Preparing your tax returns can be a long-drawn-out process under any circumstances. It is even more tiresome when you don’t know what documents you need to get started.
To start off with, you will have to enter details about yourself. This includes your Social Security Number and your filing status. If you have children or any dependents, you have to provide their Social Security details as well. If you are filing jointly with your spouse, you will have to enter their social security details too.
You will also need to submit your tax returns from the previous year if this is not your first time filing your taxes. While it is not mandatory to follow this, it just makes the process simpler since you have a reference of all the documents you filed earlier.
Proof of income
The next step is to gather all your documents related to your income. You need to fill out specific forms for the money you received during the previous tax year. Depending on the nature of your employment, you will have to fill out Form W-2 or Form 1099 or both while filing tax returns.
Form W-2 is issued to you by your employer. This is usually provided by your employer by January 31. If your employer does not automatically give you this form, you could file a request for it. Your employer also submits a copy of your W-2 to the IRS and outlines how much money you were paid during the year and how much was withheld in taxes. The W-2 that you submit to the IRS is verified with the W-2 submitted by your employer.
This form is used by people who are hired as independent contractors or freelancers. There are types of Form 1099 that you will have to submit depending on the type of payment. Freelancers or contract employees have to fill out Form 1099-MISC. If you earned any interest through your investments, you will have to file Form 1099-INT. And if you earned dividends from your investments, you will have to file Form 1099-DIV. If your employer paid you through a digital payment channel such as PayPal, you will have to file Form 1099-K.
The next step is to gather documents to file your tax deductions. Tax deductions help reduce your taxable income, which in turn reduces how much you pay in taxes. You can use a standard deduction based on your income level. This usually does not require much documentation to claim the deduction. However, if you think an itemized deduction could help save you more on your tax bill, you will need proof for each deduction that you claim. Here’s a list of the most common deductions that you can claim:
- IRA and 401(k) contributions
- Medical expenses
- Property taxes
- Interest paid on mortgages
- Expenses for tuition and other education expenses
- State and local taxes
Credits are similar to tax deductions with the added advantage of having a dollar-for-dollar deduction in your tax bill. Tax deductions reduce your taxable income, while tax credits directly reduce how much you pay in taxes. Like tax deductions, you have to submit documentation to prove your claims for tax credits. Some of the most common tax credits include Child Tax Credits, Retirement Account contributions, and American Opportunity and Lifetime Learning Credits. In cases where your tax credits are more than your tax bill, you are actually eligible for a tax refund from the IRS.
When paying your taxes you have to go back to your W-2 form and look at how much of your income was withheld as taxes. If you’ve made an estimate of how much you have to pay in taxes for a specific year, having this information is useful in determining exactly how much you owe in taxes.
The stress of filing tax returns
Filing taxes can overwhelm the best of us, especially when we’re not sure where to start. Preparing for tax season in advance is a great way to gradually ease into the process and having your documents handy can speed up the process to a large extent. Having a checklist also helps you file your taxes on time and avoid paying any penalties for missing deadlines set by the IRS.