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Get a jump on your taxes
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January 21, 2002: 10:27 a.m. ET
Don't get caught off-guard on April 15. Find out now what you'll owe or get back.
By Beverly Goodman
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NEW YORK (CNN/Money) - Tax preparation can inspire the procrastinator in almost everyone. Getting organized now, though, can help turn an annual ordeal into just another unpleasant task.
We'll take you through a few steps that will help you prepare records for your federal return and give you a heads-up as to whether you're likely to either write a check or cash one come April. We'll tackle each issue in roughly the same order you'll encounter them on your 1040. Alternatively, you can go to the H&R Block Tax Calculator to use an online calculator from our partners at H&R Block. Now let's get started.
Get organized
The first thing you'll need to do to accurately estimate your taxes is to gather all the relevant paperwork. That includes the W-2s and 1099s that reflect the income you earned throughout 2001, as well as forms such as 1099-DIV, which reflects any dividend income. Also make sure you keep the tax booklet the Internal Revenue Service sends you handy -- you'll need it to determine your actual tax obligation.
Personalize your information
You're entitled to a personal exemption amounting to $2,900 for you, your spouse and for each dependent. Total up the amount your personal exemptions are worth. You'll subtract this figure from your gross income in a later step. If you're married and your adjusted gross income (AGI) exceeds $199,450 ($132,950 if you're single) you will begin to lose some or all of those exemptions; use the worksheet provided in your tax booklet to determine the extent your exemptions will be phased out.
Tally your income
Now you need to come up with a rough estimate of your gross income before whittling away at it with various deductions. Make sure you include your spouse's income if you're filing jointly. All you need is your paperwork and some simple arithmetic. You'll likely have income from a variety of sources:
• Wages will be reflected on a W-2 or 1099s from any freelance or contract work.
• Interest income from bank accounts and corporate bonds (form 1099-INT or 1099-OID); from Treasury bills and other federal government bonds (Series E, EE, HH, etc.), as well as from any mutual funds invested in these types of securities.
• Dividend income from stocks and mutual funds, reported on a 1099-DIV.
• Other taxable income from rental property, royalties, estates and trusts, IRA and pension distributions, alimony or unemployment compensation.
• Capital gains from stock sales or mutual fund distributions. You can match up long-term (securities held more than 12 months) losses to offset long-term gains.
If your long-term losses exceed long-term gains, you can then use them to offset short-term gains. Then match any short-term losses against any remaining gains. Long-term capital gains will be taxed at a lower rate than your other income (generally 10 percent if you're in the 15 percent bracket; 20 percent in the upper brackets).
Click here to check CNN/Money's tax center
But unless a large percentage of your income is from long-term capital gains, you can more easily arrive at a reasonable first estimate of your federal tax obligation if you lump it in with your other income.
Make the necessary adjustments
The IRS allows you to reduce your gross income by subtracting certain items. These items aren't considered deductions per se, because they're subtracted from your gross income, rather than your adjusted gross income (AGI). Take your total income and subtract any deductible contributions to 401(k)s or other employer-sponsored retirement plans, deductible IRAs and self-employment retirement plans like Keoghs SIMPLEs and SEP-IRAs.
Also deduct any marital payments like alimony, expenses relating to rental or royalty income, applicable student loan interest and moving expenses incurred when relocating for work. If you're self-employed, you can also subtract 50 percent of your self-employed tax liability and 60 percent of your health insurance premiums. And if your capital losses exceed any gains, you can subtract the remainder of the loss amount (up to $3,000) from your gross income as well. (If you still have excess losses, you'll have to save them for next year's return.)
You've now arrived at your AGI estimate. You can now also subtract the personal exemptions you calculated earlier.
Deductions are a taxpayer's best friend
You probably already know the basics -- the IRS allows you to whittle away at your income by allowing reductions for items such as mortgage interest, charitable donations, and state and local taxes. Medical and dental expenses (that weren't reimbursed by your insurance company) are deductible only to the extent that they exceed 7.5 percent of your AGI.
So if your AGI is $100,000 and your medical expenses amounted to $8,000, just $500 of them will be deductible. (7.5 percent of $100,000 is $7,500, so the $500 remaining will be deductible.) Other expenses -- such as unreimbursed travel, meals and entertainment expenses of employees on trips away from home, union dues, professional and business association dues, costs of looking for a new job, tax advice and preparation fees -- are deductible only to the extent they exceed 2 percent of your AGI. If, after compiling all these deductions, you find they don't exceed the $4,550 standard deduction for singles or $7,600 for joint filers, you're probably better off not itemizing and simply claiming the standard deduction instead.
Take it to the table
You've now arrived at your taxable income. Check the figure on the IRS tables provided in your 1040 booklet according to your filing status (single, married filing jointly or separately, or head of household). The number in the table reflects your total tax obligation for 2001.
Give yourself some credit
If you qualify for any credits, such as the $1,500 Hope and $1,000 Lifetime Learning education credits, the $600 per-child credit (for children under age 17 as of Dec. 31, 2001), or other credits for foreign income, dependent care or the like, reduce your tax by that amount. (Keep in mind, though, that most credits are not refundable, which means they'll reduce your tax liability until it hits zero, but won't entitle you to a refund.)
Now subtract from that amount all the tax you've paid, whether through an employer's withholding or your own estimated tax payments during the year.
The remaining figure is a rough estimate of what you'll need to pay or what your refund might be when you file. If the remainder is a negative number you may be entitled to a refund. And that's the best way to turn a negative into a positive. 
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