When tax season approaches, most people try to reduce their tax liability. But before you start thinking about deductions, it’s time to organize your documents.
Is a Tax Preparer Needed?
Whether to hire a tax preparer depends on several factors. If you have no deductions and a W-2, you can do your taxes with some simple tax software.If you choose to do your taxes, you’ll want to look into tax software. It’s important to compare features and prices when choosing software. Is there support if you have a question? Is it easy for you to use?
- TaxAct
- H&R Block
- Turbotax
- TaxSlayer
When to Hire a Tax Professional
On the other hand, there are several reasons you may want to turn to a tax professional. For example, if you were audited in previous years, worked in multiple states, sold investments, own a business, recently married, etc., you may want to talk to a tax preparer.Once you decide to have a professional prepare your tax returns, there’s another decision to make. Should you go with a certified public accountant (CPA) or a tax preparer?
A tax preparer has training in accounting and can handle most filing situations. A CPA is a licensed and certified professional who can offer expert advice and audit assistance.
Organize All Documents and Receipts
You‘ll need to gather several documents. If you’re employed, start with the W-2 form, also known as the Wage and Tax Statement. You’ll receive it from your employer at the end of the year.If you are a freelancer or contractor, you must provide a 1099 Form. You'll receive that from your clients.
Those with an IRA need to submit Form 5498. It is used for reporting your contributions.
Your tax preparer will be able to help you. But as you receive the documents in the mail from various entities, ensure they go in one place so you'll have them handy.
Know Tax Brackets
The United States has a progressive tax system. The result is that people with higher incomes are subjected to higher rates than people with lower incomes.For example, if you’re a single filer earning $32,000 in taxable income that would put you in the 12 percent tax bracket. But you don’t pay 12 percent for the entire $32,000. You would pay 10 percent on the first $10,275 and 12 percent on the rest.
Apply Deductions and Tax Credits
Tax credits and deductions can reduce your tax liability, but it’s important to know the difference between the two.Tax credits give you a dollar-for-dollar reduction in your tax liability. They don’t reduce your taxable income; the credit is deducted from your final amount owed. They can increase your tax refund. For example, if you have a $2,000 child tax credit, your final tax bill will be lowered by $2,000.
- child tax credit—up to $2,000 per child
- child and dependent care credit—up to $3,000 for one dependent or $6,000 for two or more
- American opportunity tax credit—up to $2,500 for tuition, books, equipment, and school fees
- earned income tax credit—a refundable tax break for low-income taxpayers
- adoption credit—up to $7,430
- lifetime learning credit—up to $2,000
- etc.
- charitable donations—up to 60 percent of AGI
- medical expense deductions—unreimbursed expenses of more than 7.5 percent of AGI
- mortgage interest deductions
- IRA contributions deductions—$22,500 and $30,00 for 50 or older
- health savings account contributions—up to $3,850 and $7,750 for families
- home office deductions
- etc.
Tax-Filing Deadlines
It’s imperative that you file your taxes on time. This will save you money.The IRS will levy a Failure to File penalty. It equals 5 percent of your unpaid tax liability for each month you fail to file. The fine can max out at 25 percent.
If you fail to pay taxes by the deadline, your penalty is 5 percent per month of the taxes owed, up to 25 percent.
Note that if you fail to file or pay, you will be paying two fines: one for the failure to file and one for the non-payment of taxes.
Save Time and Money With Preparation
The earlier you start working on taxes, the more opportunities you have to compile receipts and forms. You may find additional deductions if you are organized.Most accountants charge by the hour. Handing your CPA a box of receipts will only run up your accounting bill. Since they'll have to take the time to organize them.
