Whether you hire a professional to help you prepare your tax return or you decide to do it on your own, you will need a checklist to get through the process.
Your level of expertise in tax law and crunching numbers will ultimately determine if you need to pay someone to handle it for you.
The most obvious advantage of completing your own tax return is that it’s cheaper, but it can take a lot of time, and time is money. According to data from the IRS, the average person needs around 11 hours. You can also try using tax preparation software to speed things up a bit.
But even if you do hire a professional, you’ll still need to do some of the work, and the sooner you start, the sooner you can relax.
Gather your receipts and double-check that you’ve gotten all of the necessary documents from your employers and financial institutions. Last year’s tax return might serve as a useful guide, so you don’t miss anything important.
Where to Start
If you decide to handle your taxes on your own, start by downloading the necessary forms and instructions from the IRS and get a return from your state’s tax department.
Unless you’re 65 or older, you may be constrained to using Form 1040 in 2021 to prepare your 2020 return. Another important change brought about by the Tax Cuts and Jobs Act of 2017 is that you no longer have the option of filing Forms 1040-EZ or 1040-A. The IRS has created a revised Form 1040 to comply with the TCJA and make the process more efficient. However, people 65 and older can still use Form 1040-SR.
The 2020 tax return is shorter, but it includes three schedules that are likely to be required in all but the simplest of tax situations—another reason to consult professional tax services this year.
Most Americans choose to have their tax returns prepared by an accountant or other tax professional because they want to make sure everything is done correctly, so they don’t have any issue with the IRS. If you decide to do the same, find a tax professional with the appropriate level of expertise and experience for your needs. While some accountants work as generalists, others are specialized in certain categories of clients like Americans living abroad or self-employed.
If you qualify, you can also get help with tax preparation for free from local non-profits. As of tax year 2020, the Volunteer Income Tax Assistance (VITA) program provides free tax preparation assistance to those earning $65,000 or less per year, and you may also be eligible if you speak English as a second language or you have a disability.
Tax Counseling for the Elderly (TCE) provides free tax preparation assistance to taxpayers aged 60 or older while the American Association of Retired Persons (AARP) focuses on taxpayers over 50.
During tax season, you can usually find representatives from these organizations in local community centers, colleges, and libraries.
Round up Your Documents and Receipts
By the end of January, you should have all the tax paperwork you need from your employer, banks, and anyone else you do business with. Check that the information on each form corresponds to your own records.
The following are a few of the most prevalent forms:
- Form W-2 (Wage and Tax Statement) – This is a form that employers have to send to the IRS and their employees. It shows employees’ annual earnings and the amount of taxes deducted from their paychecks.
- Various 1099 forms – They show other income sources like Form 1099-DIV for dividends, Form 1099-INT for interest, and Form 1099-MISC for independent contractors. Keep in mind that brokers don’t have to submit Form 1099-B11 (shows gains and losses on securities transactions) until mid-February, so expect it to arrive later.
- Form 1098 (Mortgage Interest Statement) – This is the form you use to report interest and related expenses you paid on your mortgage throughout the tax year, where the total is $600 or more. Points paid on the acquisition of the property are an example of related expenses. Prepaid interest on a home loan is referred to as points, and it is used to improve the rate on the mortgage issued by the lender.
- Form W-2G – This is a form that gaming facilities will send to you in January if you won money from gambling in the previous year and includes information you’ll need to disclose when filing your taxes, such as the amount of money you’ve won, the date when you won, the type of wager you made, and the amount of federal and state income tax that was already deducted.
Legally, you must report winnings from any sort of gambling activity, including lotteries, bingo, slot machines, cards, racing, and sports, to the IRS, regardless of how much you won or whether you’ve won the money in the US or abroad.
Whether you itemize your deductions or take the standard deduction determines which receipts you’ll need. You’ll naturally want to choose the option that will give you a bigger write-off, but the only way to find out which is favorable is to add up all of your itemized deductions and compare the result with the standard deduction. For the 2020 tax year, the standard deduction is $12,400 for single taxpayers and $24,800.15 for married couples filing together.
Focus on receipts for medical expenses not covered by insurance or paid by any other health plan, investment-related expenses, and property taxes. All of them are subject to limitations, but if they’re significant enough, it might be worthwhile to itemize.
Even if you don’t itemize, you can deduct up to $300 in charitable contributions on your 2020 tax return, but the donation must be made directly to charity in cash instead of going to a donor-advised fund or a private foundation. Otherwise, you’ll have to itemize, which fewer people do because the standard deduction was doubled a few years ago.
You must disclose your books and records if you have business revenue and expenses to declare on Schedule C.
If you make the effort of organizing your documents, it will take the tax professional less time to prepare your taxes, so they will charge you lower fees.
