Taxes are due in April, and while preparing a return can be stressful, working ahead of time can eliminate much of that anxiety.
Don’t let the deadline sneak up on you this year. Instead, optimize what you get back in taxes by following these five steps to file your return.
Step 1: Collect Your Information
First, you need to collect all your forms and receipts. The documents you’ll need depend on your circumstances. Many people have W-2s and 1099s, but you may also need statements for tuition, mortgage interest, qualified health insurance coverage, and student loan interest. Consult the IRS list of forms to see which ones apply to you.
Employers must send your W-2s and 1099s by Feb. 1. Some will send them to you electronically, while others will deliver them by mail, so keep an eye out.
You’ll also need to gather receipts for qualifying deductions if you itemize deductions. This step is critical if you’re audited, as your receipts prove you correctly calculated your deductions. Common deductions are charitable donations, home mortgage interest, and unreimbursed medical and dental expenses.
You’ll also want to collect documents for any eligible tax credits. These tax credits are more beneficial than deductions because they reduce the amount you owe the IRS rather than just reducing your taxable income. Tax credits are available for expenses incurred from adoption, education, disabled dependent care, etc. Review this list of available tax credits and deductions from the IRS.
Step 2: Choose a Deduction Method
You’ll need to choose what method you use for deductions. For many people, the standard deduction is the best choice, but depending on your charitable donations, medical expenses, and so on, it may be better to itemize. The choice boils down to which method lowers your taxable income the most.
“Each year, you get to choose between itemizing or taking the standard deduction,” according to Investopedia. “You should always research that choice since the allowable deductions and their amounts sometimes change from year to year.”
Step 3: Estimate What You Owe
Next, you will want to estimate how much you owe or expect to receive in a refund so there are no unpleasant surprises. You can do this with an online tax estimator. When you have a clear picture of your tax liability, you can take charge of your finances as you plan for future years.
It is also wise to stay abreast of any changes to tax law or tax brackets. For example, the tax brackets for 2023 are significantly different from past years because of inflation. For many people, these changes—wider tax brackets and increased exemptions and credits—will mean a lower tax bill.
Adjust your withholdings now to avoid a significant tax return for the money you earn in 2023.
Photo: Sergii Gnatiuk via 123RF
Step 4: Consider Hiring a Tax Expert
Using a certified public accountant is helpful but only sometimes necessary. It depends on how complicated your taxes are and your personal preference. However, if you are self-employed or an employer, have several sources of income, or own rental properties, consider hiring a CPA to ensure nothing falls through the cracks. After all, getting into hot water with the IRS is stressful.
CPAs prepare tax documents, file returns, and strategize how to minimize your tax liability for the following year. In addition, they can represent you if the IRS has questions about your return or if the organization audits you.
Step 5: File Your Taxes Electronically
Use tax software to file electronically or take your paperwork to a CPA. To avoid delays, e-file and sign up for direct deposit.
The IRS provides Free File as one way to file electronically, or you can choose from the many companies that offer e-filing services.
While there is no one-size-fits-all way to file taxes, following these steps will help you to prepare an accurate return, so you can file your taxes without worry.