The 2020 individual tax returns deadline is just around the corner, but many Americans have no idea what they need to file their taxes. In fact, most US residents usually pay to file their returns even though the IRS reports that 70% of taxpayers should be able to do a free file.
In a recent survey on 1,200 Americans belonging to different tax brackets, researchers uncovered that more than 58% of American taxpayers paid at least $50 to file their returns! Some are using tax software, while others are hiring tax preparers. Whatever the case, having all your documents in one place is imperative. Here is what you need:
- Personal Information
Personal information plus that of your dependents, if you have a spouse and children, is required. Details of your parents may also be necessary, so make sure to have them around.
If you plan on paying a preparer for the service, carry the actual documents when meeting the expert. This is really important to ensure all the details are captured accurately. Bring your social security number and those of your dependents.
A copy of your tax returns of the previous year will also smoothen the process for you and your accountant.
- Proof Of Income
Income is any money earned that is not a present or gift. This money must always reflect on your tax returns lest you end up facing legal ramifications due to underreporting or underpaying taxes.
Examples of the income documentation required are rental income, prizes, income from hobbies, unemployment compensation, forgiven debt, income from foreign sources, sale of real estate, retirement benefits, bank interest, gambling, alimony, and dividends. Note that this list is not conclusive.
Self-employed and freelancers will require the following documents to report their income:
- 1099 – You are supposed to get a 1099 form from every person or company you worked for that year and earned more than $600. Earnings of less than $600 are reported under the Schedule C form.
- 1040 – 1040 must contain a Schedule SE form to determine the taxes owed.
If you are employed, your employer should provide a W-2 form documenting your income from the job.
Details on student loan and mortgage interests paid are captured in form 1098. Unemployment compensation is reported with form 1099G.
- Deductions And Credits
Deductions are crucial if you want to lower your tax bill. As the accountants at taxsharkinc.com point out, overpaying the IRS is a real thing. The worst part is that many taxpayers are still unaware of deductibles and credits that can lower their tax liability.
Generally speaking, there are two main ways of reducing your tax bill. The first is through tax deductibles. These will reduce your taxable income hence decreasing the total amount of taxes owed. For instance, if your income for the year was $75,000, and you have a deductible of $6,000, your taxable income will drop to $69,000. This should reduce your taxes by a few hundred dollars.
The other way to reduce your bill is through tax credits. These are applied on a dollar-for-dollar basis. Therefore, if the tax owed is $4,000, and you have a tax credit of $600, you’ll only pay $3,400.
Itemizing deductibles and credits require quite a lot of effort since documentation for all tax breaks is necessary. That’s why some people opt to work with a preparer.
Some of the breaks you may qualify for are:
- Mortgage interest – interests paid on a qualifying mortgage are usually deductible.
- Retirement contributions – The contributions paid to a retirement plan are deducted from the tax.
- Child tax credit – A credit of up to $2,000 per child is extended to taxpayers with qualifying dependent children.
- Lifetime learning credit – The credit deducts expenses incurred in tuition and other fees in a qualifying learning institution.
- Proof Of Losses
This includes fire or police reports and insurance claims proving natural disasters, theft, fire, etc.
- Proof Of Expenses
Proof of expenses helps to support your claim for tax relief and refund. This includes documents such as charitable contributions, medical costs, and self-employment expenses like travel or mileage.
Some of the other documents that you may need are foreign bank accounts, a marriage certificate if you got married that year, and a divorce document if you were divorced during the year. For foreign bank accounts, check the IRS website to see if your specific account has reached the threshold needed for reporting.
The trick to having a seamless tax season is preparing in advance. It doesn’t matter if you are doing the filing yourself or paying a preparer. Hopefully, the above checklist has given you all the information you need to get ready.