Tax season is here, which means you’ll probably be neck-deep in a sea of tax forms.
You aren’t alone. Taxpayers across the country are wading their way through 1040’s and a confusing buffet of Schedule A, B, C, D & E’s designed to “help” you file deductions and claim earnings from a variety of sources.
Because the names of the forms we mentioned above give absolutely no explanation as to what they’re for or what they’ll do, we’ve created a list of nine tax forms we’ll explain in simple terms:
- Schedule A
- Schedule B
- Schedule C
- Schedule D
- Schedule E
For each form, we’ll include a link to the IRS’ official page for that form. At the end of this article, we’ll give you links to some other helpful tax articles we’ve written.
1040: The Ruler of All Tax Forms
Imagine a kingdom where tax worksheets run around doing their daily tasks of organizing people’s deductions and expenses. In this kingdom, the 1040 is the form that reigns. All information gathered from Schedules A-E get sent up to the 1040 castle for processing.
Now, there are different 1040’s floating around: there’s the straight 1040, the 1040-EZ, the 1040-A and the 1040-X. In a general sense, the purpose of all these forms is to get an accurate record of what you earned, what you’re deducting and what you owe.
The history of the 1040 form goes all the way back to 1913, the year in which the IRS created the form. It was the 1040th form they’d written up, and that’s why it gets its numerical name, the Chicago Tribune pointed out in an interesting 1994 article.
“The number 1040 was simply the next number up in the system of sequential numbering of forms developed by the Bureau of Internal Revenue, the predecessor of today’s IRS,” one of the paper’s reporters wrote.
A website called the Tax History Project kept track of all 1040’s between 1913 and 2006. You can click here to see a copy of the original 1040. Back then, the 1040 was all of four pages long, including instructions.
The current 1040? A total of 108 pages, including 106 pages of instructions.
Why have the instructions gotten so out-of-control? Well, a lot of that has to do with how complex deductions, credits, and income scenarios have become.
“Including one page of instructions, the 1040 for tax year 1913 was four pages long and its list of deductions was Spartan compared with today's sumptuous array of write-offs for money put in IRA’s and retirement plans, alimony payments, itemized deductions for charitable contributions, etc., standard deductions for non-itemizers, dependency exemptions, and the like,” the Tribune added.
And the Tribune is right, as you’ve probably experienced. There are six main sections of the current 1040:
- Income: Total of all the money you brought in
- Adjusted Gross Income: Income after certain deductions
- Tax and Credits: Additional deductions and credits
- Other Taxes: This includes self-employment tax
- Payments: Estimated payments and the earned income credit
- Refund: How much, if any, you’re getting back
These six sections include 79 lines of information you have to submit. Once you’re done with the form, you’ll know how much you earned after deductions and how much tax you should have paid.
Now, we know that most of you probably file online with one of the four most popular tax filing sites – very few taxpayers do their taxes by hand.
However, the process is still the same. As you answer questions and provide information, your tax software is entering that information into your 1040, line by line. The enticing refund total you see on your screen is actually just pulled from a running total on your 1040.
The 1040-EZ is a simplified version of the 1040. Instead of 79 lines of information, there are only 14.
The IRS wants to know how much you made on your W-2 or 1099, how much you earned in interest from financial accounts, who your dependents are, how much you paid in taxes over the course of the year and if you had health insurance.
This form is for people who have no dependents (kids, basically) and don’t want to claim any deductions aside from what’s given to you for being single or married.
The 1040-A is a step up in complexity from the 1040-EZ, but it’s still not as extensive as a 1040. This form has 51 lines of information, which is still 28 less than the normal 1040.
The main difference between this form and the 1040 is the 1040-A has bigger sections for income (you can add retirement income and stock dividends) and deductions/credits.
According to the IRS, this form is best suited for people who have multiple forms of income and want to take more deductions than what they’re allowed on the 1040-EZ.
