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If you earned income this year, you'll have to file a tax return by April 15, 2021. But do you know how to prepare for tax season?
April may be several months away, but that doesn't mean you can't start your tax prep now. From gathering your personal finance documents to deciding whether to hire an accountant, there are several ways you can begin getting ready.
Here are five things you can do prior to tax season to help you prepare.
1. Check Your Withholding
If you work a traditional W-2 job, now is a good time to ensure that your employer is withholding the right amount of taxes from your paycheck.
At the beginning of every year, you fill out a W-4 form and provide information on your tax status (whether you're married or single), how many dependents you'll claim and other adjustments, such as additional non-employment income and deductions. However, things can change throughout the year, which may affect your tax obligations. For example, you may have married or divorced, had a baby or started freelancing on the side. If so, consider contacting your HR department and adjusting your withholding to either reduce or increase the amount of taxes withheld from your paycheck.
The IRS tax withholding estimator can help you figure out how much you need to withhold. If it's too late in the year to make these adjustments, use this information when you fill out a new W-4 in January.
2. Know Your Filing Status
The IRS has five main filing statuses: married filing jointly, married filing separately, single, head of household and qualifying widower with dependent child. Each status determines your tax filing requirements and what deductions and credits you qualify for.
It's important to weigh all these factors and make sure you understand the tax consequences before you choose your filing status. Again, life changes can happen throughout the year that affect your tax status, such as getting married or having a baby. And even if you are married, you and your spouse may decide that filing your taxes separately may be best — just keep in mind that doing so will reduce your standard deduction and may disqualify you from receiving other tax credits and deductions.
3. Organize Your Documents
Next, gather all your pertinent tax and personal finance documents. If you have a traditional 9-to-5 job, you can expect to receive your W-2 by early February at the latest, since the IRS requires employers to file W-2s by Jan. 31 every year. Your W-2 will include all the relevant income and tax withholding information you need to file your tax return, so store it in a safe place once you receive it.
If you're self-employed, you'll need to wait to receive 1099s from your clients before you can file your return (if you made at least $600 from each client during the year). While you wait, you can tabulate all your business expenses, including details you need to claim the home office deduction if you work from home. This can be easier if you've been doing proper record keeping throughout the year or if you use a bookkeeping service or software. If not, comb through your credit card statements and your business receipts and input all this information into a single spreadsheet.
Also, keep an eye out for other end-of-year tax documents for retirement contributions, student loan and mortgage interest and health savings accounts (HSA). The forms you need will vary depending on your tax situation, but once you receive all the necessary forms, scan and make copies of them or store them all in a single file so you can easily access everything when you're ready to file your tax return.
4. Maximize Your Deductions
If you're worried about owing taxes when you file your return, now is a good time to maximize all your allowable deductions.
One of the simplest ways to do this is by increasing your end-of-year retirement contributions. The IRS allows you to make retirement contributions and deduct these contributions — if you qualify — up until you file your return or the April 15 filing deadline, whichever comes first. You can also make HSA contributions until April 15.
5. Decide Whether You'll Hire an Accountant
Once you've done all this legwork and figured out how to prepare for tax season, consider whether you want to do your own taxes or hire a professional.
If your taxes are straightforward, you may be able to use tax filing software to handle this yourself. If you have a more complicated tax situation — such as a change in your filing status, owning multiple properties or being self-employed — it might be worth the additional expense to hire an accountant.
Tax law changes every year, and you may not fully understand what credits and deductions you qualify for. You can also make unintentional mistakes that leave you with a bigger tax bill than expected. If you can afford to hire an accountant, it may be worthwhile and actually save you time and money in the long run.
Getting Ready for Tax Season
Preparing to file taxes can be overwhelming, but you can make the process less stressful by staying organized throughout the year and following these action items. Store all your tax documents in one place, understand your tax filing status and seek the help of an accountant if you need it.
April 15 comes every year like clockwork, so taking all these steps now will help to ensure you're not scrambling come tax time.