How to File Your Taxes
Filing your taxes can be a daunting task, but it doesn’t need to be that way. Our tutorial will help guide you through every step of the way. If you ever get confused about a certain form or term, refer to our Guide to Tax Terminology [HYPERLINK] for a quick explanation.
The first thing you’ll need to do is gather all of your tax documents. If you are employed, your employer will have sent you a W-2 detailing your wages and salary for the year. You may have also received a 1099 or 1098 for detailing other income and deductions.
Once you have all of your documents together, you’re ready to start filling out your Form 1040. After filling out your personal and family information at the top of the form, the rest of the front page will help you calculate your *taxable income*. You start out with your salary from your Form W-2, and go on to add taxable interest, dividends, and others to find your total income. Then you can subtract any deductions to find your taxable income.
The top half of the back page helps you calculate your total tax and total payments. Calculating your total tax may include other forms, and it will also take self-employment taxes into account. For total payments, you can find the federal income tax withheld from your paycheck in Form W-2 and add that to any tax credits.
But wait! Taxes don’t always have to be about the money you’re paying to the government – sometimes you’ll find that the government owes you! If your total payments are greater than your total taxes, you are deserving of a tax refund that can be deposited in your bank account or set aside for next year’s taxes.
After completing your Form 1040, mail it neatly to the appropriate IRS processing center. Congrats – you’re all done! Of course, if you don’t want to fill out your tax returns manually, you have at your disposal accountants, tax software, or websites like TurboTax that are willing to help you. Most of these tools require you to pay to use them, but some offer a free version
If your taxes are fairly simple.
If you do decide you want a professional to look over your taxes, consider consulting a tax advisor. A tax advisor is a professional with advanced training and knowledge of tax law. Tax advisors find ways for their clients to lower their tax liability and find the right deductions and credits. Tax Advisors are hired in order to minimize the amount of taxes that their clients pay so that they save money, while remaining compliant with the law.
Lowering Your Taxes
So how do you ensure that you don’t overpay your taxes? Here are a few ways to make sure you file correctly and maximize your refund.
Tax planning is the part of your financial plan in which you arrange your finances to pay as little in taxes as possible. You can do this by reducing your taxable income, increasing your tax deductions, and taking advantage of tax credits.
1) Reduce your income. Reducing income sounds crazy! Who would want to make less money just to pay fewer taxes?! Not so fast – you can lower your taxable income by maximizing retirement savings and transferring earnings into 401(k)s or traditional IRAs. These retirement contributions are not taxed.
2) Itemize your deductions. Keep track of deductible expenses such as charitable donations, mortgage payments, and medical expenses throughout the year and choose to itemize your deductions at tax time.
3) Take advantage of tax credits. There are tax credits for a variety of things, including college expenses, saving for retirement, adopting children, and childcare expenses that allow you to go to work. Researching these credits and finding ones you qualify for is a great way to directly lower the amount of taxes you owe.
These methods of lowering your taxes aren’t mutually exclusive. For the best possible result, keep all three in mind as you receive paychecks.
Even though you may be done filing your taxes, be sure to keep all of the tax documents from that year! If the IRS has a question about a tax return, you may be asked to provide proof, such as a receipt that supports your deduction claim. Here are some things to keep in mind as you go throughout the year so that you have all the proper receipts and documentation ready for the NEXT time you have to file taxes.
Itemizing your deductions can help you reduce your tax bill, but it requires careful recordkeeping. For each of your deductible expenses, you will need to keep the receipts as evidence.
Instead of scrambling to find all your receipts from the year at tax time, it is best to collect and organize receipts as you go. Whenever you have a tax-deductible expense, label the receipt with the type of expense and file it in a binder or folder for safekeeping.
The IRS will also accept digital records of your deductible expenses. You can choose to keep your receipts in a spreadsheet or use an online storage service. If you choose to store your records online, make sure that you always backup your documents.
The IRS says you need to keep your receipts “as long as needed to prove the income or deductions on a tax return.” In general, this means you should keep your records for three years from the date the return was filed.
Once you’ve filed away your old tax documents and created a system for organizing your new ones, you’re all set! Be sure to keep on top of your receipts and documentation for next year so you won’t be scrambling to find that receipt from last February come tax season. By having a consistent filing system in place, doing your taxes every year will be a breeze!