Example – How to Prepare Your Income Tax Return by Yourself

Tom is a 25 year-old single who works for ABC Co. and lives in State A since 2012. In 2016, he earned $100,000 salary, $100 interest income and $7,100 from sale of 70 shares of ABC Co. stock. Tom received a few hundred shares of restricted stock units (RSU) from ABC Co. 100 RSUs were vested on 9/30/2016. The closing price of ABC Co.’s stock is $100 per share on 9/30/2016. Tom’s employer included $10,000 ($100 X 100 shares) on Tom’s W-2 as income and withheld $3,000 ($100 X 30 shares) federal tax. Tom received the remaining 70 shares and sold them on 10/15/2016 with net proceeds $7,100. Tom does not own a house and is debt free. He never prepared his income tax return by himself and wants to know how to prepare his own tax return for tax year 2016.

Step 1: Collect information needed for tax preparation.

1. W-2 form – Tom should receive a W-2 form from his employer before January 31 of 2016.
2. Form 1099-INT – This form is from the bank or financial institution where Tom deposits his money. The $100 interest income should be reported on this form.
3. Form 1099-B – This form may provide some information about the ABC Co. stock sale.
4. Collect the following information needed for reporting the stock sale. You should be able to find the information from the statement of your brokerage account, or document from your employer about the RSU, your W-2 and Form 1099-B. Make sure that your total cost basis agrees with the amount reported on your W-2. If Form 1099-B reports 70 shares sold, you will only need to input and report 70 shares sold when you prepare your tax return.
5. A copy of Tom's 2015 tax return.

Step 2: Purchase a tax preparation software. For state return, select the state of which you are a resident. 

There are various tax preparation software products available on the market. Most popular ones include TurboTax, TaxACT and H&R Block. You can go to their website and purchase the software package that meets your needs.

If your income is below $64,000 in 2016, you may find free tax preparation software on IRS website.

Step 3: Start to prepare federal and state returns.

Open the tax software and go through the preparation process guided by the software. You will use all the information you collected on Step 1 during the process. Your federal and state returns will be created after you complete the guided process.

Step 4: Review your federal and state returns.

In addition to go through the review process guided by the software, you will need to do the following:

1. Make sure your name, address and SS# are input correctly.
2. Make sure the numbers on the tax form agree with the numbers on the supporting document. For example, the wage on the tax form should agree with the wage on W-2.
3. Compare your 2016’s return with 2015’s return and make sure that the difference on each tax line is reasonable. For example, if you see that you reported $200 dividend income on 2015’s return but $0 dividend on 2016’s return, you will need to figure out why. Maybe you forget to report the dividend or you sold the stock that generated the dividend income in 2015.

Step 5: File your federal and state returns after you review the returns and make corrections if there is any. 

You can e-file or paper-file your federal and state returns by following the filing process guided by the software.

Related Article(s)

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