Your Ultimate Tax Prep Checklist before Filing
Filing your taxes can be a pain but the sooner you file, the sooner you will get your refund. There are some things you need to keep in mind when it comes to tax prep.
Before you get started on your taxes, you need to gather some documents for tax prep. It helps to make the process go much smoother so you don’t have to pause and find a document you may have forgotten about.
Personal Information
You will need a Social Security Number for everyone that you are including on your tax return. This obviously includes your own number but you also need your spouse’s or dependent’s number if it applies. If you don’t have someone’s Social Security Number then you will need to have his or her tax ID number instead. In addition to the Social Security Number, you also need the date of birth for everyone on the return.
Investment and Income Information
This will be the bulk of your tax documents and tax prep and there can be a lot depending on your income throughout the year.
Your W-2 Tax Statement
This document shows how much you have earned throughout the year and how much you withheld for taxes. Your employer has until the end of January to send this document to you. If you haven’t gotten yours by the date then you should request it. Some employers will have online copies while others will just mail it to your address on file.
Financial Institution or Bank Statements
If you have made contributions to your IRA then you need Form 5498. If you are paying down student loan debt then you need Form 1098-E. If you have a home mortgage then you need the Form 1098 Mortgage Interest statement.
Last Year's State Refund
If you itemize deductions then the state refund is considered income for your tax purposes.
Miscellaneous Income Records
This includes any gambling winnings, award money, or lottery payouts.
All Form 1099s
There are several different types of 1099 forms and you need to make sure you gather all of them. A MISC form is if you are self-employed and received over $600 from one client. The DIV form is if you received dividends. A G Form is if you get benefits or money from the government. A K Form is for third-party transactions, such as through Venmo or PayPal. An R Form is for distributions from an IRA, annuity, pension, or retirement plan.
If you were unemployed then unemployment compensation is included in your taxable income so you must include it in your tax return. You should have a 1099 G from the state that paid you unemployment compensation.
Business Records and Self-Employment Forms
You may not have these forms if you work a typical job with a W-2. However, if you are self-employed or own your own business then you will need to gather this information.
Business Expense Records
This can be in the form of credit card statements, records of checks, or receipts.
Quarterly Estimated Tax Payments
If you are paying installments on your tax bill during the year then the IRS and the state should be sending you a record of what you have paid, similar to a receipt.
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Mileage Records
In order to get a deduction for your travel, you will need to know the miles you have driven only for work purposes.
Home Office Expenses
If you are going to be taking a home office deduction then you need to know how big the space is in square feet. If you decide to go along with this deduction, you also need a record of home-related expenses, such as the mortgage or utilities.
Medical Expense Records and Receipts
Receipts for Any Unreimbursed Medical Expense
This can include exams, surgeries, and other preventative care. It can also include glasses, braces, hearing aids, and prescriptions.
Form 1095
If you enrolled through the Marketplace you get a 1095-A. If you have individual coverage then you get a 1095-B and if your employer offers coverage then you should get a 1095-C.
Social Security Benefits
If you get Social Security then you should get an SSA-1099 form that shows the total amount of benefits you got in the last year.
Charitable Donations
If you plan on using a tax deduction for the donations you have made to charity then you need to back them up with receipts showing the date, value, and charitable organization.
Documents for Homeowners
If you are homeowner, you will have additional documents for your taxes. If you itemize your deductions, you will want to keep property tax receipts since you can write off a portion of the property taxes you paid.
Other Events to Be Aware Of
Significant life changes can affect your taxes. Make sure you list any significant life changes you go through to be certain that your taxes are completed correctly.
If you sell your home, you will need to report this on your taxes. For most people, the sale of a home won’t affect taxes but if you think you could be affected, you will need to report this. If you have suffered a catastrophic loss, you also need to claim this. The IRS allows you to itemize casualty losses, which are usually related to natural disasters.
If you got divorced or married, you need to have this information ready to report to the IRS. It’s not always required but you may want to have your marriage certificate handy.
What’s the Difference Between Credits, Deductions, and Adjustments?
Part of tax prep can be understanding what some of the terms mean. Tax prep is understanding how to lower your tax bills by correctly using credits, deductions, and adjustments can help lower what you owe. All three typically help with lowering your bill but not all are created equal.
Tax Credits
A credit is something that directly lowers the amount you owe on your taxes. Taxes credits can be responsible for the high-impact reduction on a tax bill and provide the most benefit when it comes to how much you have to pay to the IRS. If you are a parent then you may already be familiar with tax credits. Governments will also offer tax credits to promote certain behaviors, such as replacing appliances with energy-efficient models.
Tax credits are your best bet when it comes to reducing your tax liability. When you get a tax credit, you get an exact dollar-for-dollar reduction in what you owe. For example, if you owe $4,000 and get a tax credit of $2,000 then this means you only have to pay $2,000.
>br>There are three different types of tax credits. Non-refundable tax credits are deducted from the bill until the amount equals zero. For example, if you owe $4,000 in taxes and get $4,500 in tax credits you end up at zero but you won’t get the extra $500. Refundable tax credits provide the highest benefit because it doesn’t matter what you might owe since you get the entire amount of the credit.
