Paying Taxes After You Die

If you die and leave an estate, you will use IRS Form 1041 to file and pay federal income taxes each year.  In the eyes of the IRS, your property is treated as if it were a person: it gets a tax id number and must pay taxes on income.  Who takes care of this?  It’s up to you, and this is usually designated in your will.  This person is called your executor.

What Does an Executor Do?

Aside from sorting out your will, the executor will make sure all your financial property is appropriately distributed or managed.  Life insurance claims may have to be filed if you died unexpectedly.  Your Social Security benefits will stop but if you have a surviving spouse they will go to him or her.  The executor makes sure this happens.

Now, if there is money or other property left in your estate after all your bills are paid, the estate lives on.  Most people turn over the management of the estate to a lawyer.  He or she makes sure taxes get filed and paid, and that investments are managed properly.  If the executor is capable, he or she can do this but whatever the case, someone will have to file IRS form 1041 at least once after you die.

IRS Form 1041

This is called U.S. Income Tax Return for Estates and Trusts.  It looks remarkably similar to the individual tax return forms used by actual people…the 1040, 1040A and the 1040EZ.

That’s because it basically is the same…income minus deductions = tax.  Nice and simple.  The estate can even make a charitable contribution, just as if it were a real person, and it can get a deduction for it too, just like a real person.  We’ve almost covered all the parts of the 1041, it’s so simple.  Just two pages, and must of it may not even be applicable to many executors’ estates.

Here’s a direct link to the actual IRS Form 1041…no gimmicks, just a friendly link to the site. Continue reading “Paying Taxes After You Die”

Can I Use IRS Form 1040A? Do You Really Need to Know?

What’s the difference between IRS 1040, 1040A and 1040EZ?  Which 1040 form do you use?  What is tax form 1040EZ?  Do you really need to know?  The answer is no, not really.  Back before online tax preparation and tax prep software, when income tax returns were filed on paper forms, taxpayers did need to know.  The 1040 is the basic individual tax return used to file federal incomes taxes with the IRS.  The 1040 A is a much shorter form used by taxpayers who don’t need to claim quite as many deductions and tax credits.  The 1040EZ is a one-page income tax form for taxpayers whose financial life is so simple it can be summarized on the one-page simple easy IRS 1040 EZ.

But now we have entered the 21st century where paper tax forms are becoming less prevalent.  Now, millions of taxpayers file their federal income tax returns online or with software they downloaded from a tax preparation company.  You create a login and it begins somewhat like any website that asks for personal information in order to create an account.  Once you’ve created an account, the software guides you through a series of questions about your income and your life.  You’ll be asked to enter figures from your wage statement (W2) or other sources of income.

The final product is an electronic file that you e-file with the IRS.  For your records, you can print out the IRS tax forms that pertain to your tax return.  Sometimes only then do you realize which tax form was used…the 1040EZ, the 1040A, or the 1040 long form.

So that begs the question: do you really need to know which tax form you should use?  The tax prep software will figure that out for you!  For those with curious brains, IRS Form 1040A is not the simplest tax form and it’s not the most complex, either.  It’s right in the middle…sort of like Goldilocks’s bowl of porridge.  You can use IRS Form 1040A if you dont’ have a very complicated financial life but you need to claim a few deductions like dependents and an IRA contribution deduction.  You still must make under $100,000 in order to use IRS Form 1040A. Continue reading “Can I Use IRS Form 1040A? Do You Really Need to Know?”

IRS Form 1040 EZ: If Only Life Were This Simple

There are only a few circumstances I cant think of where filing your federal income tax return on paper is preferable to filing electronically.  When your tax life is so simple and straightforward that you can get away with using the IRS Form 1040 EZ, sometimes paper filing is just as good.  However, if you want a fast refund, e-filing is still the way to go.

IRS Form 1040 EZ: The Way All Tax Forms Should Be!

IRS Form 1040 EZ is a thing of simplistic beauty: one page, twelve lines.  Everyone can understand this form, so there’s no need for tax accountants, tax lawyers or even a nasty trip to the local tax preparation storefront of misery during tax season…you can fill out the EZ yourself!

