Ready, Set, File: How to Prepare to File Your Taxes

Now that the New Year is here, it’s time to start thinking about filing your taxes. I know most people dread this, especially if you end up filing your own taxes. So, here are some easy steps to help you prepare to file your return.

1.????? Create an online account at IRS.gov.

When you create an account on IRS.gov you get access to all of your tax records for the year.? When you do pretty much anything with money, there are mandatory reporters who must report your financial activities to the IRS.? You can look to see what has been reported to make sure it’s accurate or remind yourself about things that have happened during the year.

If you are hiring a professional to do your taxes for you, these records are very helpful.? Make sure you download the Wage and Income Transcript (WAIT) for your tax preparer.? They can use this as a resource to prepare your tax return.

2.????? Gather and organize your tax records

Make sure you start gathering your tax records as soon as possible to help you file your taxes.? If you made money, there is a tax form for that.? If you plan on taking a deduction, there is probably a tax form for that too. Here are some of the more common ones:

???????? Form W-2

o?? This is the most common tax form.? If you are employed and you receive a wage, you will have a W-2.? You get this from your employer so you can record how much you were paid and how much was withheld from your paycheck to pay for taxes during the year.

???????? Form 1099-NEC

o?? This is probably the second most common tax form.? This is for independent contractors.? If you have a side business where you do contract work for other businesses, you will receive a 1099-NEC which stands for “Nonemployee Compensation”. You will get this from the business you did contract work for.

???????? Schedule K-1

o?? This is for people who own a business. If you have an ownership interest in a partnership or an LLC, you will likely receive a Schedule K-1 that shows how much of the business income should be attributed to you.? Remember, it doesn’t show how much you actually received from the business, just what portion of the business income should be attributed to you. You will get this form from the business you have an ownership interest in.? If you do all the work for your business, you will want to have a professional prepare the form for you.

???????? Form 1099-K

o?? This form is for those who sold goods and received some sort of electronic payment.? For example, if your customers paid you with a credit card, debit card, payment app, or through an online marketplace you likely have a lot of these forms you have to report to the IRS and pay taxes on.? You can get this form from your payment processor.

???????? Form 1099-INT

o?? This is for those who received enough interest that they are required to report it on their tax return. Technically, if you receive more than $10 in interest you are legally required to report it.? However, the IRS isn’t going to waste its resources auditing you for anything under $100.? However, if there are other issues that you are audited for, this is something that will be tacked on in the audit.? Just be smart about it and report your interest income. You will get this form from whoever paid the interest.

???????? Form 1099-R

o?? This form is for those who receive retirement benefits.? Depending on what type of retirement plan you have, you may or may not be taxed on your retirement income.? Either way, you still need to report it. The IRS does not know what kind of retirement plan you have and will simply assume that anything you receive for your retirement is taxable if you do not tell them otherwise. You will get this form from your retirement company.

???????? Form 1099-B

o?? This form is for those who sold stocks or securities during the tax year.? When you sell stock, you are taxed on the gain from the sale.? Gain is what you received from selling the stock minus what you paid for it in the first place. The IRS doesn’t know what you originally paid for your stock, so they will assume the entire purchase price is your gain.? Again, you have to report it so you can tell them how much of the purchase price is actually gain.? You will get this form from your stock broker.

???????? Form 1099-MISC

o?? This is a catch-all form for income.? If you received money and there isn’t a specific form for reporting that income, you will receive a 1099-MISC.? This could be for things like rents, prizes and awards, medical and healthcare payments, crop insurance proceeds, etc. You will get this form from whoever paid you the income.

???????? Form 1099-SA

o?? This is a form you use to exclude income from your taxes that were paid to a Health Savings Account (HSA). Income that is deposited into an HSA is tax-free, but you must report it and claim it on your tax return.? Otherwise, the IRS will assume you used that money for nonmedical purposes.? You can get this form from the bank that holds your HSA account.

???????? Form 1098-T

o?? This form is for students or those who claim students as dependents.? There are a few education-related credits you can claim on your tax return.? But again, you have to claim it, the IRS isn’t going to do it for you.? You can get this form by going to the university or college website, logging into the student account, and downloading the tax form on file.

???????? Form 1095-A

o?? This is the health insurance tax form.? This is used for taxpayers to report that they enrolled in a qualified health plan through the insurance marketplace and/or claim the premium tax credit.

3.????? Check your Taxpayer Identification Number (ITIN) to make sure it still works.

Your ITIN is your government-issued identification number. For most people, this is simply your Social Security Number (SSN).? If you do file with your SSN, double-check to make sure no one is using your SSN before you file your taxes.? To do this, simply go onto your IRS.gov account and make sure there aren’t any income reports on your transcripts you don’t recognize.

However, some people have to file their taxes with a special ITIN apart from their SSN.? If you are a victim of identity theft or you simply do not have an SSN, you can apply for an ITIN so you can file your taxes.? Just remember, ITINs are not permanent and need to be renewed every ten (10) years.? So make sure you renew your ITIN if it has expired before you file your tax return.

4.????? Make sure you’ve withheld or paid enough estimated taxes for the tax year

For those who have taxes withheld by their employer, or make estimated tax payments, make sure that you have them withhold enough taxes so you aren’t hit with a large tax debt when you file your taxes.? To help you do this, the IRS has a tax withholding estimator that is very helpful. If you haven’t withheld enough, you can always adjust your W-4 with your employer.? Simply go to your employer’s HR department and ask to revise your W-4.

If you have to pay estimated taxes during the tax year, make sure you are up to date on your estimated payments.? Anyone can make estimated tax payments, but estimated tax payments are generally required for business owners. These are people like sole proprietors, partners, S corporation shareholders, and corporations that expect to owe a certain amount in taxes when they file their returns. For more guidance on this, please see this link.

Bonus: File electronically and choose direct deposit

The last one isn’t really a necessary step, but it does make things easier for everyone.? When you file your return, you can choose to mail in a paper return or file it electronically.? Generally, I advise people to file electronically because it’s faster and there’s less chance of your return getting lost in the shuffle.?

I also generally advise clients to choose direct deposit because you get your return back faster.? Otherwise, you will have to wait for the IRS to mail you a paper check and then deposit it to the bank yourself.? If you are more comfortable with that, it still exists as an option, but I find direct deposit generally more efficient.

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If you do need help with your taxes, consider talking to a certified tax professional.? Follow this link to set up a free consultation with a certified tax professional to help you with your tax situation.