With each new year comes the inexorable approach of tax season. It starts with the furnishing of W-2s, 1099s and other income documents. Then comes the scramble to find all possible deductions, which requires more documentation. Finally, it’s time to sit down with a tax advisor or fire up a tax software program and try to get as big a refund as possible or limit your payment to a less painful sum.
While we can’t change how much the tax code mandates you to pay, we can ensure you get every possible break and make the process far less time consuming. Achieving both these objectives comes down to organization.
Whether you file yourself or hire a tax professional, you’ll need to gather the information, forms and documents that form the basis of your return.
To help get the most from tax deductions and complete the process with a minimum amount of stress, here are the most important steps to take in preparation for filing your taxes both accurately and for the highest benefit.
Obtain a W-2 for each job
If you worked for any employers during the year, the IRS requires they provide a W-2, which they furnish by mail or electronically. This form shows your total income, all deductions out of your paycheck and you net earnings. It also totals how much federal, state, local and payroll tax your employer withheld, crucial numbers for accurate filing.
Employers must send W-2s by January 31st. If you do not receive yours by mid-February, check with the employer and make sure it has the correct contact information.
Collect any 1099 forms
If you’ve worked as an independent contractor, you’ll receive a 1099 from the employer instead of a W-2. Since self-employed people pay their own taxes, the 1099 shows your gross income without any deductions. Make sure to track all work-related expenses throughout the year, as most are fully deductible.
If you have fallen behind on tracking expenses, now is the time to go through your records and tally the total. Also, if filing your own taxes, make sure to understand the business owner deductions made available by the Tax Cut and Jobs Act and utilize all available breaks.
1099s are issued for many reasons other than self-employment income. For example, governments issue 1099s for unemployment insurance benefits, financial institutions for taxable retirement account distributions and credit card companies for debt cancellation. All 1099s must be tallied into gross income. Be sure to also document any payments you made that offset 1099 income.
Gather 1098 forms for interest deductions
Those who paid deductible interest particularly need their 1098 forms. These forms are issued by financial institutions and reflect tax deductible interest you paid during the year. Like W-2s and 1099s, the IRS requires these institutions send 1098s by January 31st. Form 1098 are often for mortgage- and student loan interest.
If you paid tax deductible tuition, you will need Form 1098-T to calculate the deduction.
Obtain additional schedules and forms
The IRS also requires forms for many tax credits. For example, the childcare tax credit requires Form 2441. Separate paperwork is also needed to claim the energy savings credit. Forms and schedules may also be required for deductions available to college students and recent graduates.
After you gather the documentation
Once you have the documentation in hand, it’s time to determine your adjusted gross income (AGI). AGI is one of the most important figures when filing federal and state income tax returns. Note: If you are self-filing, you may need your 2018 AGI to log into e-file applications.
To determine AGI accurately, use this checklist for needed information:
o W-2 forms
o Pay stubs
o Home mortgage payment stubs or purchase closing statement
o Last year’s tax return
o Documentation for and itemized deductions
o Charitable contribution documentation
o Business travel expense documentation
o Credit card statements and bank statements that verify deductions
o Medical bills
o 1099 forms
With your tax documents in hand, you are ready to determine you AGI, take full advantage of all deductions and tax credits and get your tax preparation behind you.
Tax season can seem like a bore, but when you are organized and gather all documents ahead of time, it can be a breeze. So, resist the urge to groan and get your tax documents organized. You might be surprised by a lower tax burden than expected or an especially juicy refund.
Tax Avenger is an experienced full-service CPA and Tax Resolution Firm helping clients throughout Michigan. We provide efficient, cost-effective service with exceptional skills and experience to handle all needs. We offer a full complement of services from Business, Individual, Financial and Tax consulting to Accounting services, and so much more. As tax specialists, our expertise and knowledge ensure compliance with government laws while maximizing benefits and minimizing tax liabilities. Call us today and speak with an experienced CPA for a Free Consultation!