Here's What You Need to Do Your Taxes

Tax season is upon us, but there’s no reason to stress! Taxes can seem daunting, but they’re easier when you have what you need. The sooner you get your taxes done, the sooner you can either enjoy your refund or tackle what you owe, depending on your situation. Here's what you need to file your taxes quickly.

1. A Method for Filing 

You can choose one of two preferred filing methods: doing it yourself with a tax software or paying an accountant to do it for you. Each method has benefits and drawbacks.

• Filing with Tax Software: If you’re confident in your bookkeeping skills, you may be able to save money by filing with a tax software. Some tax filing software is free to use and file, while others include fees and taxes. Choose a product that works for your tax situation and one you feel comfortable using.

• Filing with an Accountant: Many experts recommend hiring one if you’re in a complicated tax situation, such as owning a business/being self-employed, undergoing a life change (i.e. marriage, a job change, receiving an inheritance) that influences your taxable income, or owing money from previous tax years. An accountant may also help you find exemptions and credits you didn’t know about, which can decrease your tax liability and/or increase your refund. An ideal personal accountant should ideally:

  • Come highly recommended by friends, family members, and/or colleagues
  • Not promise unrealistic results, like an absurdly large refund
  • Willingly offer information that verifies their legitimacy, such as a Preparer Tax Identification Number (PTIN)

2. Identifying Documents and Tax-Specific Forms

Whether you do your taxes with an accountant or on your own, you’ll need several documents to file them accurately. What you’ll need depends on your employment situation and any tax credits or deductions you wish to claim. You will almost certainly need your:

• Social Security Information: You’ll need your Social Security number, as well as the numbers of your spouse and any dependents you have. 
• W2(s): If you have a job (and you’re not self-employed) you should have received a W2 from your employer at the beginning of the year. This form details how much you paid in taxes over the previous year. Note that if you have more than one job, you’ll get multiple W2s - one from each employer.
• Form 1099: A Form 1099 is similar to a W2, but whereas W2s are issued from an employer to their employees, Form 1099s track a self-employed person’s income. Depending on how many clients you have, you may have several 1099s. Your 1099(s) may also end with a suffix, depending on the type of payment you received (i.e. debit cards, PayPal, investment earnings.)
• Supporting Evidence for Tax Credits and Deductions: Tax credits and deductions can potentially scale down your tax liability and increase your tax refund. But you may need to provide supporting evidence in order to successfully claim them.

Tax Credits

A tax credit is a direct, dollar-for-dollar reduction of your overall tax bill. In theory, these credits reduce the financial burden of taxes on households under a specific income level. Here are some examples of common tax credits and the documentation you’ll need.

• The Child Tax Credit, or CTC, is defined as “an annual tax credit available to taxpayers with qualifying dependent children.” Under the rules set by the IRS, this credit offers up to $3,600 per qualifying dependent child in your household if your income is under a specific threshold.
• The Earned Income Tax Credit (EITC) can potentially reduce your tax bill by thousands of dollars, depending on your annual income and the size of your household. In order to claim this credit, you’ll need to provide identifying information about each of your children via a Schedule EIC form.
• Undergraduate students and recent graduates can take advantage of the American opportunity tax credit (AOTC), which could lower one’s tax liability by up to $2,500. Note that in order to qualify for this credit, you must have taken college courses and accrued education expenses in the previous year; for example, in order to qualify for the credit when you file, you’d need to have taken courses in the previous year. You will use a Form 1098-T, sent to you by your school, to claim this credit. 

Tax Deductions

Whereas a tax credit subtracts money from your overall tax bill, a deduction lowers the amount of money you pay taxes on in the first place. These often require more documentation than claiming a credit does, but they can significantly reduce your tax liability and, in so doing, increase any refund you may receive. Here are some of the most common tax deductions and the supporting evidence you’ll need:

• Homeowners who are paying off a mortgage may be able to take advantage of a mortgage interest deduction. The size of the deduction depends on the interest you paid on your mortgage (up to $750,000 or $375,000 if married filing separately) in the previous tax year. In order to claim this deduction, you’ll need a Form 1098 sent to you from your mortgage lender.
• If you paid more than $600 in student loan interest last year, you might qualify for a student loan interest deduction of up to $2,500. You’ll use a Form 1098-E, commonly called the student loan interest deduction form to claim it. You should have received this form in the mail at the beginning of the year if you qualify for the deduction.
• A medical expense deduction can help offset some of the hefty costs of medical care, as the IRS allows you to claim unreimbursed qualifying medical expenses that exceed 7.5% of your adjusted gross income for the year. Just make sure you have receipts from the expenses you’re claiming so you can verify their authenticity if necessary.

This isn’t a complete list of the credits and deductions you could qualify for. Familiarize yourself with all the options available to help lower your tax bill, then gather the supporting evidence you need to legitimize your claim to them. 

3. A Plan for Next Steps

Filing your taxes can end in one of three ways: breaking even, receiving a tax refund, or owing money to the IRS. If you break even this year, then your work is done. If you receive a refund or an additional tax bill, you have a few more things to do.

If You Get a Refund

It can be tempting to spend your entire tax return, but it’s important to be careful and to prepare for the unexpected. Although it may feel like “extra money,” a tax refund is just the government returning the extra money you paid them last year. Here are some ways to get the most out of it:

• Pay off credit card debt. Credit card debt can add up if it’s not paid off quickly. Use all or part of your tax return to eliminate your credit card balance. If your credit card debt is bigger than your refund, consider refinancing with a debt consolidation or personal loan.
• Start or contribute to your emergency fund. An emergency fund provides a buffer between you and financial stress when unexpected expenses arise. It can also help you prepare for a recession and its possible effects on your finances. Use your refund to add to or build your emergency fund and prepare for the unexpected.Want more information about these tips? Need a few more suggestions for what to do with your refund? Check out our guide to using your tax refund wisely

• Make a big purchase. You may have large expenses you’ve been putting off, like buying a car or making repairs around the house. In that event, your tax refund can provide the cash boost you need to buy it.

If You Owe Money

If you didn’t account for all your income sources, had a major life change (e.g. an inheritance, a major promotion/pay raise, getting married or divorced) that affected your taxable income, and/or had too little withheld from your paycheck last year, you may end up owing money to the IRS. You can either pay the whole bill up front or spread your payments out over time.

• If you pay it all at once, the IRS accepts tax bill payments in three ways: two online and one offline. Your online options include the Electronic Federal Tax Payment System (EFTPS) and Direct Pay. If you’d prefer to pay the old-fashioned way, you can send a check to an IRS Service Center via the U.S. Postal Service. Note that the address you’ll send the check to depends on your state, so if you choose this method, make sure to send it to the right place.
• If you pay in installments, you have two plan options: short-term, in which you make larger payments and complete your bill in 180 days or fewer, and long-term, in which you make smaller payments over a longer period. Keep in mind there are fees and accrued penalties and interest until the balance is paid in full.

Everyone's tax situation is different. Those with more complex circumstances may want to hire a tax accountant while those with straightforward taxes may choose to file on their own. Whatever the case may be for you, weigh your options and do what makes sense for your money.