form for You

The 1040 tax form is to be used by the following U.S. taxpayers: 

  • Independent contractors 
  • Small business owners from the following categories:
    • Self-employed 
    • Sole Proprietorship
    • Single-member LLC
    • Partner in a partnership
    • Farmer 

If you are in any of the above categories, then the correct form to be used for filing your taxes is Form 1040.

Step 2: Collect the Documents Required to Complete Form 1040

Collecting all the required documents ahead of time will make the process of completing Form 1040 much easier. 

Here is a compiled list of all the possible documents you may need:

  1. Last year’s tax return – this is important because you will need it to determine if you are due a refund or owe taxes for this year
  2. Social Security Number (SSN)
  3. Date of birth (in case you are completing the form for someone else)
  4. Statement(s) of Wages Earned (i.e. W-2 or 1099s)
  5. Statement of unemployment compensation received
  6. Alimony income or payments (plus the date of the divorce or separation agreement)
  7. Statement of Deductible Retirement Contributions
  8. Statement(s) of interest or dividends from brokerages or banks
  9. Schedule SE for self-employment tax deductions
  10. Statement of loan interest received or payments
  11. Proof of Health Savings Account Deduction (Form 8889)
  12. Self-employed SEP, SIMPLE and other qualified plans, plus any health insurance documents
  13. Proof of tax credits and deductions
  14. Bank information for direct deposit information in the event of a refund

Step 3: Complete and Append Applicable Form 1040 Schedules

Collecting all the required documents ahead of time will make the process of completing Form 1040 much easier. 

Form 1040 may look simple to some people however there are extra tax forms connected to it that are called schedules.

Schedules are required to show that calculations on the main form are accurate by giving the necessary details behind each calculation.

When all the schedules are collected and organized, the completion of Form 1040 is more straightforward. 

Below are the 6 possible supplemental schedules that you might need to complete Form 1040:

  1. Schedule A: Itemized tax deductions (from page 2 of Form 1040)
  2. Schedule B: Interest and dividend income (from page 1 of Form 1040, line 2-3)
  3. Schedule C: Line 7 of Schedule C is where sole proprietors can report their business revenue, expenses, and profit (or loss)
  4. Schedule D: Used for asset sales that generate capital gains or losses — posted to Schedule 1.
  5. Schedule E: Supplemental form to report income or loss from rental real estate, partnerships, S corporations, royalties, trusts, estates and residual interests in real estate mortgage investment conduits (REMICs)
  6. Schedule F: Line 9 of Schedule F is used to report the amount of gross income from a farming business

Below are schedules that were introduced in 2018, created to clarify the process of filing a tax return:

Schedule 1: This schedule is used to report additional income from capital gains and/or unemployment compensation in addition to including various tax deductions that include the student-loan interest deduction.

Schedule 4: The purpose of this schedule is to allow self-employed individuals to list any self-employment taxes. 

Step 4: Fill in the Personal Data Section

This step requires completion of the personal data section including the “Dependents” section (if applicable).

Step 5: Complete the Reported Income Section

Reported income is filled in for this section with parts as follows:

Part 1: Lines 1 – 7

Fill in the applicable income from the W-2 and the self-employment documents on line 1 and repeat the process for all other income sources that may include:

  • Interest earned
  • Qualified investment dividends
  • Withdrawals from IRA distributions/pension/annuities accounts
  • Capital gains (or losses – use Schedule D)
  • Any other income from Schedule 1

Part 2: Line 7B

Line 7B is where you add all the amounts from lines 1-7 (including the applicable schedules) for the final amount of total reported income.

Step 6: Calculate Adjusted Gross Income (AGI)

Reported income is filled in for this section with parts as follows:

This step will require you to use Schedule 1 to report various types of additional income not reported in the previous section and/or include applicable expenses that can reduce total taxable income:

There are two parts to this step as follows:

Part 1: Report Additional Income

Lines 1-8 in this section will require you to fill in any of the following 8 types of income as follows:

  1. Taxable refunds, credits or offsets of state and local income taxes
  2. Alimony payments (Include the date of divorce or separation agreement)
  3. Business income or loss (complete Schedule C)
  4. Gains or losses from sales of business property (complete Form 4797)
  5. Real estate rental income, royalties, or income from a partnership, C corporation or trust (complete Schedule E)
  6. Farm income (complete Schedule F)
  7. Unemployment compensation
  8. Other income (list type and amounts)

Once all the above sources of income are declared you must calculate the sum and (a) put it on line 9 of Schedule 1 and (b) disclose it on line 7a on Form 1040 (from the previous section). 

Part 2: Income Adjustments

This section will require you to list all the expenses made during the current tax year that can be subtracted from taxable income. 

Please note that these are expenses and NOT deductions.

