It is that season again! In three short months Americans will be filing their taxes, and for most, this can be an overwhelming experience. Not only does it require a great deal of paperwork, but it comes at a price. In fact, the average tax preparer, accountant, or CPA cost between $173 to over $500, depending on your individual tax situation. At one point or another, American filers often find themselves toggling between self-preparing their taxes or forfeiting a great deal of cash. Not to mention that self-preparation comes with the added fear that you may walk away paying more taxes or jeopardizing your refund potential. Because let’s face it, understanding the fine print or tax deduction library is hardly normalized content. Talk about a dry read! This is one reason why CPA’s make big money.
More and more are choosing to do their taxes on their own. However, it is not always clear where to start. This is especially true if you own a home, are a freelancer, go to school, or have special tax situations that are not always clear during self-preparation.
Thanks to technology, transparency, and tax assisting software—you can put your self-preparing fears to rest once and for all.
If you are looking to reclaim major dollars this year and complete your taxes alone, here are some helpful steps to help you get started.
1. Gather All Necessary Paperwork and Forms
Before you file, make sure you have everything you need in front of you, which includes all your spouse’s documents if you are Married and Filing Jointly. Having this step completed before you begin will reduce your time, allow you to complete your taxes in one sitting, prevent you from having to make an amendment later, or miss out on any crucial tax breaks designed to save you money.
Your paperwork should include but is not limited to:
- Obtain all W-2, W-7, or financial statements
- This document shows how much money you made in the tax year and what was already deducted from your paycheck
- This is issued by your employer or previous employers
- This can often be found online (if your employer supports this)
- If it is not online, it will be mailed to you by your current or past employers
- According to federal law, your employer has until January 31st to provide this to you
- Freelancers do not get one of these and often will need all their billable documents to answer questions about income (See 1099 for more information)
- 1098-T (Student Tuition Statements)
- If you are a student, you may receive a tax credit for tuition and other costs you paid out while in school (this includes financial aid and student loans)
- If you are Native American and obtained a scholarship from your tribe, check to see if you need to report this amount. Even if it is on your 1098-T, this money may be exempt
- This document is supplied by your school
If a child you are claiming was enrolled in a qualifying institute of higher education at least part-time, you will need this form to claim any education credits they qualify for
- Certain tax breaks, especially those associated with homeownership will need specified information from these forms
- You can write off interest payments on your mortgage
- You will only need this if you paid over $600 (based on prior years tax law. Be sure this has not changed for 2020)
- Your mortgage company will provide you with a copy
- If you received paid family leave through your state or unemployment it may be reported here. It can also show up as “other” on your W2
- Provided to you by your student loan servicer
- This form shows how much interest and payments you paid on private and federal student loans
- If you are a freelancer, be sure you have everything you need to complete a 1099
- Freelancers are not typically paid a taxed amount so be prepared to owe taxes on the amount you made and have your deductibles ready to lower this amount
- If you are not given a 1099 by your client, which often you are not, you will have to account for the amount and report it
- Personal Documents
- You are going to need all official names and social security numbers for you, your partner, and all dependents
- Prior Tax Return
- Be sure to have a copy of last year’s tax return available to use for reference and to answer certain questions
- Expense Receipts
- All expenses you are going to claim and use as a write off need to be firmly documented and come with proof. This is especially true for those who are business owners, have an operating LLC, and are claiming portions of their car payment, home, and all other expenditures. If your tax return is audited for legitimacy, providing proof and documentation is often sufficient to move your return along.
- Further Consideration
This year if you did not get your stimulus payment in full, due to a birth of a child or for whatever reason, be sure that you have their information ready so you can receive that payment as part of your refund.
2. Decide How You Are Going to File Your Taxes
Some suggest researching your filing status next, but I feel before you do this—you should decide whether you will be solely filing on your own, or choosing a tax platform, such as TurboTax to assist you. While you may have to pay a nominal fee to file, these platforms are designed to assist you with every step of your taxes, give you access to forums and professionals, allow you to file online, which expedites any refunds that may be involved, sets up direct deposit with the IRS, and walks you through each step of the process.
Here are a few options to consider:
Turbo Tax remains one of the most popular ways to file your taxes without the assistance of a CPA. They are specifically designed to take you through each step of the process to minimize your liability/burden and maximize your return. It asks simple questions, goes through each deduction and ways to save, and breaks down the complexities of filing taxes into easy, clear steps that makes filing your taxes a breeze. While there are several premier features of Turbo Tax, the fact you only pay for services you need, makes it even better. For easy returns, you can even file for free! However, for those needing extra insight, you can upgrade to whatever level is best for your personal situation. Turbo Tax also comes with audit protection and plants your information into an algorithm that determines which filing status will provide you with the best tax break.
IRS (Do it Yourself)
You have the option to download all the forms from the IRS and simply do it yourself. To do this, you will need to have a firm grasp of basic math and spend some time researching deductions and tax credits that apply to your situation. You have the choice to do it by paper or efile .
Often seen as Turbo Taxes rival, H&R Block offers all the benefits of Turbo Tax with the assistance of a live person. This can be especially helpful for those who have special considerations, have multiple questions, or need to report multiple revenue sources, deductions, or have complicated finances. You must pay to speak with a professional with Turbo Tax, but with H&R Block this is already provided within your service. Like Turbo Tax, there are options to file for free and they will even look over your taxes after your file with Turbo Tax to see if they can get you a larger refund. You can also file your taxes online with H&R Block!! They are cheaper and it comes with comparable service.
