How Do I Run a Simulated Tax Return?

Filing taxes can be stressful, but running a simulated tax return helps you prepare. By estimating your tax liability in advance, you can adjust withholdings and plan for potential refunds or payments. This process is especially useful after major financial changes, such as a new job, side income, or significant deductions.

To get started, gather key financial details and understand how different factors affect your taxable income.

Key Data to Gather

Before running a simulated tax return, compile all relevant financial information to ensure accuracy. Organizing these details in advance helps identify any missing documentation that could impact your estimated return.

Personal Information

Basic identifying details are required for any tax return, whether simulated or official. This includes your full legal name, Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN), and date of birth. If you’re married or have dependents, you’ll need their names, SSNs, and birthdates. These details determine eligibility for tax benefits such as the Child Tax Credit or Earned Income Tax Credit.

If the IRS has issued you an Identity Protection PIN, include it to prevent tax-related identity theft. If you’ve moved recently, update your address with the IRS and ensure it matches the one on your W-2s and other income statements. Having your bank’s routing and account number ready allows for direct deposit if you expect a refund.

Income Details

To estimate your taxable income, gather all earnings documentation. For traditional employment, this means a W-2 form from each employer, detailing wages, tax withholdings, and Social Security and Medicare contributions.

For self-employment, gig work, or freelance income, collect Forms 1099-NEC or 1099-K. Rental income, dividends, and interest are reported on Forms 1099-MISC, 1099-DIV, and 1099-INT. Retirement distributions, unemployment benefits, and Social Security payments appear on Forms 1099-R, 1099-G, or SSA-1099.

If you exercised stock options or received restricted stock units (RSUs), review employer tax documents and brokerage statements to determine taxable portions. If you sold investments, gather Form 1099-B to calculate capital gains or losses, including cost basis details.

Expense Records

Tracking deductible expenses helps estimate your tax outcome. If you had significant medical costs, maintain receipts and insurance statements to determine whether they exceed the deduction threshold—7.5% of adjusted gross income (AGI). Mortgage interest (Form 1098), student loan interest, and property taxes may also be deductible.

If you contributed to a traditional IRA, keep records of contributions, as they may reduce taxable income. Educator expenses and tuition payments, often reported on Form 1098-T, can also provide tax benefits.

For self-employed individuals, track business expenses such as home office costs, vehicle mileage, and equipment purchases. Keeping receipts and bank statements ensures accurate deductions and helps avoid issues in case of an audit.

Choosing a Filing Status

Your filing status affects tax brackets, standard deduction amounts, and eligibility for certain credits. The IRS recognizes five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Surviving Spouse.

Single status applies to unmarried individuals without dependents. However, if you financially support a qualifying dependent and maintain a separate household, you may qualify for Head of Household status, which offers a higher standard deduction and more favorable tax brackets.

Married taxpayers can file jointly or separately. Filing jointly often results in lower tax rates and access to credits such as the Earned Income Tax Credit and the American Opportunity Credit. However, if one spouse has significant medical expenses, itemized deductions, or concerns about the other spouse’s tax liability, filing separately may be preferable.

Widowed individuals may qualify for the Qualifying Surviving Spouse status for up to two years after a spouse’s death if they have a dependent child and meet income requirements. This status provides the same tax benefits as Married Filing Jointly.

Identifying Deductions and Credits

Deductions reduce taxable income, while credits directly lower the amount owed. The choice between taking the standard deduction or itemizing expenses determines which benefits can be claimed. In 2024, the standard deduction is $14,600 for Single filers, $29,200 for Married Filing Jointly, and $21,900 for Head of Household. If itemized deductions exceed these amounts, itemizing may be more beneficial.

Education-related tax benefits can significantly lower tax liability. The American Opportunity Credit allows eligible students or parents to claim up to $2,500 per student for tuition and expenses, with 40% refundable. The Lifetime Learning Credit provides up to $2,000 per return for continuing education costs but is nonrefundable. Those repaying student loans may deduct up to $2,500 in interest payments, subject to income limits.

For taxpayers with children or dependents, the Child Tax Credit offers up to $2,000 per qualifying child under 17, with up to $1,600 refundable. The Child and Dependent Care Credit reimburses a portion of childcare expenses, covering up to 35% of eligible costs, with a maximum credit of $3,000 for one child or $6,000 for two or more. The Earned Income Tax Credit (EITC) provides additional relief for low-to-moderate income workers, with amounts varying based on income and family size.

Homeowners may deduct mortgage interest and state and local taxes, though the latter is capped at $10,000. Energy-efficient home improvements, such as solar panels or heat pumps, qualify for the Residential Clean Energy Credit, which covers 30% of installation costs with no dollar limit. Renters may also be eligible for state-specific tax deductions or credits, depending on local tax laws.

Calculating Potential Taxable Income

Taxable income starts with adjusted gross income (AGI), which includes wages, business income, rental profits, and investment returns, minus allowable adjustments such as retirement contributions, health savings account (HSA) deposits, and educator expenses.

Once AGI is determined, taxable income is calculated by applying either the standard deduction or itemized deductions. If itemizing, eligible expenses such as medical costs exceeding the threshold, charitable donations within IRS limits, and unreimbursed business expenses for certain professions can be deducted. High-income individuals may also need to account for the alternative minimum tax (AMT), which recalculates taxable income by disallowing certain deductions and applying a separate tax rate structure.

Estimating Liabilities or Refunds

After determining taxable income, estimate whether you owe additional taxes or are entitled to a refund. The U.S. tax system is progressive, meaning different portions of income are taxed at increasing rates. For 2024, tax brackets range from 10% to 37%, with thresholds varying based on filing status.

Refundable and nonrefundable credits are then applied. Refundable credits, such as the Earned Income Tax Credit, can reduce tax liability below zero, resulting in a refund. Nonrefundable credits, like the Child and Dependent Care Credit, can only reduce taxes owed to zero. After credits are factored in, any taxes already paid through employer withholdings or estimated quarterly payments are subtracted. If withholdings exceed tax liability, the difference results in a refund. If taxes owed exceed payments made, the remaining balance must be paid by the filing deadline to avoid penalties and interest.

Interpreting Results

If the simulation indicates a large refund, it may suggest excessive withholdings, meaning adjustments to W-4 allowances could increase take-home pay. If you owe a significant amount, it may indicate insufficient withholdings or underestimated quarterly payments, requiring corrective action to avoid penalties. The IRS imposes underpayment penalties if tax payments fall short of 90% of the current year’s liability or 100% of the prior year’s tax, depending on income levels.

The results can also help identify opportunities for tax optimization. If taxable income is higher than expected, contributing to tax-advantaged accounts like a traditional IRA or HSA before the filing deadline may reduce liability. If deductions are close to exceeding the standard deduction threshold, strategic charitable contributions or medical expense timing could enhance itemized deductions. Reviewing the simulation also helps anticipate tax implications of major financial decisions, such as selling investments, adjusting retirement contributions, or claiming additional dependents.