In the example above, you would also get the $500 paid to you. Partially refundable tax credits are between the two. This type of credit can lower your tax bill but it can also lower taxable income. If you have already used the credit to reduce what you owe to $0 but don’t need all of it then you can take the rest as a refundable credit up to a certain amount.
The IRS website has a list of tax credits for individuals based on family size and whether or not you own a home. Some tax credits include the earned income tax credit, low-income housing credit, and child and dependent care credit.
Deductions
When people talk about tax write-offs they usually refer to deductions. Tax deductions help to reduce your bill but don’t provide a dollar-for-dollar match. Instead, deductions can help lower the amount of taxable income and, depending on what bracket you fall into, can save you more. Before you take deductions and itemize them on your tax return, you need to know if they're going to be worth more than the standard deduction you get automatically.
The most common deduction is the deduction what you pay for interest on a home mortgage loan. Generally, deductions may not provide the most benefit unless you are spending an enormous amount. They are beneficial if your cost goes above the standard deduction, which isn’t common for most people.
Adjustments
Adjustments are also another category of tax write-offs to reduce your total or gross income. They are used to lower your overall tax liability but you don’t need to go through the complicated process of itemizing them. Adjustments are directly deducted from gross income and help you arrive at your Adjusted Gross Income (AGI). As more adjustments are subtracted from your income, your AGI becomes lower. Even though adjustments may not directly impact the amount of taxes you owe, it can change your AGI.
Your AGI is used to determine which tax bracket you are and the percentage of tax you pay. This means a lower AGI can mean a lower tax bill. There are some things that are referred to as deductions but they are actually adjustments. Some common adjustments include alimony payments, IRA contributions, and half of the self-employment taxes you pay. Spotting adjustments can be easy if you use the right form. The 1040 is the one that will let you take advantage of deducting every adjustment.
Deductions You Can Receive
Deductions help lower your taxable income, which means a lower tax bill. If you are going to take advantage of deductions, you need to provide documentation. Proper documentation can protect you if you are audited and it can also help cut your tax bill by helping you remember what to claim. You won’t have to itemize in order to benefit from some deductions.
Retirement Account Contributions
You can deduct contributions to a self-employed retirement account or a traditional IRA as long as you within the contribution limits.
Education Expenses
Students can have a deduction for tuition and fees, as well as interest paid on a student loan.
Medical Bills
If medical costs are more than 10% of your adjusted gross income then you can get some savings when it is tax time.
Mortgage Interest and Property Taxes
If your property taxes are taken out of an escrow account then this will be included on the form your lender sends you. The document also shows how much loan interest you can claim on Schedule A.
Charitable Donations
It’s very important to have documentation for your charitable donations. The IRS could disallow the claim if there isn’t proper verification.
Classroom Expenses
If you are an eligible educator or schoolteacher, you are able to deduct $250 on money spent on classroom supplies.
State and Local Taxes
There are other various taxes you can deduct, including local and state income or sales taxes. You don’t need receipts for the sales tax and the IRS will provide a table with the average amount you can claim. The tax on a major purchase can be added to the table amount so you will need to keep those receipts.
Credits to Be Aware Of
Credits can be thought of as deductions' more valuable cousins. These provide dollar-for-dollar cuts in any tax you owe. Just with deductions, you also need documentation to claim them. There are different ones but listed below are some of the more popular ones.
American Opportunity and Lifetime Learning Credits
These are education-related credits that can save you some money. You need a 1098-T to claim these.
Child Tax Credit
The standard tax credit can be worth $2,000 per dependent child. If you added to your family with adoption, you can be eligible for extra tax credits.
Saver’s Credit
Contributions to a 401k or other employer-sponsored retirement plan can allow you to claim this.
Filing Taxes with a W-2 and 1099
Working two jobs isn’t always an exception and it has become more popular. A second side gig can allow you to have your dream job even if it doesn’t give you a lot of income. In order to support your passion, you usually need to have a day job or one that gives a W-2. If you have that side hustle, you are going to have to file your tax returns with both a W-2 and a 1099.
An employee will receive a W-2 form while contractors get a 1099. There are three factors that the IRS uses to decide whether you are a contractor or an employee. Does the employer control how you do your job? Does the employer pay for the tools you need to perform your job? Do you get reimbursed for job-related expenses? Do you have a contract in writing with your employer? Do you get benefits? Is the contract that you have longer than one project? If you answer yes to these questions then you are considered an employee, if not then you are considered a contract worker.
You can technically receive both forms from the same employer but this is rare. For example, if you work a normal 40-hour week under a contract then you get a W-2. If you also perform work that differs from your own job, such as cleaning the office on the weekend, then you get a 1099 for that extra work.
There is a self-employment tax for those who get a 1099 and work for themselves. Since there isn’t an employer withholding taxes from their paycheck, there is a lump sum due at tax time. This rate is 15.3% and covers Medicare and Social Security. If you receive a 1099 then you are considered self-employed and must pay these taxes. When you enter your first form of income, the refund will usually be inflated because of the standard deduction being withheld. When you enter the second income, it will usually reduce the refund because the standard deduction only applies once.
