While it's still early in the new year, it's already time to start thinking about the upcoming tax season.
The April 18 deadline may seem like an eternity away, but it'll be here sooner than you realize. Don't let it creep up on you - start preparing now.
Filing your taxes can be overwhelming at times, which is why Landmark Bank is here to help you out with five ways you can prepare to file taxes:
1. Collect important documents
Your income information is vital to filing your taxes. Whether you're full time, part time or a freelancer, you need income statements.
If you worked for one employer in 2016 or switched jobs, you'll receive a W-2 income form. You should receive all W-2 forms by Jan. 31 at the latest, according to Bankrate.
If a majority of your income in 2016 came from freelancing gigs, or even some side jobs here and there, you should have received a Form 1099-MISC from each employer or businesses you worked with. Set some time aside to gather your 1099s in one place before you file your tax return.
You'll also need a host of other documents. However, these will vary because everyone's finances are different.
Notable tax documents you'll need to gather include, but aren't limited to:
- Form 1099-DIV (Investment income from stocks or mutual bonds).
- Form 1099-B (Income from selling stocks or bonds).
- Form 1099-R (Income from a pension or Individual Retire Account)
- Form 1098-E (Indicates how much interest you paid on student loans).
- Form 1099-INT (If you earned more than $10 in interest on a savings account or certificate of deposit).
- Form 1098 (Specifically for homeowners).
As you can see, you may have a lot of documents to collect. You need time to find or receive this information, which is why you shouldn't wait until April to complete your taxes.
2. Decide how you'll file: Part I
If you're married, you and your spouse will need to decide how to file taxes. The two of you can either file a joint tax return or separate ones. Think carefully about this decision.
According to TurboTax, joint filers are usually able to deduct a large chunk of their income almost immediately. In addition to a lower tax rate, joint filers are also more likely to be able to claim deductions and/or credits (more to come on that).
Couples who file separate tax returns may be subject to higher tax rates. Furthermore, deductions are typically lower for single filers than joint filers. Discuss your filing strategy with your spouse to see which one works best for you. Obviously, if you aren't legally married, you'll need to file a 2016 return as single.
3. Decide how you'll file: Part II
This time, you'll need to decide whether you'll want to file your taxes by yourself or with the help of an accountant.
Money Crashers said this decision should be based on your income and the complexity of your finances. If you're a 20-something year old who doesn't own a home or many stocks, you can file on your own. But life-changing or unusual events warrant the help of a professional.
These big events may be:
- Participated in complex financial investments.
- Started or closed a full-or part-time business.
- Grossed over $150,000.
If you experienced any of those life altering events, you'll want to work with a tax accountant this year. Otherwise, you can probably utilize one of the many self-filing options out there, such as:
- H&R Block.
- IRS Free File.
If your income was below $64,000, the IRS allows you to file federal and state tax returns for free. Don't hesitate to research different filing options and to find one you're most comfortable using.
4. Research credits and deductions
Filing your taxes is a fact of life. It's not something we enjoy completing, but we do it anyway. Luckily, Uncle Sam sweetens the deal with credits and deductions that lower your tax burden. But because there are so many, you'll need to research which ones you qualify for.
If you are a homeowner, you can deduct the mortgage interest you paid throughout 2016. Similarly, you can deduct interest paid on student loans as well.
One of the biggest credits you can claim is the Earned Income Tax Credit. The IRS stated this benefit is available to individuals with moderate to low income. The EITC reduces your tax obligation and may even give you a refund.
However, you'll need to meet some requirements in order to claim the EITC. Be sure to research as much as possible so you can lower your tax obligations and hopefully receive a sizable refund check.
5. Start early
Procrastination is your worst enemy during tax season. If you wait too long to research, collect important financial documents and file, you'll likely rush through the process and either make mistakes or forget to claim deductions and credits.
Additionally, filing early allows you to max out your IRA contribution limits and take advantage of the Traditional IRA deduction.
You need all the time possible to file your taxes, even if your finances aren't too complicated.
Yes, it's time to start thinking about filing your taxes. But if you start early, you'll be able to comfortably gather financial documents, decide how you'll file your taxes and research credits and deductions.
For more information about smart ways to manage your finances, contact Landmark Bank.
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