How to Determine Your Income Tax Return With Your Pay Stubs

1040 Form

For many people, January through April 15 is associated with the arduous task of gathering the previous year's records and hoping for a refund rather than a tax bill. An unexpected refund is nice, but learning that you owe the Internal Revenue Service can be financially devastating. Knowing where you stand during the tax year makes annual tax reporting less of an ordeal and helps you take steps to lower your taxes.

Things You'll Need

• IRS Publication 17 (most recent edition)
• IRS 1040 Form (most recent edition)
• Pencil
• Calculator
• Most recent pay stub
• Prior year's tax return

Instructions

Gather Paperwork and Forms

1. Download the most recent Form 1040 and Publication 17 from the IRS website. You might have to use prior year instructions and forms. Publication 17 lists expected changes for the upcoming year, which you can use, along with current year tax tables on the IRS website, to adjust calculations for the current year.

2. Print a copy of Form 1040 and Schedules A and D.

3. Carefully read the rules in Publication 17 to verify filing status and dependents. These typically change with divorce, marriage, and births or deaths of dependents.

Enter Pay Stub Information

1. Enter your gross year-to-date pay from your pay stub in the "Income" section on the "Wages, salaries, tips, etc. ... " line. If filing jointly or if you have multiple jobs, add all gross pay. The year's final paycheck should show the numbers you'll use on the final tax return.

2. Find year-to-date withholding on your pay stub. Enter this amount in the "Payments" section on the second page of Form 1040, on the "Federal income tax withheld ... " line. If you enter pay stubs from multiple jobs, add withholding from all of them here.

3. Note other information relevant to your tax reporting. The most common are year-to-date deductions for retirement, medical, or child-care expenses. Some are "pretax"--removed from the gross amount of pay reported to the IRS. Other items that you pay out of taxable income might qualify as deductions or support a claim for a credit. Keep these in mind as you consider whether lines on Form 1040 or its schedules apply to your situation. Paying with "post-tax" withholdings from your paycheck is treated the same as payments by cash, checks or credit.

Calculate Total Income

1. 

   Bank income is usually taxable.

   Copy the amounts from your prior year return on the "Interest" and "Dividend" lines.

2. Enter net income expected from businesses, rental property, trusts, or sale of property ("Capital Gain or Loss" line).

3. If you received a state refund in the prior year, enter the amount in the 1040 "Income" section on the "Taxable refunds, credits, or offsets of state and local income taxes" line.

4. Enter projected totals for unemployment benefits, Social Security and pensions in the appropriate lines in the "Income" section. Use the Social Security worksheet to determine how much of your benefit is taxable if you have other income.

5. Add taxable withdrawals from tax-deferred retirement accounts.

6. Add the amounts in the "Income" section and enter the total on the last line in the "Income" section ("Total Income").

Calculate Deductions

1. Consult Publication 17 to determine whether you qualify for adjustments in the Adjusted Gross Income section.

2. Subtract total adjustments from total income, entering the total on the "Adjusted Gross Income" line. Copy it to the first line on page 2 of Form 1040.

3. Copy deductions from the prior year onto the deductions line in the "Tax and Credits" section on page 2 of Form 1040. If the current year's standard deduction is larger, use that.

Calculate Total Tax

1. Multiply your exemptions by the current year exemption amount. Enter the total on the "Exemptions" line of the "Tax and Credit" section on the second page.

2. Subtract deduction and exemption amounts from adjusted gross income and enter on the "Taxable income" line in the "Tax and Credits."

3. Find your taxable income in the most recent tax table. Enter your tax on the "Tax" line of Form 1040.

4. Enter any credits you qualify for, as detailed in Publication 17, on the total credits line of the "Tax and Credits" section. Subtract total credits from total tax, and enter the positive result or zero.

5. Add in any special taxes you owe in the "Other Taxes" section. The most common are self-employment taxes, and for early withdrawals from retirement accounts. Fill in forms and worksheets to calculate these. Add them to the amount calculated in the "Tax and Credits" section to arrive at the amount to enter on the "Total tax" line.

Finish the Estimate

1. Add any estimated payments you've made for the current year, and enter that on the "Estimated payments" line of the "Payments" section. Check your prior year's return to see whether you applied your refund to your current year estimate. If you made a payment when filing for an extension, record the amount on the line for this purpose in the "Payments" section.

2. Check the list of credits and their instructions to determine whether you qualify for any "refundable credits" listed in the "Payments" section. Enter the amounts of any credits you expect to receive.

3. Add all your payments, including the "refundable credits" that appear in the "Payments" section, for the "Total payments" line.

4. Subtract total payments from total tax. If the result is negative, enter the amount as a positive number on the "Overpaid" line. If the result is positive, enter the result on the "Amount you owe" line.

5. Make estimated tax payments or adjust your withholding, if your projections indicate you'll owe money.

Tips & Warnings

• If you have questions regarding your pay stub or believe that you have detected an error, consult your company's human resources department.

• If you know your income or deductions have changed significantly from the prior year, work through the schedules and worksheets to achieve a more accurate estimate of current year tax.

• If you have capital gains income, using the capital gains worksheet to calculate your tax may result in a lower tax liability than the amount shown on the tax table, if your incremental tax rate is higher than the flat capital gains rate.

• Tax software can simplify pre-calculating your tax liability. However, software updated for the current tax year isn't available until after the IRS finalizes its rules.

• Many mutual funds pay taxable dividends during December, when it's too late to increase your withholding. You can anticipate this by withholding extra earlier in the year or making an estimated tax payment by Jan. 15th the following year.

• You cannot file a tax return until you have received a W-2 from your employer. Employers have until Feb. 1 to provide employees with W-2s showing the previous year's income and taxes.

References

• IRS: Publication 17, 2010
• IRS: 1040 Form, 2010
• H&R Block: Tax Tips & Calculators

Resources

• Liberty Tax Service: Withholding Calculator