Personal Finance

How To Do Your Own Taxes – Important Things You Need To Know

While tax season is rarely something that we look forward to each year, it is important to file taxes on time. H&R Block and other tax preparation services can do the legwork for you at a cost.

The bill you get from your tax preparer is often shocking, leaving you wondering why you didn’t do your own taxes. Nowadays, as long as you don’t have a complicated tax situation, it’s easy to handle your own tax filing.

If you want to start taking control of handling your own taxes, read on to learn more.

Why do your own Tax Return?

As mentioned, hiring a tax professional to file a tax return on your behalf is expensive. The majority of us should be able to handle our own taxes. Doing your own taxes doesn’t mean you print out and use paper forms (though you totally can if you prefer it!).

Tax preparation software is easy to use and typically a free service that you can take advantage of. Even if you pay to use online tax software, it’s going to cost a lot less than getting professional tax prep.

Doing your own taxes will also help you get a better handle on your finances. If you made bad financial decisions in the past, are getting out of debt from student loans, or simply want to have a better picture of your finances, doing your own taxes is a great way to improve your literacy.

Doing Own Taxes

When to Hire a Tax Professional

Doing your own taxes is something that you should consider carefully. Despite the benefits of saving money and gaining a better understanding of your finances, it is not always the best choice.

Here are some reasons why you might hire a tax preparer to handle your tax filing:

Are You Self-Employed or a Business Owner?

If you own rental property, work for yourself, a freelancer, consultant, or own a business, you may have to pay self-employment taxes. Some people who have more than one job (i.e. side-hustle ) might also have to pay self-employment taxes.

Tax professionals can also find write-offs and deductions for business owners and self-employed workers. So if you’re not familiar with how all that works for your tax situation, a tax preparer is recommended.

Buying or Selling a Home

There are many tax issues like capital gains or losses and deductions related to expenses with homeownership. Work with knowledgeable tax advisor if you’re not comfortable handling your tax filing on these types of transactions.

Selling a Business Holding, Stocks, or other Assets

If you must include in your tax filing the sale or exchange of stocks, bonds, or another type of investment, it’s considered a capital asset transaction. There are a lot of rules related to this that are often left better in the hands of an expert.

Financially Supporting Someone Else

We’re not talking about a dependent child here that you can claim when you file your taxes. These are situations where you are supporting a friend or relative that isn’t a direct descendent that you could claim when filing your taxes.

i.e. Helping a friend who needs financial help even though that person has a job. You most likely can’t claim them, but a professional accountant might be able to find a way.

How Tax Brackets Work

How much tax you pay starts with your “gross” income. This is all income you have coming from different courses.

Then you make claims to the deductions that you’re eligible for. When that amount is subtracted from your gross income, you get your taxable income. The U.S. federal government uses a progressive tax system. Essentially this means the higher your taxable income, the higher your effective tax rate is.

The tax bracket that you belong to will determine what percentage your income tax will be taxed at. You may be eligible for a tax refund or owe taxes when all is said and done.

Tax Papers

What is Adjusted Gross Income?

You’ve probably heard the term, “adjusted gross income” used as well.

Don’t let it confuse you; Taxable income and adjusted gross income mean the same thing.

How to do Your Taxes

If you’ve decided that filing your taxes yourself is what you want to do, then you’ll want to start getting organized. There are a lot of tax documents and information you should know to get organized to make the process easier.

When you’re ready to start your tax preparation, follow these steps below:

How To Do Your Own Taxes-Filling Tax Papers

Collect all your Paperwork

Having a smooth process when you file taxes is often dependent on how well organized you are from the start. So take the time to get ready to file your tax returns by gathering all your documents.

Paperwork about your dividend income and other income sources should be collected. Here are a few examples of things you may need:

W-2s

Each employer should provide you with this document. It is typically available on demand by logging into your HR’s online platform. Otherwise, they may have mailed you a copy to your home address.

1099s

If you worked as an independent contractor or had a side hustle, you’ll need to file taxes with your 1099. Each client that you worked for should send you this document with how much money you earned last year.

Interest Statements

If you own a home, you’ll need to report that mortgage interest that you’ve paid through last year. The interest that had accumulated must be over $600 to be included in your tax returns.

Figure out your Filing Status

Your filing status will is very critical to your taxes so you should determine it accurately. Your tax burden could be reduced significantly or you could own taxes based on this.

It shouldn’t be very difficult for you to figure out which of the five tax filing options to choose. Here they are below:

  • Single – You can claim this status if you’re not married, legally separated, or divorced.
  • Married, filing jointly – If you file your taxes with your spouse and your marriage took place on or before the last day of the tax year, this is the status you should choose.
  • Married, filing separately – You can also choose to file your taxes separately, despite being married. Keep in mind that this could lead to higher taxes owed in some cases.
  • Head of household – If you have at least one dependent and are not married, you could qualify for this status.
  • Widow or Widower with Dependents – If your spouse passed away last year, leaving you with a dependent child, you might qualify for this filing status.