There is also software you can purchase that helps you file your tax return. There are several out there that may assist you, but offer a more personalized, self-governed way of completing your taxes.
Choosing Your Filing Status
While Turbo Tax and H&R Block will tell you which filing status will best meet your needs, reduce your taxes, and provide you with the greatest return—if you are going this alone, this may not be clear.
Remember before you choose, that there are benefits and considerations with each one.
Here are your five status options for filing.
- Single: choose this if you are not married, legally separated, or divorced.
- Married Filing Jointly: choose this if you are married and want to file your taxes together
- Married Filing Separately: choose this if you are married but want to file your tax return separately. Depending on your situation, at times, you can owe less taxes if you do this, or if your tax situation would negatively impact your spouse.
- Head of Household: This status can provide you with a greater return and lower tax liability if you are single, not married, and meet the qualifications. You must have paid more than half of all expenses of a household and not be married. This includes caring for a child more than half of the time as well. There are a lot of rules that you need to be aware of before choosing this status option.
- Qualifying Widow with Dependent Child: This is reserved for those who spouse died and there is a qualifying dependent.
If you need further explanation, read more on the IRS website here.
Deductibles vs. Credits
It is helpful to understand the difference between deductibles and tax credits. At times they may seem interchangeable, but their purposes are not the same even though at times they render the same result: lowering taxes owed and providing you with a greater refund.
A deductible is used to lower the amount of tax you owe, and the tax rate used to calculate the amount owed. Deductibles are typically dollar for dollar. Meaning, if you deduct $100, you will see $100 subtracted from how much taxes you owe.
A tax credit reduces your tax owed or provides you with an instant kickback (or refund) depending on the individual credit you are claiming.
While both are designed to lower your taxes and provide you with a greater refund, they are thought of differently in the mind of the IRS.
Before you begin, it is helpful to understand all available ways you can lower your tax burden and increase your refund. One way to do this is to take full advantage of the credits offered to you. Here are the most common tax credits but be on the lookout for others that may apply to your situation.
1. Earned Income Tax Credit
If you qualify for this tax credit, your taxes will be reduced, and you will experience a major boost in your overall refund. Contrary to popular belief, you do not need to have a dependent to qualify; however, having dependents makes it easier. To qualify, you must make less than a certain amount and:
- Be 25 years or older
- Not Earned more than $3,650 in investment income
- Not Married Filing Separately
- Be Married, have a social security number, and lived in America for more than six months
- Not be claimed by another as a dependent
- Make under a certain amount depending on your household size
2. Lifetime Learning Credit
This is the one credit that provides relief throughout your education and is not restricted to the first four years. Depending on your yearly income, this credit can be as high as $2,000. There are instances where this credit is extended to nondegree seekers as well.
To qualify for this credit, you must:
- Be considered a student
- If married, make less than $118,000
- If single, make less than $59,000
3. American Opportunity Tax Credit or Hope Credit
This tax credit can only be claimed for the first four years of your or your child’s education. This credit offers up to $2,500 per student. The qualifying student must:
- Be enrolled at least half time at a qualifying institution
- And have qualifying expenses
4. The Child and Dependent Care Credit
This credit provides substantial relief to those with children who must be in daycare while their parents/caregiver’s work.
To qualify for this credit:
- You must have a qualifying dependent 13 years or younger
- Your filing status cannot be Married Filing Separately
5. The Child Tax Credit
This tax credit offers up to $2,000 per qualifying child and works to reduce the amount of taxes owed. Please note, this credit does issue a $2,000 refund per child, but could increase your return, if the amount the credit helps with offsets the amount owed.
6. Savers Tax Credit
This credit is offered to those who contribute to their retirement plans, offering a credit of $1,000 for Single filers and $2,000 for those Married and Filing Jointly.
To take advantage of this credit:
- You must be over 18 years or older
- Must not be a full-time student
- Cannot be claimed as a dependent
- Cannot have made more than $48,750 for Single filers or more than $65,000 for those who are Married and Filing Jointly
You Have Rights!
You may not know, but you have rights as a taxpayer in the United States of America. It is beneficial for all Americans to understand their rights regardless if it is tax season or not. This way you are prepared for every eventuality and understand your role, all expectations, and what protections are offered should anything be required of you that goes against your individual rights. Consult the Taxpayer Bill of Rights for further information.
When to Choose a Tax Professional
There are instances when choosing a professional will simply benefit you most. If you find your tax situation to be overly complex and you are concerned that you are not receiving the most out of your credits or your end result has you paying more than expected, it is time to seek a professional. However, if you have only one or two questions, there are tax professionals who take questions on a regular basis. Make use of them if you find yourself in situations where you are guessing and unsure. Not filing correctly could result in an audit or a month-long process of back and forth between you and the IRS providing information. It is in your best interest to do it correctly the first time! Therefore, if you find yourself in a situation where you just do not know or feel you are paying too much or receiving too little, go with your gut, and consult a tax professional.
Tax season is almost upon us and soon you must decide how you want to file your taxes. For most people, hiring a tax professional is simply too much money. Luckily, easy software options like Turbo Tax or tax tutorials provide you with alternatives that not only fit your budget, but your comfortability level. In the end, it is important that you choose the option that is best for your budget, tax situation, and will provide you with the greatest return.