How to do your taxes: Preparation

Stack.
Billion Photos / Shutterstock

The key to a painless tax-time experience is proper preparation. Getting organized and creating a game plan is half the battle and will make the rest of the process go more smoothly.

Get your documents in order

The tax documents you need will depend on your unique financial situation. Here are some of the most common:

  • W-2s - You should receive a W-2 from each of your employers. Your W-2 will tell you how much your annual wages and how much tax was withheld. If you earned money from more than one employer, you will receive multiple W-2 forms that need to be added together.

  • 1099s - You may receive 1099s for other forms of income. There are over 15 different types of 1099 forms (which can get confusing), but the most common is Form 1099-MISC, which you’ll receive from any freelance or contract client who paid you over $600. Other common 1099s are Form 1099-DIV and 1099-INT, which show how much dividends and interest earned on your investments.

  • Interest statements - The interest you pay on student loans and mortgages may be tax-deductible. If you’ve made student loan interest payments, you’ll receive a 1098-E. If you’ve paid interest on a mortgage, you should receive a mortgage interest statement from your lender.

Deductible expense receipts: For any deduction you take, you’ll need to be able to prove it with a receipt. For example, if you’re self-employed, you’ll need receipts for business-related expenses like meals, advertising, travel expenses, education, etc. If you’ve made charitable contributions or had significant unreimbursed medical expenses (>7.5% of adjusted gross income), you’ll want to gather those receipts as well.

Records of contributions made to retirement and health savings accounts: Contributions to health savings accounts (HSAs) and certain retirement accounts (401(k), IRA, 403(b), etc.) are tax-deductible and may even qualify you for a Saver’s Credit.

Filing status

The filing status you choose could significantly affect your tax bill.

In many cases, choosing the correct status is straightforward. But as you’re about to see, it can also get complicated.

Here are the filing statuses you’ll choose from:

  • Single - If you’ve never been married, or you are divorced or legally separated

  • Married filing jointly - You may choose this status if you were married before December 31 of the tax year in question. Filing jointly makes sense for most married couples due to added tax breaks.

  • Married filing separately - This is where things get confusing. If you’re married, you and your spouse also have the option to file separately. But why would you do that?

There are two possible reasons:

You realize that filing separately lowers your tax burden (e.g., if one spouse has significant unreimbursed medical expenses, which can only be deducted after they exceed 7.5% of your adjusted gross income). You and your spouse keep your finances separate.

To determine which filing status will result in the fewest taxes owed, you’ll have to run the numbers both ways — filing jointly and filing separately.

  • Head of household - If you are unmarried with dependents living with you, filing as head of household will give you more tax advantages than filing as Single.

  • Widow or widower with dependents - If you have dependent children or other family members and your spouse has died.

Select the right form(s):

1040 tax form, laptop, glasses, coffee on desk
RomanR / Shutterstock

This is the part where most people’s eyes start to glaze over. Or rather, they used to.

Up until recently, taxpayers had to choose between three confusingly similar forms—Form 1040, Form 1040-A, and Form 1040-EZ.

In 2018, these forms were all merged into the “new” Form 1040.

If you fill out Form 1040, you did it right.

That said, there are a few other forms to be aware of:

  • Form 1040-SR - New simplified tax form for seniors with uncomplicated financial situations

  • Form 1040-ES - Used to calculate and pay estimated tax on income for the current year that is not subject to withholding. This includes self-employment income, rental property income, interests, dividends, etc.

  • Schedule A - Form needed if you decide to itemize your tax deductions.

Look into eligible tax deductions

One of the biggest advantages to hiring a professional tax preparer is that they will know all the deductions you qualify for.

When you file your own taxes, you’re more likely to miss something and overpay. To avoid this, you’ll need to do some research.

Some of the most common credits and deductions are:

  • Child tax credit
  • Charitable donations credit
  • Medical expenses deduction
  • Student loan interest deduction
  • Child and dependent care tax credit
  • Self-employment expenses deduction
  • Lifetime learning credit (for tuition costs)
  • Earned income credit (for low income-earners)
  • Retirement plan or health savings account contribution deductions

Many of these deductions involve some gray area—especially when it comes to self-employment expenses. To avoid mishaps with the IRS, try not to push the limits too far with questionable deductions. Trump’s 2017 Tax Cuts and Jobs Act eliminated some deductions including the mortgage interest and alimony deductions.

