Research shows that 139,364,000 U.S. taxpayers have filed individual income tax returns with the IRS for 2018.
Taxes may feel like an inevitable part of American working life. But actually preparing them can cause all kinds of headaches and anxiety!
Failing to file taxes or making an error of some kind can also result in penalties. In most cases, these penalties involve additional fees and interest.
In others, the IRS may perform an audit or even press criminal charges.
Luckily, it is possible to prepare your taxes properly to keep the IRS from knocking at your front door. In this post, we discuss how to prepare taxes the right way, every time.
Keep reading for insight!
1. Know Your Options
There are many tax preparation options available to American consumers. The avenue you choose will depend on your own personal preference and filing needs.
E-Filing
In this digital age, it’s possible to file your taxes entirely online! Taxpayers can take advantage of various e-filing platforms like TurboTax or H&R Block to file their state and federal tax returns.
E-filing software typically guides taxpayers through all components of their tax returns. When you e-file, you will still have to input relevant financial data, such as W-2 details. Most software programs check for eligible tax deductions automatically.
When you e-file, you’ll be able to submit returns digitally to the IRS rather than having to mail them–in most cases! Taxpayers can also opt to receive direct deposits of refunds from the IRS into their bank accounts.
E-filing software claims to make the tax preparation process easy and fast. However, it’s not for everyone, as taxpayers still have to input the right details. Most e-filing tax software also does cost money, depending on the program.
Paper Filing through the IRS
Taxpayers can submit paper tax returns to the IRS. This is the most intensive of all filing options, as taxpayers must individually crunch all of those numbers and physically mail state and federal returns.
You can download all relevant tax forms from the IRS’s website, fill these out by hand, and slide them into a mailbox with payment (if need be). Taxpayers still receive their refunds when paper filing.
Be careful of this option, however. Paper returns have an error rate of approximately 21%! Errors can compel tax audits, where the IRS conducts an investigation of your return details. These can result in penalties and fees.
Paper filing is thus better suited for people who have a knack for numbers and aren’t daunted by tax return language.
Hiring a CPA or Tax Preparation Service
Taxpayers can dodge the number-crunching of tax filing by hiring a CPA or tax preparation service to do it for them.
When choosing this option, taxpayers entrust all relevant financial data to a licensed professional.
That professional then performs the appropriate calculations to ensure that all returns are error-free. Tax preparation services will also ensure that taxpayers maximize their deductions and tax credits.
This is probably the easiest and most effective of the filing options out there. Taxpayers will generally have to pay for these services. However, they can guarantee a return free of errors!
Working with an accountant can also be extra helpful for small business owners, freelancers, and investors. These individuals are likely to have more specific, complex filing situations.
2. Gather Your Documents
Regardless of what tax preparation option you choose, it’s essential to get all of the right documents in order.
What documents do you need to assemble to prepare taxes? In general, you’ll need documents related to the income you currently receive.
Working employees will receive a W-2 reporting form from an employer. Independent contractors will receive a 1099 form detailing income accrued.
There are other sources of income taxpayers should report, including business profit, bank account interest, gambling winnings, alimony, child support, and employer bonuses. (This is not the full list!)
You will also need documents related to investments, homeownership, health insurance coverage, retirement accounts, and medical expenses. If you are a business owner of any kind, gather relevant receipts for business expenses.
3. Know Your Filing Status
There are five tax filing statuses: single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child.
Make sure you know yours before you file! CPAs and e-filing software can both help you identify your filing status if you are unsure.
4. Choose the Itemized or Standard Deduction
Both itemized and standardized deductions are designed to lower your taxable income. But which one should you choose?
Standard deductions reduce your income by a fixed amount ($12,000 for 2018). Itemized deductions consist of a list of eligible expenses.
Which one you choose depends on which one is larger! If you only have a handful of eligible expenses, then the standard deduction is ideal for you (and vice versa).
5. File State and Federal Taxes and File Early
Don’t forget that you will have to file both state and federal taxes. Most taxpayers thus submit at least one state return in addition to a federal return.
This is vital, as individual states have different tax policies and credits!
We also always recommend that taxpayers take their time when preparing taxes. Doing so can ensure an error-free return.
Plus, a lot of employers may not send out tax documents until the end of January. It’s important to have all of your documents in hand before filing. The deadline for filing is generally the middle of April every year.
If you’re down to the wire for any reason, don’t worry! You can file for an extension.
How Much Does it Cost to Prepare Taxes?
You may have to pay for your tax preparation. Of course, how much you pay will depend upon the option you choose!
If you opt to file your taxes by paper return, and to do so on your own, you’ll likely pay $0. Keep in mind, though, that this option has a high error rate.
Some e-filing software is free, depending on the platform and the window in which you submit your returns. Most e-filing programs, especially specialized ones catering to certain taxpayers, have fixed fees. These can range from $60 – $200.
Final Thoughts: How to Prepare Taxes
Now you know what you need to do to prepare taxes hassle-free. What comes next?
We can help you with every aspect of the tax preparation process. Keep the IRS at bay by scheduling your first free consultation now!
