Oct 29, 2017

As part of the pre-approval (or approval) process, your mortgage lender will probably ask to see the last two years of federal income tax returns.  Make sure you include all pages of your returns and any associated schedules.  Here's a little more detail about the specific forms you will encounter.

If you don't have any income other than W-2 (wage earner) income or any adjustments (like a deduction for dependents or student loan interest), you may file a Form 1040EZ.  It is only one page.  And it's not terribly common.

IRS Form 1040EZ Example

Most tax payers will file Form 1040.  This form is two pages.  It is a summary of your income, adjustments, and credits.

IRS Form 1040 Example

It's likely that you will also have a number of schedules attached to your tax return.  Use Form 1040 as a guide.  In the above example, Henrietta and Hillary probably file a Schedule B, Schedule C, and Schedule E since there is income listed in each of those categories.  Common forms and schedules include:

  • Schedule A for itemized deductions
  • Form 2106 for employee business expenses
  • Schedule B for interest and dividends
  • Schedule C for business income from a sole proprietorship
  • Form 4562 for depreciation and amortization
  • Schedule D for capital gains and losses
  • Form 8949 for sales and other dispositions of capital assets
  • Form 6252 for installment sale income
  • Schedule E for rental real estate, business income, trust and royalties
  • Schedule F for farm income

Schedule E, Page 2

Pay close attention if you have page 2 of a Schedule E.  This is your indication that you might need to keep digging.  If you have ownership interest in a partnership or S Corp, it will be listed here.  In the example below, Henrietta and Hillary will need to provide K-1s for Acme Books, Acme Corporation, and Oklahoma Oil LP.

IRS Schedule E Example

If the K-1s indicate that either Henrietta or Hillary own more than 25% of the business, they will also need to provide business tax returns.  If they own less than 25% of the business, the K-1s are sufficient.  In the example below, Oklahoma Oil is just an investment for Henrietta.  She only needs to provide the K-1s.

IRS Schedule K-1 Example

Business Tax Returns

If you are self-employed (you own 25% or more of any business) and you file separate returns for your business, you will also need two years of business tax returns.  You will have Form 1065 if your business is a partnership, Form 1120 for a corporation, or Form 1120S if you own an S Corporation.

Form 1065 is five pages long.  It will come with a Schedule K-1 for each partner.

IRS Form 1065 Example

Form 1120S is also five pages long and will come with a Schedule K-1 for each shareholder.

IRS Form 1120S Example

Form 1120 is very similar to 1120S.  It is also five pages long.  It may come with Form 1125-E for compensation of officers.

IRS Form 1120 Example

Don't forget your W-2s!

In addition to the actual tax returns, your lender will want to see W-2s and/or 1099s for all sources of income.  You will have used these documents to prepare your tax returns (or you would have provided them to your CPA).  But you don't actually send them to the IRS.  They may be stored separately from your actual tax forms (or your CPA might not have returned them).  Don't assume they are in the same folder!

  • Form W-2 is completed by your employer to document your earnings for the calendar year.  If you are retired and haven't worked during the last tax year, you won't have a W-2.
     
  • The Form 1099 series reports income that isn't salary, wages or tips.  If you worked as an independent contractor or freelance consultant, you may have received a 1099-MISC.  Social security income is reported on an SSA-1099Form 1099-R is used for distributions from pensions, annuities or retirement plans.  And a 1099-DIV reports dividends, distributions, capital gains, and federal income tax withheld from investment accounts.

If in doubt, bring the whole folder!  Your loan officer can pick out the specific documents she needs.

Examples of IRS W-2s and 1099s

Don't have your tax returns handy?

If your CPA files your taxes, ask him or her to email the tax returns directly to your loan officer.

If you use TurboTax, log onto their web site (good luck remembering your user name and password), select My TurboTax, then My Docs.  Save the tax returns as a pdf document.

If all else fails, you can get tax transcripts directly from the IRS.  Sometimes you can get them online.  Otherwise, you'll have to wait for them to arrive via snail mail.  Plan ahead!  If you have to call them you'll spend at least 30 minutes on the phone.  Fun times!

You will need two things from the IRS:  Tax Return Transcripts for the previous two years (the actual returns) and Wage and Income Transcripts for the previous two years (W-2s and 1099s).