After you add up all your eligible deductions, you’ll have a decision to make.

Should you itemize or use the standard deduction?

For the 2020 tax year, the standard deduction is $12,400 for single taxpayers and married individuals filing separately ($24,800 if you are married and filing jointly). If this is less than the sum of your itemized deductions, you can lower your tax burden by itemizing.

That said, if you itemize deductions, you’ll need to gather proof for each individual deduction and fill out extra paperwork. This extra time and complexity might not be worth it if your itemized deductions aren’t significantly greater than the standard deduction.

When should you start filing your taxes?

July 15, Cover design with silver - white clock in natural concept.
MR.Frost / Shutterstock

Before we get into how to file your own taxes, let’s make sure we know when the best time is to do it.

It feels great to be proactive, knock your taxes out early, and relax when all the procrastinators are scrambling to meet the deadline.

For the 2020 tax year, the IRS has extended the filing deadline to July 15.

Despite having extra time, your best bet is to schedule a “tax prep day” as early as possible. This will leave you wiggle room in case you need extra time to hunt down any missing documents.

If for some reason you can’t finish by July 15, you can push back the deadline to October 15 by filing for an extension. Keep in mind, you’ll still need to pay your estimated taxes by the normal deadline.

How to file your taxes

African Professional Chartered Accountant Woman Doing Tax
Andrey_Popov / Shutterstock

Before diving into your taxes, make sure to check for any important tax changes for the current tax season. Laws are constantly changing, and the rules you followed in the past may have changed.

Once you’re up to date, you’ll have to decide whether you’ll file your taxes by hand, through the IRS e-File website, or with online tax-filing software.

By hand

If you’re not comfortable using technology or just like to do things the old-fashioned way, you can download your forms from the IRS website, print them out, and complete them by hand.

Apart from the stamp needed to mail in your returns, this option is completely free.

Printing out paper forms only makes sense if you have a simple tax situation. If not, it can get overwhelming shuffling through stacks of paperwork, filling up scratch paper with calculations, and praying you don’t accidentally fill in the wrong box.

IRS online forms

Another free option is to use the free fillable forms on the IRS e-File website.

This method helps you stay organized, and since the forms make basic calculations automatically, you lessen the risk of math errors.

These forms have line-by-line instructions to help you fill them out, but it doesn’t show you which forms to choose or offer personalized tax advice — that is research you’ll have to do yourself.

Whether you fill out forms by hand or online, the IRS Interactive Tax Assistant (ITA) is a handy resource that covers many common questions you may have.

Online tax software

If you have a more complex tax situation or just don't want to do things by hand, there are a number of tax software options:

The price of these tools ranges from free to a few hundred dollars depending on the complexity of your finances. If you have a simple tax situation, filing your federal return may even be free.

Unlike the IRS fillable forms, these sites will help you find potential deductions that maximize your refund.

These tax software sites are designed to make the filing process as foolproof as possible — starting from the moment you land on their homepage.

If you need help

Young couple sitting in an office talking to a woman broker or investment adviser
ESB Professional / Shutterstock

Unless you have a background in accounting, filing your taxes by yourself can be both challenging and time-consuming.

While tools like online software can make DIY taxes more bearable, sometimes it’s just too much.

If you have a complicated tax situation, feel anxious about making mistakes, or simply don’t have time to do it yourself — then you may be better off working with a tax professional.

Not only will they take the load off your shoulders, but you can also rest assured that you won’t pay Uncle Sam a penny more than you owe — and hopefully even get a larger refund.

About the Author

Mitchell Glass

Mitchell Glass

Freelance Contributor

Mitchell is a freelance contributor to MoneyWise.com.

You May Also Like

Capital One Shopping vs. Honey — Which One Saves You More?

These similar-looking services provided totally different results in our test run.

Do Big Stores Save You the Most? We Price-Check Our Shopping List

With one 30-second trick, we found $460 in savings beyond Walmart and Amazon.

Take a Break From Your Debt This Month

Let debt consolidation give you a break.