As the holidays end and the New Year begins, tax season looms large for all of us. Many people are more than happy to file their returns as soon as they receive all the tax documents, knowing a nice refund awaits that may be automatically deposited into their bank account. For others, filing taxes is a dreaded task, with the expectation of dipping into savings to pay the government. We hope this tax tips below will help alleviate some of the stress and keep or even add money to your bank account this tax season.
Keep in mind that the tax code that governs our returns is fairly complicated and changes yearly. If you have questions about a specific tax scenario, it is best to consult a qualified tax preparer or certified public accountant (CPA).
When are tax returns due?
Individual tax returns should be postmarked on or before April 15th. Extensions may be requested by filling out Form 4868. Filing an extension will give you six additional months until October 15 to file your tax return. However, filing for an extension does not extend the time you have in which to pay your tax liability. If you believe you will owe taxes, the best way to avoid additional interest and penalties is to pay the expected liability with Form 4868. If you live in a state that also requires an income tax return, you should be aware of the filing deadlines as all states have different rules and extension forms.
How to file your tax return?
In this electronic age, more and more individuals are filing both federal and state returns online due to the ease of access and the many software programs available to help. If you choose to file a paper return, you can print the form from the IRS website or you can get the forms from your local post office or library. If your income is below $60,000, there are multiple tax services that will allow you to file both your federal and state tax return for free. Visit www.irs.gov and click on “Free File” under Filing and Payment. Also note that some states offer free filing through their state government website.
To get started, the first item to review is your filing status and dependents. You should gather the following information for everyone in your household:
- Name and tax ID (either the individual’s social security number or Individual Taxpayer Identifier Number)
- The date of birth and the relationship of the individual to the taxpayer (son, daughter, parent, spouse)
- Taxpayer’s current address
Documents to collect
For reporting your income and claiming deductions, there are various tax documents to collect. Forms W-2, 1099, 1098 and 1095-A’s must be distributed or mailed to individuals on or before January 31. You should expect to receive these forms in late January or in the first 10 days of February. Items to include:
- W2 (for each job held during the tax year)
- 1099 (social security, contract work, state tax refund, rental income, school loans)
- 1098 (school loans, mortgage interest, property tax, school tuition)
- 1095-A (if you enrolled in a health plan through the Marketplace)
- Interest-Dividend-Capital Gain Statements (checking/savings, cd’s, broker statements, stocks, mutual funds)
- Charitable contributions (letters from the charitable organization, cancelled checks, donation receipts)
- A voided check (this will help set up direct deposit, so a refund can be deposited directly into your account)
- Last year’s tax return. If you have it, last year’s return is very helpful in ensuring your tax return for the current year is complete, as well as reporting items that have been carried forward that can reduce your tax liability for the current year (capital loss carryforward).
One of the most concerning matters to individuals is whether or not social security benefits are taxable. Social security benefits are often tax-free, however, if you have substantial income from other sources, such as wages, self-employment, interest and dividends or stock sales, you may find that a portion of your benefits are taxable. If a portion of your social security benefits are taxable, you may want to increase withholding from wages or through the social security administration.
Do you have health insurance?
One of the most recent changes to the 1040 is that you are now required to report whether or not you have health insurance for yourself as well your spouse and dependents listed on your tax return. This requirement is for everyone, whether you have commercial insurance through an employer, Medicare or Medicaid, or the Marketplace. If you purchase health insurance through the Marketplace, you will need Form 1095A to file with your tax return.
This form will be provided by your health insurance provider and should be mailed to you by the end of January. You will also be able to access the form online through your account that was set up for your health insurance. If you have health insurance through the Marketplace and received a premium credit, you will have to file a tax return in order to receive the premium tax credit for the next year. Additionally, if you have a significant life event, such as a birth or adoption, marriage or divorce, move to a new address or have a change in household income, don’t forget to contact the Marketplace to ensure that your coverage is adjusted accordingly.
Reducing tax liability
To assist in reducing your tax liability, it may benefit you to file Schedule A for Itemized Deductions. These deductions include payments for:
- Medical and dental expenses – The deduction for medical expenses is the amount in excess of 10% of your adjusted gross income (AGI). If you or your spouse is over 65 then the deduction is the amount in excess of 7.5% of your AGI. One of the most overlooked medical deductions is the cost of transportation to receive medical care. These costs include taxi or bus fares, tolls, parking fees and the actual cost of gasoline, or the standard mileage rate (currently 24 cents a mile).
- Taxes paid – Include the state and local income tax paid in the tax year, real estate tax, and property tax. If you live in a state without an income tax, you can deduct sales tax paid during the year but you must have the receipts to support your deduction.
- Mortgage interest paid (often reported on Form 1098).
- Charitable contributions – Contributions may be made in cash or property. If you give $250 or more to an organization, the organization is required to provide you with a statement detailing the donation. Don’t forget you can include out-of-pocket costs that are paid to do volunteer work as well as mileage driven for volunteer purposes.
There are other services available to assist in preparing your tax return. The IRS.gov website was recently updated to be more user-friendly. In addition, you can often find groups in the local community that will assist you in preparing and filing your return. If you have any difficulties in understanding what you need to file your taxes, we encourage you to review the IRS website or reach out to a local civic group for guidance. If you have a more complex tax situation, it may be necessary to contact a tax preparation service or a CPA.