Getting Ready for Tax Season: How to Prepare & File Your Taxes
Another tax period has gone by and now it’s time to start getting ready for tax season! Use our tax preparation checklist to prepare and file your taxes this year, whether you’re filing for yourself or for your business.
When Does Tax Season Start and End?
Tax season typically begins at the end of January and runs through April 15. In 2019, individuals can file taxes as early as January 28. However, businesses, financial institutions, and investment firms have until January 31 to mail out any tax documents to employees and clients.
Steps for Getting Ready for Tax Season
One of the most important parts of preparing to file your taxes is just getting your resources and information together. Use the tax preparation checklist below to get started. Once completed, filing your tax return for yourself or your business should be simple!
1. Gather Necessary Documents
To file your tax return, you’ll need the following documents and information:
- General information such as your name, address, Social Security number, and phone number
- Your employer’s name, address, and phone number
- The date you started working for your employer (and an end date if you’ve left a company)
- Estimated paid wages and federal income tax that’s been withheld in 2018
- Bank, 401K, and IRA forms for any interest you’ve earned
- All information on dependents (dates of birth, Social Security numbers, childcare records, income of older children, etc.)
- Any additional information for write-offs (home ownership paperwork, charitable donation records, health insurance information, etc.)
2. Get a Full Understanding of Write-Offs
The term “write-off” is used interchangeably with “deduction,” which can be defined as a monetary amount that reduces your taxable income. When filing taxes, you can choose between a standard, fixed deduction amount or an itemized deduction that allows you to combine expenses that total more than a standard deduction. While individual taxpayers often choose a standard, fixed deduction, businesses can opt for an itemized deduction to maximize their tax savings.
Common Personal Deductions/Write-Offs Include:
- Health savings account contributions
- Certain retirement plan contributions
- Student loan interest
- Charitable gifts and donations
- State and local taxes
Common Business Deductions/Write-Offs Include:
- Business automotive expenses
- Business travel expenses
- Customer gifts
- Continued education for licensing and skill improvement
- Mortgage interprets for business property
What’s the Difference Between a Tax Deduction & Tax Credit?
Both deductions and credits help to lower the amount of tax you owe. The difference is that deductions subtract from your taxes while credits provide you with money to go toward paying back your owed taxes.
Let’s use an example to get a full grasp on the difference —
Assume that a taxpayer has an income of $100,000 and is unmarried. If they’re filing taxes in 2019 for the 2018 year, they would be placed in the 24% bracket. According to NerdWallet’s federal income tax bracket table, they would owe $14,089.50 plus 24% of their income amount over $82,500, which equates to $4,200. