It’s tax season in America. By April 15th, this year’s tax filing deadline, some 250 million individuals and households will have filed their tax returns with the Internal Revenue Service (IRS).
There are two main steps that you’ll need to take to have your federal and state tax return filed by the deadline. The first is to gather and organize all the necessary tax documents in one place. The second is to complete and file your tax return. For the second step, you’ll need to decide if you will complete the return on your own or if you will hire a tax professional to do it for you.
Step #1: Gathering All Necessary Tax Documents
First, you need to gather all the necessary tax documents into a safe and secure folder (either physical or electronic). Most tax forms are required by law to be mailed out to you by January 31, but in some cases, special forms may come as late as February or March. Below is a summary of the tax forms and documentation most commonly needed for filing. You should become familiar with each of them and how they impact your taxes.
Social Security Numbers or TINs – You’ll need a Social Security number or Tax Identification Number (TIN) for you, your spouse, and any dependents. Have these readily available as you begin.
W-2 – Provided by an employer, this document discloses the wages you earned, taxes withheld, and deductions from your paycheck that may impact your taxes such as health insurance premiums and retirement contributions. You should receive one form from each employer from which you earned a wage during the previous year.
1099 Series – There are several different kinds of 1099 forms you may receive. What they hold in common is that they all represent additional income you received that isn’t from a salary, wage, or tip. The most common forms to receive are a 1099-DIV representing dividend income, 1099-INT representing interest income, and 1099-MISC representing many forms of income, most notably earnings from self-employment, rents, and royalties. Many other forms of 1099s exist for things like your HSA.
1098 Series – Opposite of 1099s, the forms in the 1098 series largely represent money you paid out such as mortgage interest, student loans, etc. These documents are especially important if you itemize your taxes as they can often help lower your adjusted gross income (AGI) or allow for deductions to be made.
Documentation of Certain Expenses – There are many tax credits and deductions available for certain expenses you incur throughout the year. The following commonly help lower the amount of tax you’ll pay:
Casualty and theft losses
Direct expenses related to volunteering (including mileage while on the volunteer job but not to and from your place of volunteering)
Charitable Receipts – The IRS requires substantiation for charitable gifts of $250 or more. It’s a good practice to save and store all charitable receipts in one place. Gifts to qualified charities are generally deductible, and especially impactful if you itemize your deductions.
Step #2: Prepare and File Tax Return
As mentioned earlier, Step #2 is one that you could choose to do on your own or hire a tax professional. Per Pew Research, just over half of taxpayers (56%) pay someone else to do this work for them. According to the National Society of Accountants, the expected range for average tax preparation services is $175 to $500. Meanwhile, the IRS has released research concluding that the average taxpayer spends 13 hours preparing and filing their return.
You’ll have to determine if it’s worth paying someone hundreds of dollars to save you a day or two of work. Keep in mind, however, that there are several factors that determine the complexity of your taxes. The actual investment (either in cost to hire or your personal time) can vary drastically from household to household.
Another reason why you may want to consider doing your taxes on your own is to gain a deeper understanding of how you are taxed. This will allow you to understand what changes you may be able to make now and in the future in order to lower your tax burden.
If you Decide to Prepare Your Own Taxes…
…then the following are helpful tips to consider:
Use a reputable and IRS approved e-file program
I’d recommend that you compare different products to decide what is best for you, but two that I’ve used in the past with success are TurboTax® and TaxAct®.
Understand all deductions and credits you do (or could) qualify for
A good tax program should automatically recognize deductions and credits you are eligible for. You should still understand and look for opportunities that you may still be able to qualify for.
Example - Saver’s Credit: Households below a certain adjusted gross income (AGI) threshold qualify for a credit of up to $1,000 ($2,000 for married couples) when they put money into a qualifying retirement account. A household just above the threshold could still fund a traditional Individual Retirement Account (IRA) before Tax Day in order to bring their AGI below the required threshold to claim the credit (or a larger amount of it). This would result in fewer taxes owed from the reduced AGI, as well as the saver’s credit itself! Some call this a ‘double savings.’
Check for errors before filing
Your tax software should automatically check for errors and omissions. It won’t necessarily catch data entry errors, however. Check every form entered one more time before transmitting your return to the IRS.
Consider a second look even if you’ve already filed
The IRS allows taxpayers to amend their return if necessary. Certain and specific rules apply and should be considered carefully. Some professional tax preparation firms offer a ‘free’ second look. This may be a good option, but make sure to read all of the fine print first. You’re likely giving up a high percentage of any additional benefit they find you are entitled to.
If you Decide to Hire Someone Else to Prepare Your Taxes…
…then the following are helpful tips to consider:
Consider only paying for advice when you need it
Having a complicated tax return doesn’t necessarily obligate hiring someone. You can always pay just to consult on difficult matters. As one saying goes, “pay for advice, not for filling in boxes.”
Choose a licensed and reputable tax preparer
The bigger companies come with name recognition and reputation. Smaller firms and sole-proprietors can be a great option, too. You can ask the firm for referrals or look online to see what past clients have to say. Either way, make sure to do your diligence and know who you are trusting.
Ask questions ahead of time
Understand exactly what you are paying for before you sign anything. Clarifying what’s expected of you will help ensure you have good service and a positive experience.
Make sure ALL your Information is together and neatly organized
It will likely cost you more money every time you forget a form or otherwise cause more back-and-forth with the preparer. Making the effort to get it right the first time is an easy way to keep the cost down.
How We Can Help
The Bible calls us to “give to Caesar what is Caesar’s and to God what is God’s” (Mark 12:17). While each of us owes taxes to the government, we can remember that our lives belong to God. Furthermore, all who pay taxes have the opportunity to recognize the distinct privilege of participating in our tax system and the benefits received from it, even if we don’t agree with how each dollar is spent.
Your personal financial plan very closely impacts your taxes and vice versa. Your plan, therefore, is not something to consider only once per year when taxes are due. Guide Financial Planning works with you to develop an easy-to-understand financial plan that is based on your goals, values, and tax implications.
Do you have questions about your finances and want to get your financial life in order? Why wait, the first 30-minute phone call is always free and you can schedule right here!