If only all income tax forms were this simple.  It would be a shame to wipe out an entire industry of accountants and tax prep software designers and audit assistance companies, not to mention IRS employees.  However, wouldn’t we all be a lot better off if our tax code was as simple as the 1040 EZ makes it look?  The EZ simply takes your wage income, factors in the withholding you’ve already paid the IRS via your paychecks, calculates the Earned Income Credit if you qualify, then subtracts your withholding from the tax you owe and voila: you’re done filing your federal income tax for another year.

You see, it’s the tax credits and deductions that make our tax code so very complicated.  All the little bonuses and favors the IRS does to reward certain behavior.  For example, you can get a tax credit if you purchase energy-saving improvements for your home.  There’s a form for that, of course.  Another example: you can get a deduction if you have children (dependents).  You get another deduction if you contribute to a certain type of retirement account.  And of course the list goes on.  All of these things disqualify a taxpayer from being able to use IRS Form 1040 EZ.

But if you have no dependents, you claim no credits or deductions, you don’t make much money in interest, and a few other qualifications, you can get away with using the IRS’s simplest, easiest tax form available: the 1040 EZ.  It certainly makes tax time a lot easier! Continue reading “IRS Form 1040 EZ: If Only Life Were This Simple”

Employers: Don’t Forget IRS Form 941

If you have employees you need to know about IRS Form 941.  This is called Employer’s Quarterly Federal Tax Return.  It basically covers what you paid your employees and what you need to pay in Social Security and Medicare taxes on their behalf.  You are reporting and paying the withholding you calculated on every paycheck for that quarter, and matching it with your half.

How to Avoid Paying Penalties on the IRS Form 941

Get this darn form in on time every quarter.  Don’t delay, and do it as soon as you can.  Unless you go through a third-party company that can submit electronically, you will need to print out a fresh Form 941 every three months, fill it out and mail it to the IRS.  If there’s one thing you put at the top of your list of things not to forget or avoid, it’s the 941.

That’s because you’re dealing with your employee salaries here.  Or rather you’re dealing with money that’s not yours but that’s in your care.  You see, you’ve already take out money from every paycheck as you go…that’s called withholding and I hope that if you’re reading about the 941 you already know what withholding is.

That money you have from withholding is not yours…it belongs to the IRS.  You’ve been keeping it for them for a period of up to three months.  And if you fail to hand it over to the IRS in proper format or on time, boy oh boy the penalties are terrible.  Late fees, interest, and penalties and the more wages you’ve paid the higher your penalties will be, as well as interest of course.

So please remember to file IRS Form 941 every quarter and do it on time.  If you are required to make Federal Deposits these must be made on time too.  Good luck! Continue reading “Employers: Don’t Forget IRS Form 941”

When You Have to USe the IRS Form 1040

IRS Form 1040 is what you use if you can’t get away with using the 1040EZ or the 1040A.  It’s preferable to use a shorter, easier tax form when filing your federal income tax return, so take a quick look at our IRS Form 1040 checklist below to see which form you should use.

IRS Form 1040 Checklist

You must use IRS Form 1040 if you do any of the following…

  • you itemize your deductions
  • you have profit from a business
  • you made well over $100,000, since that’s the cutoff for adjusted gross income (AGI) and the 1040
  • you sold property and made income
  • that goes for selling stocks, too
  • and bonds or mutual funds: sell the for a profit and you must use IRS Form 1040
  • did you make income from an S-corp?  1040 for you!
  • make rental income
  • if you want tax credit for a Health Savings Account (HSA) then the 1040 is necessary
  • make foreign wages

Of course none of this matters if you are using tax preparation software.  That’s because all you do to prepare your taxes when using software is to answer questions, fill in numbers, and make a few easy decisions.  The software chooses the correct form for you based on the complexity of the information you need to report on your income.

The only time it matters is when you can get away with using the 1040 EZ.  That form is so simple you can get away with filling it out by hand and mailing it in.  It actually takes about 10 minutes and you’re done with your federal taxes.  That, by the way, is the reason so many paid tax preparers offer to do simple taxes for free…it literally takes them just a few minutes to file a 1040 EZ.  They hope they can convince you to buy other tax prep services while you’re there, like State tax preparation or Audit Protection, etc.  The real work in tax prep is when the taxpayer has lots of information to report…thus requiring the full IRS Form 1040.

For a look at the Form 1040 on the IRS website, go  here and you can download a PDF version of the official form. Continue reading “When You Have to USe the IRS Form 1040”