Steps to Take Now to Get a Head Start on Your Taxes


preparing to file taxes

Every year beginning January 1 and ending on April 15, we are required to file our income tax return. While taxes are a simple process for many workers, it’s better to give yourself plenty of time to prepare for tax filing your tax return. Use this checklist as a guide to begin your preparation to avoid missing essential information.

Know your tax filing status

Your filing status determines tax filing requirements, how much taxes you owe for the year, and any deductions and tax credits for which you are eligible. The filing statuses to choose from are a single filer, head of household (HOH), married filing separately (MFS), married filing jointly (MFJ), and a qualifying widow with a dependent. Each filing status comes with a different tax-bracket income threshold, standard deductions, and eligibility for tax credits. Your filing status can change as life changes, such as the birth of a new child or getting married, so you want to make sure you choose based on your current situation.

Federal Income Tax Brackets for Income Earned in 2021

Tax Rate Single Married Filing Jointly  Married Filing Separately Head of Household
10% $0 – $9,950 $0 – 19,900 $0 – $9,950 $0 – $14,200
12% $9,951 – $40,525 $19,901 – $81,050 $9,951 – $40,525 $14,201 – $54,200
22% $40,526 – $86,375 $81,051 – $172,750 $40,526 – $86,375 $54,201 – $86,350
24% $86,376 – $164,925 $172,751 – $329,850 $86,376 – $164,925 $86,351 – $164,900
32% $164,926 – $209,425 $329,851 – $418,850 $164,926 – $209,425 $164,901 – $209,400
35% $209,426 – $523,600 $418,851 – $628,300 $209,426 – $314,150 $209,401 – $523,600
37% $523,601+ $628,301+ $314,151+ $523,601+

Source: Internal Revenue Service

Check your withholding

You will have completed a Wage and Tax Statement (W2) at the start of your permanent job, which determines how much tax your employer has withheld from your paycheck throughout the year. You included your tax status, the number of dependents you are claiming, and any non-employment income and deductions. However, your circumstances may have changed since you initially submitted the form, which can change your tax status, such as an additional dependent you are claiming, marriage, or the birth of a new child. If your W2 needs updating, contact your company’s Human Resources department before the end of this year to adjust your withholding tax.

Gather financial documents and forms

To file your tax return, you will need the social security numbers for yourself, your spouse, and all dependents you are claiming, including children and elderly parents.

Next, gather all of the documents that confirm the money you earned during the year. Employers must issue a Wage and Tax Statement (W2) before January 31. The W2 form includes income and tax withholding information you will need to file your tax return.

You could receive multiple 1099 Forms, depending on the types of payments you receive.

1099-MISC is for contract work, 1099-INT is for interest earned on your investments and savings, 1099-DIV is for dividends, and 1099-B is for broker-handles transactions.

If self-employed, you will need a 1099-NEC for Income for Non-Employee Compensation or a 1099-K for Third Party Network Transactions for payments made through a third-party such as PayPal, Venmo, or Amazon.

If you claimed unemployment benefits at any time during the year, you will be sent Form 1099-G, which shows the amount the state paid you.

Additional documents that you can start to gather or put aside as they arrive in the mail are your contributions to a traditional IRA or self-employment retirement account (SEP IRA), student loan and mortgage interest, and contributions to your health savings accounts (has), medical bills, property tax and mortgage interest, and charitable donations.

Should you itemize or take the standard deduction?

An itemized deduction is an expense that you incurred during the year that can be subtracted from your gross income to reduce your taxable income lower your tax bill. A standard deduction is the portion of your income not subject to tax that can reduce your tax bill. You can claim whichever method lowers your taxes the most, so be sure to weigh all of your options carefully.

Before deciding whether to itemize or take the standard deduction, you should total your deductions to see if they are above or below the current standard deduction. If your itemized deductions are above the standard deduction for your tax status, then you should itemize expenses on your tax return. You must have documents and receipts that back up the eligible expenses that you are itemizing.

For 2021, the standard deductions are:

Single $12,550
Head of Household $18,800
Married Filing Separately $12,550
Married Filing Jointly $25,100

Deductions you can itemize on your tax return

If you choose to itemize your tax deductions, you will need to file Schedule A (Form 1040 or 1040-SR): Itemized Deductions. The list of expenses that IRS has approved to be itemized is extensive, so consider meeting with a financial advisor or tax preparation specialist for assistance.

Here are a few of the deductions you can itemize on your 2021 tax return:

  • Mortgage interest on the first $750,000 — or $1 million, if you bought the home before Dec. 16, 2017
  • Charitable contributions
  • Medical and dental expenses (exceeding 7.5% of your adjusted gross income)
  • State and local income, plus either personal property or sales taxes up to $10,000
  • Investment interest

Click here to read the IRS instructions for Schedule A, which explain which of your expenses are deductible and where they should be listed on the form.

Consider hiring a tax consultant

After gathering your financial documents and receipts, you need to decide if you can file your tax return on your own or meet with a tax consultant. If you have a standard tax situation, you may feel comfortable filing your taxes yourself. However, hiring a tax consultant can be beneficial if you have a complex tax situation or are self-employed. A tax consultant can assess your tax situation and educate you on the tax deductions and tax credits you are qualified to claim for your filing status.

With tax season right around the corner, starting to gather your documents early can make you better prepared when you start filling out your tax return or meet with a tax consultant.

 

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