Preparing to file your federal income tax return can be daunting. But, with a little preparation and planning, you can avoid common mistakes and make a successful tax return. While it may seem scary, it’s not as difficult as you think. With the right preparation, you can easily get to the bottom of how much you owe to Uncle Sam.
Here’s a beginner’s guide on how you can file your taxes.
Keep An Eye On Your Income
You must file a tax return if you have exceeded certain income levels during the year. Before you start working, ensure that your pay stubs reflect your year-to-date income. If you have multiple jobs, make sure that all of them are included in the calculation. Besides income from your regular job, you must include other sources such as interest, property, and investments.
Save The Right Paperwork All Year Long
It’s important to keep track of all the necessary tax-related documents throughout the year to make filing a successful return easier. Some of these include receipts for various expenses, such as medical bills and charitable donations. You can also keep statements for student loans and investments.
These documents can help you determine if you should file a more direct tax return or take the standard deduction. The IRS also suggests keeping records for up to three years.
Watch For Your Income Documents To Arrive
These documents will be sent out in January or February, and they can provide you with a summary of how much income you have earned from your various sources. If you’re a full-time employee, you’ll receive a Form W-2 to show how much income you have earned. On the other hand, if you’re a freelance or contract worker, you’ll get a Form 1099-NEC to show what you earned.
You’ll also receive documents that show the dividends or interest that you have earned from investments. If you’re a college student, you’ll receive a Form 1098-T to show how much you have paid in tuition. It can help you determine the various credits and deductions related to education expenses.
You can’t start preparing a tax return until you have received all the necessary documents from your employers. After that, you can use these documents to file Form 1040, the IRS’s main form for individual income taxes.
Learn Which Credits And Deductions You Can Take
Before preparing a tax return, you must learn which deductions and credits you can take. If you’re not a student contributing to a retirement plan, you can take advantage of the saver’s credit. The amount of this credit depends on your adjusted gross income and filing status. You might be eligible if your adjusted gross income is less than $34,000 for the 2022 tax year.
If you’re married and filing jointly, you might be able to take advantage of this credit. However, these numbers will change in the following tax years.
You can also take a deduction for student loan interest payments. If your adjusted gross income is less than $34,000 for the tax year, you can get up to $2,500 in this credit.
If you’re a college student, you can also take a charitable deduction on donations to your alma mater. Generally, this can be done if you have an adjusted gross income of less than $34,000.
If you’re a freelance worker, you might be able to take a deduction for work-related expenses. These include office supplies and industry subscriptions.
Mind Your Deadlines
Getting your tax documents in January or February gives you around two months to prepare a return, which is ideal since you’ll have time to complete it before the April 15 due date. It would help if you also planned on starting your return as early as possible to get the most out of your time.
Experts recommend that individuals file their tax returns early to avoid potential identity theft and fraud. Also, by doing so, you can get a refund earlier than if you wait until the due date.
If you need more time to prepare a return, you can usually request an extension, which allows you to file a return up to six months later. However, if you have outstanding debt, you still have to make a payment before the due date, which is usually April 15. The IRS also offers payment plans if you cannot make a timely payment.
Decide How To File Your Tax Return
You have many options for filing and preparing your tax return. Before you start, learn about each option to make your best choice.
You can get free tax preparation software from the IRS if you have an adjusted gross income below a certain income limit. This program can help you determine which credits and deductions you can take.
You can use the IRS’ online forms if you have an adjusted gross income above the income limit. However, they do not provide the same level of guidance as the paper versions.
These tools will walk you through the various steps of preparing a tax return. They can also help you determine which credits and deductions are available.
The IRS has a directory that can help you find a certified tax preparer in your area. Although this doesn’t mean they’re trustworthy, it’s a good start. You may also need to file state or local tax returns if you have an individual income.
About The Author
Francisco Faraco is a CFA Charterholder who has also been a Teaching Assistant at the University of Chicago for the Master of Science in Financial Mathematics. His experience makes him ideally positioned to impart his knowledge in financial markets to others.