Though tax season rarely brings excitement, filing taxes on time remains crucial. Services like H&R Block can handle the heavy lifting, but they come with a price tag that might make you reconsider.
The shocking bill from your tax preparer often leaves you questioning why you didn’t tackle your own taxes. Today, handling your tax filing is straightforward—provided your situation isn’t overly complex.
Ready to take control of your tax preparation? Here’s everything you need to know about filing your own taxes.
Why Handle Your Own Tax Return?
As noted earlier, hiring a tax professional comes with significant expense. Most of us can successfully manage our own tax returns without professional help. Self-filing doesn’t require printing paper forms and working with a pencil (though that option remains available!).
Tax preparation software offers user-friendly interfaces and typically provides free services worth exploring. Even paid online tax software costs substantially less than professional tax preparation.
Self-filing taxes also strengthens your financial awareness. Whether you’re recovering from past financial mistakes, paying off student loan debt, or seeking a clearer picture of your financial health, preparing your own taxes significantly improves your financial literacy.
When to Hire a Tax Professional
Self-filing requires careful consideration. While saving money and gaining financial insight offer clear benefits, DIY tax preparation isn’t always the smartest choice.
Consider hiring a tax preparer in these situations:
Are You Self-Employed or a Business Owner?
Property owners, freelancers, consultants, and business owners often face self-employment tax obligations. Side-hustle workers with multiple income sources may also encounter these requirements.
Tax professionals excel at identifying write-offs and deductions for business owners and self-employed individuals. Without expertise in these areas, hiring a tax preparer becomes highly recommended.
Buying or Selling a Home
Real estate transactions involve complex tax implications, including capital gains considerations, losses, and homeownership-related deductions. Unless you’re confident navigating these complexities, working with an experienced tax advisor proves worthwhile.
Selling Business Holdings, Stocks, or Other Assets
When your tax return must include sales or exchanges of stocks, bonds, or other investment types, you’re dealing with capital asset transactions. The numerous regulations governing these transactions typically require professional expertise.
Financially Supporting Someone Else
This goes beyond claiming dependent children on your tax return. We’re discussing situations where you support friends or relatives who aren’t direct descendants eligible for standard dependent claims.
For instance, financially assisting a working friend who needs help. While you likely can’t claim them as a dependent, a professional accountant might discover viable options.
Understanding Tax Brackets
Your tax calculation begins with gross income—all money flowing in from various sources.
Next, you claim eligible deductions. Subtracting these from gross income yields your taxable income. The federal government operates on a progressive tax system, meaning higher taxable income results in higher effective tax rates.
Your tax bracket determines the percentage applied to your income tax calculation. Depending on your situation, you’ll either receive a tax refund or owe additional taxes.
What is Adjusted Gross Income?
You’ve likely encountered the term “adjusted gross income” in tax discussions.
Don’t let terminology confuse you—taxable income and adjusted gross income refer to the same concept.
How to Prepare Your Own Taxes
Once you’ve decided to file taxes yourself, organization becomes your first priority. Gathering the right tax documents and information streamlines the entire process significantly.
When you’re ready to begin tax preparation, follow these essential steps:
Gather All Required Documentation
Smooth tax filing depends largely on thorough preparation from the start. Invest time in organizing your tax return by collecting all necessary documents.
Compile documentation covering dividend income and all other income sources. Essential documents may include:
W-2s
Every employer must provide this document. Access it through your HR department’s online platform or expect a mailed copy to your home address.
1099s
Independent contractors and side-hustle workers need these forms for tax filing. Each client should send documentation showing your previous year’s earnings.
Interest Statements
Homeowners must report mortgage interest paid during the previous year. Interest accumulation must exceed $600 to require inclusion in your tax return.
Determine Your Filing Status
Filing status critically impacts your tax burden, potentially reducing what you owe or increasing your liability significantly.
Selecting from the five filing status options should be straightforward:
- Single – Choose this if you’re unmarried, legally separated, or divorced.
- Married, filing jointly – Select this when filing with your spouse, provided marriage occurred on or before the tax year’s final day.
- Married, filing separately – Married couples can file separately, though this sometimes results in higher tax obligations.
- Head of household – Unmarried taxpayers with at least one dependent may qualify for this status.
- Widow or Widower with Dependents – If your spouse died during the previous year and you have dependent children, this status might apply.
Identify Available Credits and Deductions
Understanding eligible tax deductions and credits helps you prepare proper documentation while maximizing potential refunds.
Tax breaks reduce your overall obligation, applying to federal income tax and potentially state and local taxes. Unlike the recovery rebate credit—a one-time direct payment many received before filing—these ongoing credits require annual claims.
Key credits and deductions include:
Saver’s Credit
Retirement plan contributors who aren’t claimed as dependents or full-time students might qualify for this credit. Income restrictions vary by filing status and change annually.
Child Tax Credit
This credit received significant increases as economic impact payments for 2021. Consult tax resources for year-specific information, as this credit provides claims for each qualifying child.
Earned Income Credit
Designed for low-to-moderate income earners, this credit’s amount varies based on disability status, children, and other qualifying conditions.
Charitable Deductions
Charitable donations may qualify as tax-deductible expenses, particularly when itemizing deductions.
Itemized vs. Standard Deductions
Itemized deductions represent specific expenses that reduce your taxable income. The deductions mentioned above represent just a fraction of available options.
Alternatively, you can claim the standard deduction—a flat-dollar reduction with no documentation requirements that lowers your adjusted gross income.
You cannot claim both itemized and standard deductions. Choose the option that provides greater tax savings.
If your standard deduction exceeds itemized amounts, take the standard deduction—it also saves preparation time.
When itemized deductions exceed your standard amount, itemizing makes financial sense despite requiring additional documentation time.
Filing Your Tax Return
With all preparation complete, it’s time to tackle your actual tax return.
Complete your tax return well before filing deadlines to avoid penalty fees for late submission.
Three filing methods are available for your tax return:
Download Tax Forms
The IRS website provides free downloads of all necessary tax forms. Complete them manually and submit via mail.
This method works well for simple returns with minimal forms, though e-filing typically offers greater convenience.
E-File Through the IRS
The IRS website offers dedicated e-filing through fillable forms. Federal tax returns can be filed free if your income falls below $72,000.
State tax filing varies significantly. Some states offer free e-filing while others require payment to Free File partners for preparation services.
Use Online Tax Software
Companies like H&R Block, TurboTax, and Credit Karma Tax provide comprehensive online tax software programs. Set up direct deposit to receive state or federal refunds directly to your bank account.
Many providers offer free online services for qualifying taxpayers (such as TurboTax’s free edition). Non-qualifying users pay e-filing fees to cover processing costs.
Even paid software represents excellent value. These robust programs handle complex tax situations effectively, often including audit representation as a valuable bonus feature.
Receiving Your Refund or Making Tax Payments
After submitting your tax year information, you’ll know whether you’re receiving a refund or owe additional taxes.
Tax refunds arrive through several options: mailed checks, direct deposit to your bank account, or Treasury Department savings bond purchases.
When owing taxes, payments go to your state’s revenue department or the IRS. While we don’t provide legal advice, paying your tax bill remains essential.
Unpaid taxes won’t immediately impact you, but eventual credit report consequences are possible. Without funds to pay immediately, arrange payment options right away:
- Contact the IRS to establish an installment agreement for your tax bill. This represents the ideal solution among available options.
- Use a credit card with sufficient limits. This affects your credit utilization ratio and incurs interest charges but provides additional payment time.
- Obtain a personal loan to cover unexpected tax bills. Personal loans slightly impact credit scores and include interest charges.