If you make a mistake on your 1040, you may need to file what’s known as an “amended tax return”. If that’s the case, you’ll fill out a 1040-X.
You can also use the 1040-X for several other situations that are more obscure. The majority of taxpayers will use the 1040-X to correct a mistake.
Like the 1040-EZ and 1040-A, this is a far simpler form than the 1040. There are 29 lines of information, most of which include three columns: original amount, correct amount and the difference between the two.
You’ll use these columns to enter information that was incorrectly filed in the first tax return. For example, if you said you earned $34,000 in a year but it was actually $43,000, you’ll write down the original amount ($34K), the correct amount ($43K) and the difference: $9,000.
Schedule A-E: Lots of Work for One Number
Imagine someone let you borrow money 10 years ago and, over the past decade, you’ve lent money to him, done favors and paid some of it back.
Your friend comes up to you one day and says, “Hey man, you know that $500 I let you borrow 10 years ago? I need it back.”
You respond with a laugh – you’ve paid him back plenty based on how much you’ve lent him, helped him and paid him.
Of course, none of that matters; you have to have proof to show that you owe him less than what he wants from you.
To do that, you go back to your bank statements and identify transfers you made to his account.
You get copies of the checks you wrote him. You also get photos from Instagram that show you helping him move, watching his dogs and photos from that road trip when you paid for gas.
With all this proof, you get a pen and write down exactly how much you’ve repaid him over the years.
Then, you give him the paper and say, “Look. This worksheet shows I don’t owe you anything. In fact, you owe me!”
Schedules A, B, C, D and E work like this. They’re the worksheets you fill out to show the IRS you deserve a break on your taxes, and, in some cases, to prove the IRS owes you money.
Each worksheet is intended for specific kinds of deductions. Once you add up all those deductions, you get a number you’ll plug into one line on your 1040.
Pro tip: Deductions reduce the total income the IRS taxes. Tax credits reduce the total taxes you pay.
Schedule A: Itemized Deductions
The Schedule A has eight sections on it. One of the sections is simply a total of all the deductions you took, and the other seven sections are devoted to specific kinds of deductions. Taxpayers often miss the deductions on Schedule A:
- Medical and dental expenses
- Taxes you paid
- Interest you paid
- Gifts to charity
- Casualty and theft losses
- Job expenses and certain miscellaneous deductions
- Other miscellaneous deductions
Like we said, this worksheet includes deductions that taxpayers often miss, a fact we learned as we talked with tax experts ahead of our guide to the most commonly overlooked tax deductions.
Even if you’re filing online and your tax software automatically fills out this worksheet, download it through the IRS website. Reading over what you’re able to deduct can help you form a tax-saving strategy for this upcoming year.
Schedule B: Interest and Ordinary Dividends
The Schedule B is for people who make money from interest gained through investments. Those investments could be dividends from stocks you invested in, or they could be money you earned from interest built up in your savings, money market or CD accounts.
The worksheet is split into three parts: interest, dividends, and foreign accounts/trusts.
You know you’ll have to file a Schedule B along with your 1040 if you receive any of the following forms: 1099-INT, 1099-DIV or 1099-OID.
The first two forms are pretty familiar to most people – you get them if you earned interest (INT) or dividends (DIV).
The 1099-OID is what’s known as an Original Issue Discount, and requires you to claim any money you made from a bond, money you loan to a business or the government. In other words, you have to tell the IRS if you sold the bond for more than you paid for it.
Schedule C: Profit or Loss from Business
Freelance workers and small business owners are familiar with this worksheet. This is what you’ll use to deduct any expenses related to your business.
The deductions you can take on this form are divided into five different sections:
- Cost of goods sold
- Vehicle information
- Other expenses
Of all the IRS deduction worksheets, we think this one is one of the most popular ones. Freelancer work has exploded over the past decade, which means an interest in the Schedule C has also increased greatly.