The expenses the federal government allows to be excluded from taxable income are called “adjustments to income”, and can include the following:

  • Educator expenses (line 10)
  • Certain business expenses of a reservist, performing artist, and fee-based government official (line 11) (use Form 2106)
  • Health Savings Account (HSA) contributions with post-tax dollars (line 12)
  • Moving expenses for active-duty U.S. Armed Forces (line 13)
  • Half of the self-employment tax (line 14)
  • Retirement account contributions for self-employed and small business owners (line 15)
  • Self-employed health insurance deduction (line 16)
  • Penalties paid for early withdrawal of savings (Certificate of Deposit (CD) accounts) (line 17)
  • Alimony paid per agreements prior to 2019 (line 18)
  • Contributions to a traditional IRA using post-tax dollars (line 19)
  • Student loan interest up to $2,500 (line 20)
  • Tuition and fee expenses for self, spouse or dependent (line 21)

There are three parts to completing this section, as follows:

  1. Compile expenses. Add up all the expenses from lines 10-22 and enter the sum on line 22 of Schedule 1.
  2. Update Form 1040 with expense amount. Copy the amount from line 22 on Schedule 1 to line 8a on Form 1040.
  3. Fill in adjusted gross income on Form 1040. Subtract line 8a from Form 1040 from line 7B of Form 1040 to fill in the final adjusted gross income amount.

Step 7: Determine if you need to use standard or itemized deductions

The purpose of this section is to determine whether using standardized or itemized deductions will lower the amount of taxes paid.

The key difference is the process: a standard deduction lowers your taxable income by a single fixed amount. Itemized deductions consist of eligible expenses that can be added together for a possibly larger total amount.

You can claim whichever lowers your tax bill the most. 

The following table lists standardized deductions:

After determining the standardized amount you can choose to compile itemized deductions to see if this amount is greater. This task will require the use of Schedule A which lists the following deductions:

  • Mortgage interest deduction
  • Deduction for state and local income taxes paid
  • Medical expense deductions
  • Charitable donations deduction for casualty and theft losses in a federally declared disaster area
  • Gambling losses
  • Casualty and theft losses of certain income-producing property
  • Losses from Schedule K-1
  • Federal estate taxes on income
  • Amortizable bond premiums
  • Ordinary loss attributable to certain bond investments
  • Certain repayments of Social Security or other income
  • Certain unrecovered investments in a pension
  • Impairment-related work expenses for the disabled

Note: Other tax breaks exist, however it may not be possible to deduct everything.

Following the above calculations, you can enter the higher deduction amount on line 9 of Form 1040.

Step 8: Determine the Amount of Qualified Business Income Deductions (IMPORTANT!)

This section applies to individuals that may be eligible for a qualified business income deduction, also called the Section 199A deduction. These include owners of businesses operated through sole proprietorships, partnerships, S corporations in addition to some trusts and estates.

The deduction allows them to deduct up to 20 percent of their qualified business income (QBI), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. 

Please note that income earned by a C corporation or by providing services as an employee isn’t eligible for the deduction.

To complete this step please use Form 8895 or Form 8895-A to calculate the relevant amount, and then enter it on line 10 of Form 1040. 

Following the above calculations, you can enter the higher deduction amount on line 9 of Form 1040.

Step 9: Calculate Taxable Income

Following the completion of the previous steps, taxable income can now be calculated using the following steps:

  1. Add the amounts on lines 9 and 10, and enter the sum on line 11a.
  2. Subtract 11a from 8b (Adjusted Gross Income) to obtain taxable income. Enter this amount on line 11b.

Step 10: Tax Credits

Following the calculation of total taxable income is the calculation of tax credits that can reduce tax liability. This can be done in two parts as follows:

There are two parts to this step as follows:

Part 1: Calculate tax liability

Use the appropriate tax tables to calculate tax liability and multiply this tax rate by the taxable income calculated in the previous step. Enter this amount on line 12.

Part 2: Fill in the Appropriate Tax Credits

Tax credits can be filled in for specific circumstances as follows:

  • Child tax credit (line 13)
  • Earned Income Credit (EIC) (line 18a)
  • Additional child tax credit (line 18b)
  • American opportunity credit (education) (line 18c)

Enter the total amount calculated above on line 18e.

Step 11: Enter Tax Payments

Tax payments made previously for self-employment or any taxes withheld on the W-2 form can be entered on lines 15 & 17.

Step 12: Calculate Taxes to be Paid or Refund Due

In this step we calculate if there is a refund due or tax amount to be paid using the following formulas:

If line 19 is greater than line 16, then you have a refund due and can enter the overpayment amount on lines 20 and 21a.  

Electronic remittance of the refund is possible by entering the relevant banking information in the boxes on lines 21b-d. 

If the amount on line 19 is greater than line 16, then you owe the difference. This payment can be entered on line 23. 

Step 13: Sign Your Name on the Form

IRS forms are not processed without signatures so it is very important to SIGN YOUR NAME! Please ensure that you sign the form whether you completed these steps yourself or if you used a CPA or tax preparation service.

About Zoey Wen

Content contributor and website admin @ Exper.

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