With a basic understanding of terms and some tips for filing taxes, you can join those who find filing a return a simple matter. Or, you may decide that hiring a professional is the best option for you. Either way, these tax prep tips ensure you understand enough to be sure that your return is accurate and on time.
Recognize the most common tax forms
One of the most important tax prep tips is understanding which tax forms you may need to use. These are the ones most commonly used:
- W-4: This form tells your employer how much federal tax to withhold from your gross pay each pay period
- W-2: Your employer sends this form to the Internal Revenue Service at the end of each year and provides you with a copy. It is a report of your income and withholdings for the year
- Form 1099: There are several versions of these. They are reports of income from interest and dividends, self-employment, retirement account withdrawals, and other income not reported on a W-2
- Form 1040: This is the individual income tax return form. You list all your income, exemptions, and deductions here to determine your tax liability for the year
If you elect to use tax software, it will probably list the forms you need for your return.
Claim the correct filing status
This may be one of the most important bits of information you include on your return because it determines tax rates and standard deductions on returns. There are five filing statuses:
- Single: If you were unmarried on the last day of the year, you may file as single
- Head of Household: This filing status is for single persons with one or more dependents for more than half the year and who paid half or more of the cost of keeping up a home
- Married, Filing Jointly: Under this status, spouses file a single return, combining both income and deductions
- Married, Filing Separately: If a married couple cannot agree to file jointly or if they prefer to keep their tax liabilities separate
- Qualifying Widow or Widower With Dependent Child: If your spouse dies during the tax year, you may still use the Married, Filing Jointly status if you would otherwise qualify for it. After that, if you have not remarried, you may use the qualifying widow/widower status
Understand a few other terms
Total income and adjusted gross income are also important to understand. Total income refers to all the income you receive during the tax year. Adjusted gross income is that total minus certain expenses, or adjustments, such as tuition and individual retirement account (IRA) contributions. Your adjusted gross income, or AGI, determines which deductions and credits you may take, in turn lowering your taxable income.
Understanding standard and itemized deductions is also key. A standard deduction is a preset amount that is based on your filing status. Subtracting a standard deduction from your AGI determines your taxable income — the amount on which the IRS base your tax liability. When you itemize your deductions, you list all of your qualifying deductions, such as medical expenses, charitable contributions, and mortgage interest to figure out your AGI.
Income levels that require a tax return
If you earn below certain amounts, you don’t need to to file a tax return, unless you are due a refund. Filing status and age are the basis for income levels. Tax preparers or most tax software programs can help you determine the current minimum income levels.
Tax prep tips to decide on DIY or professional preparation
For most people, this decision comes down to the amount of time and money they will invest in the tax filing process. If your combined household income is more than $200,000 per year, most experts recommend hiring a professional. The same is true if you are a business owner, a freelancer, are self-employed, have extensive investments or assets, or if you make significant charitable contributions. On the other hand, if you have the patience to spend up to 16 hours, which is the IRS estimate for completing a FORM 1040, tackle it on your own.
If you go with a preparer, collect this information before you go:
- Social Security numbers and dates of birth for yourself, your spouse, and dependents
- W-2s and other income documentation
- Documentation of adjustments, such as IRA contributions, energy credits, and more
- Receipts or documentation of deductions, like education, adoption, medical and dental expenses, home mortgage interest and points
Finally, one of the best tips for filing taxes is to start preparing now for filing next year’s return. Browse Quill for the supplies you need to simplify tax return season.