It’s a new year, but don’t expect an automatic income tax extension as we saw in 2020.
- Find your previous tax returns
- Organize your tax documents and information
- Determine your tax bracket
- File an extension if necessary
- Use guided Tax filing software for assistance
- Hire a CPA if you have complicated taxes
- Pay your taxes on time!
The year 2020 is in the past but paying your 2020 taxes is just around the corner. For many working people this isn’t a huge deal as much of your taxes will likely be pulled from your paycheck automatically and you may even be getting a tax refund. But the only way to get your tax refund is to file your taxes. For everyone else, filing your taxes correctly and on time is important to avoid expensive penalties, fees, and interest for “failure to pay”.
Remember the date to file is April 15th if you want to avoid penalties.
As the saying goes, “in this world nothing can be said to be certain, except death and taxes“. That is 100% accurate. If you make a wage or earn income through a business, you will have to pay taxes. People who work on a cash basis also must pay taxes. Your taxes may be more or less complicated depending on your situation. Here we’ll be looking at how and when you should start the process of doing your taxes. We’ll also look at the risks of not filing or filing incorrect tax information.
The government will always get what they’re owed, so pay close attention and don’t delay.
Find Your Previous Tax Returns
A simple way to make sure you are successful during tax season is to get ahold of your previous tax returns from the last few years. If you haven’t seen any major life-changing events to your income or filing status, using your previous returns will accelerate your tax preparation process and provide a good amount of the information you need for the filing.
If you’re using an online service like TurboTax, they may be able to find and use your previous tax returns to auto-fill much of the most important information that is required on the forms. If you’re doing it manually or getting help from a CPA or professional tax preparer, you can still utilize your previous returns to cross-check information from the last few years to be sure the information your listing is current.
Your recent returns can also help you remember all the different deductions you’re eligible for and other important details that will affect the taxes you pay. Let’s say you donated to charity or contributed to an IRA within the past year, you are likely able to deduct those donations if you have a physical receipt or canceled check from the charity. Look over your previous returns for information like this regarding deduction-eligible expenses, automatic deductions, charity contributions, or other items you make on an annual basis.
Organize Your Tax Documents and Information
One of the smartest things to do when preparing your taxes is to organize your tax documents and get every relevant document along with the supplemental information supporting them ahead of time.
Check receipts (or your bank statements) and determine if itemizing your deductions, or using the available standard deductions, will be best for your situation. If you’re not sure it may be best to get some assistance with a CPA or if you’re income is lower than $55,000 for free through the IRS programs Certified Volunteer Income Tax Assistance (VITA) or a Tax Counseling for the Elderly (TCE) location. The documents you’ll need can include (but are not limited to):
- Form SSA-1099
- Other 1099’s for dividends, interest, non-employee compensation, you’re self-employed, cancellation of debt, etc.
- W-2 (if you were employed)
- Form 1098 (owned a home that gained mortgage interest or paid school tuition or interest payments on a student loan)
- Form 1095-A (if you bought health insurance from a government-run exchange)
This is not a complete list and every person can have different tax documents that are necessary for their circumstance. If you’re looking to Start a Business, your tax situation likely will change for the following year, not the previous one.
Determine Your Tax Bracket
There are 7 tax brackets in the United States. Keep in mind that some rates have changed over the past few years for different income levels and can do so with each new administration or a change in the law. That is why it is important to know what your income is, what tax bracket you fall into, and what is the current rate for that tax bracket.
The basic rates at the time of this writing are as follows:
Filing Status: Single (Not Married)
Income : Tax Rate %
- Up to $9,525: 10%
- $9,526-$38,700: 12%
- $38,701 – $82,500: 22%
- $82,501-$157,500: 24%
- $157,501-$200,000: 32%
- $200,001-$500,000: 35%
- Over $500,000: 37%
Filing Status: Married (Filing Jointly)
Income: Tax Rate %
- Up to $19,050: 10%
- $19,051-$77,400: 12%
- $77,401-$165,00: 22%
- $165,001-$315,000: 24%
- $315,001-$400,000: 32%
- $400,001-$600,000: 35%
- Over $600,000: 37%
As you can see your filing status and your income level are the biggest factors that determine your tax bracket. Knowing how much you earn is critically important to pay your taxes properly.
Standard Tax Deductions & Extensions
Tax laws recently changed and a big part of those changes was regarding deductions and exemptions. The standard deduction for a married couple filing their taxes jointly went from $12,000 to $24,000. For individuals filing as “single” that number also nearly doubled from $6,500 to $12,000. But, the changes also eliminated the personal exemption of $4,150.
Also, if you have children or dependents then there are other changes to be aware of. There has been an increase in the Child Tax Credit from $1,000 to $2,000 with $1,400 of that being excluded from your refund. Furthermore, the Child Tax Credit also changed it’s phasing out limits from $100,000 for married couples to a whopping $400,000 for married couples and $200,000 for those filing individually.
These are some serious changes so be sure you’re aware of them. Also, keep in mind that with each new administration (or at any time), the tax laws can be changed. So be sure you’re using the most current information when filing your taxes.
Itemized Deductions
The changes to the tax law also changed itemized deductions. An example is medical cost deductions which had been beyond 10% are now only 7.5%. There are some other changes to things like mortgage interest deduction on a loan, and others that could have an impact on the taxes you owe.
Rates on mortgage interest have changed but if you’re still hunting for one get expert mortgage advice here.
Need a Filing Extension?
If you’re running out of time and won’t be able to file your taxes by April 15th, you likely need a tax-filing extension. You’ll get an additional 6 months (October 15th) to file your taxes for the previous year. This will let you avoid the penalties including a “failure-to-file” penalty and interest owed. This doesn’t mean you don’t have to do anything as you’ll still have to file your tax estimate of what you’ll owe to avoid the penalties and fees.
Use Guided Tax Filing Software for Assistance
All of us aren’t comfortable with numbers and paperwork of this kind. Doing your taxes right on your own with no help takes a level of experience. If you don’t have experience in filing taxes it can seem a bit overwhelming. Considering deductions, exemptions, status, expenses, tax bracket, and everything else that goes with state and federal taxation; it can be downright terrifying.
Luckily, there is a multitude of free or inexpensive guided tax filing software programs you can use to go through your taxes in a step by step way. These systems make filing your taxes on your own easy enough for everyone to do it if they choose. Everything is spelled out, you simply fill in the numbers they ask for, and at the end, you’ll see what you owe or if you’re getting a refund. These systems will also let you electronically file your taxes directly with your state and the federal government.
Hire a CPA if You Have Complicated Taxes
Tax season isn’t something any of us look forward to, especially if you’re a business owner or have highly involved and complicated tax returns. Some people buy a tax preparation software program only to get into the software and realize that they’re still not comfortable filing on their own. Luckily, you don’t have to go it on your own. Hiring a Certified Tax Accountant (CPA) will take the guesswork out of your taxes. You will pay them for doing your taxes but you’ll also ensure they are filed correctly and you’re getting the best refund or paying the lowest amount possible.
Pay Your Taxes on Time!
You’d be surprised to learn how many people fail to not only file their taxes on time but also pay them. If you’ve filed, that doesn’t mean you are done with your taxes. Your taxes aren’t finished until you’ve paid what you owe (unless your getting a refund in which case you’ll get your refund after you file). So be sure to not only file your taxes but pay them as well.
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