As with all worksheets in this article, please take great care in calculating your deductions. Don’t be too aggressive. Tax experts have told us that your risk of being audited could increase if the deductions you take are significantly higher than similar tax returns from other business owners.
Schedule D: Capital Gains and Losses
The IRS created the Schedule D to track money made off capital assets, which is a fancy way of saying stuff you own. That stuff could be your home, a car, or stocks. But even though most of us own at least a car, that doesn’t mean most of us will use a Schedule D.
The best way to know if you’re going to use a Schedule D is if you receive a 1099-B, which is a tax form that shows profit or loss you received from stock sales.
The Schedule D is split up into two parts: short-term and long-term capital gains and losses. “Short-term” is considered something you owned for one year or less, while long-term is more than one year.
Average homeowners without stock sales may be familiar with the Schedule D. If you buy a home and sell it before you’ve lived in it for two years in a five-year-period, you’ll pay capital gains taxes on it.
Schedule E: Supplemental Income and Loss
This final worksheet of the five we mentioned earlier is the Schedule E. This form takes into account any income you earned that wasn’t included on the first four worksheets.
One of the biggest reasons why you’d file a Schedule E is if you have rental properties you make money from. You’ll also file a Schedule E if you earn royalties, which includes money authors make from their books.
A common scenario is a person who rents out a room in their home through Airbnb. If you aren’t renting out your property as a full-time job, then you’d file a Schedule E because your Airbnb enterprise is more of a side job than your primary income.
If you want more information about how to handle rental income, check out Ernst & Young’s informational guide to Airbnb income. It’s written for Airbnb hosts, but anyone renting a property could benefit from the information provided. (Ernst & Young’s guide is purely informational and not intended to replace the advice of a tax professional.)
Another situation where a Schedule E will be used is when you receive payment from business partnerships or S-Corporations. You’ll know this is the case when you receive a Schedule K-1 form.
Some Final Thoughts About IRS 1040’s and Schedules A-E
We’ve learned a lot over the past few months of interviewing tax professionals. One of the things we understood: We – and most Americans – are not tax pros.
Though the concept behind forms like the 1040 is simple – income, deductions, and credits – how you interpret those forms is complex. It’s no wonder that the instruction booklet for the 1040 is more than 100 pages long.
If you have any questions about these forms or you are concerned that you’ve made mistakes on your 1040 or any of the worksheets we listed, contact your tax pro. He or she will have precise, expert answers that will clear up your concerns.
A great example of the clarity a tax professional can bring is Randy Becker, a retirement expert based in the Seattle area.
Here’s how he described how each of the forms we mentioned might come into play:
“Those schedules along with the 1040 tax form really cut to the cross-section of a typical American family. Imagine a husband working for an employer. He puts his wage on the 1040.
His wife is self-employed and runs her expenses through a small business with the details listed on the Schedule C.
This couple likes to save and they earn interest on their savings, so it will be placed on the Schedule B. They also trade stock here and there, so those transactions are reported on their Schedule D.
And to supplement their income they have a rental property which flows through their Schedule E, and since they have deductions available to them for healthcare expenses, gifts given, interest paid on their mortgage, etc., they will take those deductions on their Schedule A.”
Is the IRS tax code confusing and intimidating? Yes. But finding the right tax pro will help you have a deeper understanding of what’s going on with 1040’s, Schedules A-E, deductions, expenses and more.
You can also get a lot of great information from our series of articles on tax season. We talked with more than 20 tax professionals to help us understand how taxes work for the average person. Here are some of the articles we wrote to help you with your taxes:
- Your Guide to Freelancer Taxes: 12 Expert Tips to Help Ease the Pain of Tax Season
- Tax Software vs. Accountant: Which Way is Best for Your Situation?
- 11 Common Mistakes Taxpayers Make on Their Tax Returns
- IRS Payment Plans & Installment Agreements: Everything You Need to Know
Each article includes the expertise of tax experts from across the country, as well as examples of our own experience with filing taxes.