Know what Credits and Deductions You can take

Getting a sense of what tax deductions and credits you might be eligible for is another to be prepared with the right documents. Of course, you also want to ensure you get the maximum refund possible too.

Getting a tax break means you’re reducing how much you owe. This may apply to your federal income tax or even state and local taxes. These credits don’t exactly work like the recovery rebate credit which was a one-time direct payment that many people received before filing their taxes.

Here are some of you should be aware of below:

Saver’s Credit

If you contribute to a retirement plan (can’t be claimed as a dependent and not a full-time student), you might be eligible for this tax credit. There are income restrictions depending on your filing status that you should check as they are subject to change each year.

Child Tax Credit

This credit is seeing a big increase as an economic impact payment for 2021. Seek tax advice or resources to find information specific to each tax year. This tax credit provides you with a claim for each child in your care.

Earned Income Credit

This is a tax credit that’s intended for those how to have low-to-moderate income levels. The amount of the credit may change if you are disabled, have children, or meet other conditions.

Charitable Deductions

Any money that you donate to charity might be tax-deductible. This is typically the case if you have itemized deductions.

To Itemize Deductions or Not?

Itemized deductions are expenses that lower your taxable income. The list of deductions that were discussed above is just a drop in the bucket of the ones that are available.

The alternative to do a standard deduction. This is a flat-dollar reduction that has no strings attached that reduces your adjusted gross income.

It isn’t an option to take both an itemized and standard deduct. So when deciding which one to take, it really boils down to which will save you more money.

For example, if your standard deduction is more than if you itemize deductions then take the standard deduction. It will also save you time.

It might make more sense to itemize if it’s more than your standard deduction. You’ll need to spend some extra time recording those appropriately.

Filing Your Tax Return

Now that you’re all prepared with everything you need to complete your tax returns, it’s time to do work.

Make sure you do your tax return well before the filing deadline. You could pay additional fees if you file after the date.

How To Do Your Own Taxes-Tax Form

Below are the three ways you can file your own tax return.

Download the Tax Forms

All the tax forms you’ll need are available on the IRS website. These documents are free to download and you can complete them by hand, then mail them.

If you only have a few tax forms, this method might work for you. However, e filing is usually more convenient.

E-File with the IRS

You can do an e-file using the IRS’s website. They have an E-File-specific site where you can find file fillable forms. Your federal tax returns can be filed in this manner for free if you make less than $72,000.

Your state tax filing might be a different story. Some states may offer free E-Filing of your tax return while in others you must pay a Free File partner to prepare.

Use an Online Tax Software

H&R Block, TurboTax, and Credit Karma Tax are among the companies that offer online tax software programs. You can set it up so that any state or federal refund is sent by direct deposit to your bank account.

Many providers such as the ones listed above offer a free online tax service for those who qualify (i.e. Turbotax free edition). Otherwise, you will have to pay e-file fees to cover the costs.

Even so, this is a good option even if you have to pay. Even if you have a complicated tax situation, this software is robust enough that it can handle doing your last year’s tax return. The paid software will often include audit representation in case you are audited, which is a nice bonus.

How to get your Refund or make your Tax Payment

Once you’ve submitted all your information for the tax year, you will know how much you are eligible to receive back or how much you owe.

If you’re receiving a tax refund, there are a couple of different options in how to receive your money. You could receive a mailed check or have the money direct deposited into your bank account. They can even be used to purchased savings bonds from the Treasury Department.

How To Do Your Own Taxes-Tax Refund

When you owe money, it can be sent to your state’s department of revenue or to the IRS. While we’re not here to provide legal advice, but you should be sure to pay your tax bill.

It won’t affect you immediately, but if you don’t pay eventually that could show up on your credit report. If you don’t have the money to pay for it, make arrangements immediately. Here are a few options:

  • Contact the IRS and agree to pay your tax bill with an installment agreement. Out of the three options here, this is the one that you should ideally pursue.
  • Use a credit card if you have a high enough limit. This will hurt your credit utilization ratio and may incur interest, but it also buys you some extra time to pay.
  • Take out a personal loan. Using a personal loan can help cover a higher-than-expected tax bill. This will lower your credit score slightly and you will have interest charges.

Kevin

Kevin is an ambitious entrepreneur that is obsessed with all things related to finance. From a young age, Kevin has always been involved with side hustles ranging from online selling to freelance work. Over the years, Kevin graduated from side hustles and started launching multiple online and offline businesses. Kevin is a serial entrepreneur who loves starting new businesses and exploring all things related to business and finance. He is constantly looking for new ways to save money, invest money, and create income streams.

Leave a Reply

Your email address will not be published. Required fields are marked *