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How to Get Your Taxes Done

How to Get Your Taxes Done

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Image via ccPixs.com at Flickr

Image via ccPixs.com at Flickr

So, it’s almost April and you haven’t started your taxes, eh? No shame, there’s still time to stare down your IRS-related fears. If you’ve been waking up in a cold sweat worried you’ll forget one of those long, stupidly complicated forms—or worse, owe more than you expected this year—we feel you. But you can do this thing! Whether this is your first time filing on your own, or you’re looking for an adultier way to get it done, we’ve got you covered. 

How to file

In many cases, filing your taxes isn’t difficult, and you may end up owing the IRS less than you imagined (or nothing at all). Taxpayers have several options. 

Do it yourself: You can do your taxes on your own, which saves you upfront fees on tax professionals or specialized software. But a complete DIY involves filling out tax forms that you’ll have to print out and read through. 

It might not be as hard as it sounds. The IRS has designed tax forms and wizards with relatively easy-to-follow instructions. If you hit a snag, the IRS website is surprisingly helpful and user-friendly. You can even call the IRS with questions—just remember the closer to Tax Day the longer the hold times. 

DIY might be an appealing option if your finances are simple, but mistakes will cost you. Paying less than you owe could result in a penalty and interest payments. At worst, you could be looking at an audit for big mistakes. Tax pros and software companies market their ability to pay for themselves by helping to avoid costly errors and applying every available deduction, a time-consuming process for novices.

To get going—and make sure you stay on the right track—stick with the IRS wizards. Start with: Do I Need to File a Tax Return?

Use software: If your taxes are relatively simple, online tax software can help. These programs ask you a series of questions and use your answers to populate your tax forms, which are then filed with the IRS electronically—no printing required.

Some programs are free if you meet certain criteria. The IRS offers Free File for taxpayers with income below $64,000. H&R Block More Zero provides free filing to some taxpayers who have a mortgage and itemize deductions.

If your situation is more complicated you can still use software, but for a fee. For example, TaxAct Plus, designed for homeowners and investors who need to itemize starts at $37 for federal filing. TaxAct Premium, at $47, is designed for self-employed individuals and contractors. 

Get some help: You may be able to have your taxes reviewed for free through the Volunteer Income Tax Assistance program. You’ll have to fill the forms out yourself, but you’ll get a second set of eyes from certified volunteers. The elderly, people with disabilities, limited-English speaking households, and people making $54,000 or less annually qualify for assistance. The IRS provides a database of volunteers. 

Hire a pro: You can also pay somebody to handle everything for you if you prefer the hands-off approach, have a complicated financial situation, or just want to make sure it’s done right. But it can be costly. CPA Practice Advisor reports the average cost for just a Form 1040 without itemized deductions is $176 in 2017. The cost goes up depending on how complex your tax situation is.

There’s no specific credential for preparing taxes, so it’s hard to tell who to trust. The IRS provides guidance on choosing a tax preparer, as well as a searchable database of tax preparers with various credentials. For most returns, a certified public accountant or enrolled agent is sufficient.

Having a relationship with a local tax professional can be valuable. In addition to helping at tax time, they can provide guidance throughout the year. You can call your tax adviser before making major purchases or life changes and ask about tax-saving strategies—or at least find out what to expect on your next tax bill.

Get prepared

To start your taxes, whether you do everything yourself or hire a pro, you’ll need to gather information. Financial institutions and employers often send tax forms around the end of January. 

There are other documents you don’t necessarily need for your tax return, but they’re still important. For example, you should get a Form 1095 from your health insurance provider that shows what type of coverage you had. That form doesn’t need to go to the IRS with your return, and you can prepare your taxes without it, but it can help determine whether you can receive a tax credit for your premium.

In addition to gathering forms, you’ll want to know how much you’ve spent on a variety of tax-deductible things (medical care, energy-efficient windows, charitable gifts, etc) throughout the year. The amounts will help you determine whether to itemize or take the standard deduction

To help keep track of all this information, start a physical file for tax forms you receive via mail and paper receipts, as well as a digital folder for records received electronically. Save everything for at least three years in case the IRS asks you to back up anything (seven years if you’ve taken a loss on worthless securities or a bad debt). You may even want to digitally store the information indefinitely (in a secure location) in case you ever need it for reference in the future.

Get a tax break

Taxes are inevitable, but there are several ways to lower your bill.

Credits: Credits reduce your taxes dollar-for-dollar and are the most powerful way to save money. If you have the choice between a deduction and a credit, go for the credit. The challenge is qualifying for credits—your income and expenses need to meet certain criteria, but you may qualify for some of these popular credits:
 

Original art by Eli Miller

Original art by Eli Miller

 

Deductions: Deductions reduce the amount of income you pay tax on. They won’t reduce your taxes dollar-for-dollar like credits, but there are loads of deductions available and you can likely find one or more for which you qualify. Keep an eye out for the following deductions:

Original art by Eli Miller

Original art by Eli Miller

Extensions and payments

Not ready to file (or pay) those taxes? You can get more time, but it may not be cheap.

Extra time: You can file an extension and submit your returns up to six months later. If you’re not going to make it on time, an extension helps you avoid late filing penalties. In some cases, your IRS extension also gives you an extension on state taxes, but check with your state to verify. You can file an extension through the IRS using Form 4868. Some tax software programs, like TurboTax, can also file an extension for you.

There is no extension to pay: Filing an extension buys more time for completing paperwork, but it does not give you more time to pay. If you owe money, you’ll need to get a check to the IRS before the April deadline to avoid late payment penalties and interest charges.

If you can’t afford to pay: If you owe money and you can’t afford the payment, file your return and pay what you can. There are several ways to handle a remaining balance. You may be able to pay in monthly installments or negotiate a reduced payment with the IRS. However, you’ll pay interest on any taxes that weren’t paid in April, and you may owe additional penalties.

Don’t forget state taxes

In addition to federal income taxes, you may have to file and pay taxes with your state. The good news is that state income tax rates are often lower than federal rates. Your employer should withhold taxes if you live in a state with income tax. But if you owe extra, the bill will likely be much smaller than your federal tax bill.

Most software programs and online services handle state taxes seamlessly, and local tax preparers typically include state taxes in their offering. If you’re DIY-ing your taxes, check your state’s department of revenue website to file online or print and mail forms.

Self-employed?

If you’re self-employed or you earn income from a side hustle, you’ll need to report profits and losses to the IRS. The bad news: You may have to pay more. The good news: You can deduct many of your business-related expenses.

Business expenses are any costs related to running your business, including:

  • Office space
  • Marketing
  • Travel
  • Office supplies and technology

Home offices: Using your home for office space might provide some tax benefits whether you rent or own. To qualify for the home office deduction, you need to use a dedicated space exclusively for conducting business. The IRS even offers a simplified method for calculating your deduction for up to 300 square feet. 

Professional development: You can generally deduct expenses for improving professional skills, continuing education, and earning certifications. However, you might be better off taking a Lifetime Learning Credit (if allowed) instead of a deduction. The Lifetime Learning Credit is a direct dollar-for-dollar reduction of your tax bill, so it may have a bigger impact than a deduction against your income.

Meals and entertainment: Unfortunately, deductions on meals and entertainment are often limited to 50 percent of the amount you spend. Especially when paying for yourself or other business owners, you’re not getting a free lunch.

 

After you’ve done your taxes once or twice, you’ll know the routine. And if you start collecting your tax-related documents year-round in the physical file and digital storage system you’ve set up, it will be easier still. No one loves their annual date with the IRS, but it can be relatively painless with a little bit of know-how and preparation.

 

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