This isn’t decreasing or increasing your refund. You will only get a refund when you withheld too much income from your paychecks. This is why those who are self-employed usually don’t get a refund. If you have a W-2 job, make sure you check your withholdings to make sure you are receiving the correct amount of income each month.
What You Need to Know about Charitable Deductions
Charitable deductions are an itemized deduction. Under the new tax laws, there are some deductions that are being restricted so the standard deduction can be almost doubled. This may mean it’s more helpful to take the standard deduction instead of spending time itemizing until the current tax plan expires. You are still able to get a big deduction if you plan for it. If you usually make a cash donation to your preferred charity, think about saving up the contribution amount over time. Then make a large donation for the tax year when you want to itemize your deductions.
Not every donation will count toward your deduction. When you donate anything other than cash, you need to figure out the fair market value of the items. This is the price that you would get from the marketplace if you were to sell the items. Certain gifts don’t have a value and can’t be deducted. For example, you aren’t able to deduct your time that you spend volunteering for a charity.
You also aren’t able to deduct food items given to a food pantry. If you donate clothing or household items, you can only deduct the value of those items if they are in a good used condition or better. If you participate in a charity run, you can’t deduct the cost of the race travel or accommodations. Your participation can’t count as a charitable donation.
Getting Help with Your Taxes
Even if you have everything on a tax prep checklist, there are some benefits to going to a tax professional for help.
Why You Should Hire a Tax Professional
It Can Save You Money: If the tax preparer finds just one deduction you may have missed, this can exceed the fee of professional tax prep.
Saves Time: It can take you nearly 20 hours to complete the average tax return with deductions. Your time is important and how much is it worth to you?
Answer Questions: You may have questions about your taxes. Tax professionals can answer these questions for you instantly.
The Tax Code Is Complicated: Professional tax preparers will keep up with the code and changes every year so you don’t have to.
Get Peace of Mind: Knowing a professional is handling your taxes for you can give you peace of mind and reduce some stress you have about tax prep.
Mistakes Can Be Costly: If you miss a deduction, it can cost you a lot of money but an IRS letter or audit can also be costly. A professional can help you eliminate any errors and ensure returns are prepared correctly.
Money-Saving Tax Tips Advice: A professional can advise you on year-round tax tips strategies to make smart tax-saving decisions.
Reduce the Risk of an Audit: Not only can a professional help you prevent an audit but he or she can also help if you are audited. The tax preparer knows how to deal with the IRS.
Common Tax Mistakes
You don’t want to be so overwhelmed with your tax prep, deductions, credits, and other tax information that you forget to double check basic information and make some simple mistakes. If you are trying to finish up tax returns, it can be easy to make simple mistakes when you rushing to meet the deadline. When it comes to completing complicated tax returns, you may be worried about if you have the necessary documentation and if you claimed deductions correctly instead of focusing on these items.
Forgetting to Sign the Return
You signature is one of the simplest things on your tax return but it’s often forgotten. It’s possible to get so excited about the bottom line refund or return that once you finish you forget to sign it.
Giving the Wrong Bank Account Number
Automating finances can sometimes backfire. The IRS won’t have a record of your bank account number so if you want to get your return deposited in your account, you have to give the right routing and account number. Double- or even triple-check your routing and account numbers so you can make sure your refund doesn’t end up in someone else's bank account. As you can imagine, it can be difficult to get that mess straightened out.
Giving the Wrong Social Security Number
A common mistake on tax returns is with the Social Security Number. You have to get yours and your spouse's right, along with any dependents you are claiming. These are important numbers so you want to get them right in order to avoid any hiccups in the processing.
Getting the Math Wrong
As more people are starting to use online tax tools, calculation errors aren’t as common as they once were. For those who still prefer the pencil and paper method, you need to make sure you are getting the math right and adding and subtracting correctly. This may seem like common sense but if you are rushing to fill out your forms it can be easy to transpose numbers.
Not Reporting All Your Income
You aren’t the only one who knows how much you make in a given year. All the forms you are sent, including your W-2s and 1099s, are also sent to the IRS. Even if you have made a few hundred at a side job, you need to report it. You need to report all the income you earned, no matter how small it is.
Thinking That if You Got an Extension, You Don’t Need to Pay
If you don’t have time to complete your tax return by the deadline, you can file a form to give you an extension. An extension doesn’t mean that you don’t have to pay taxes. Instead, it’s just an extension on filing the taxes. If you usually have to pay taxes, you want to avoid an extension. If you have to pay and file for the extension then there will be late fees and penalties that will add up over that period.
Final Thoughts
To begin your tax prep, you are going to need to gather all your documents. The documents you need to gather will depend on your unique financial situation but your tax prep will always include your personal information and income. It helps to know the difference between tax credits, adjustments, and deductions so that you can also have the right documents for these.
There are plenty of different deductions, adjustments, and credits you can receive. You may decide to hire a tax professional for help with your tax prep so you can have peace of mind and ensure that your return is filed correctly. Whether or you are doing taxes on your own or with the help of a professional, it does help to avoid some common mistakes.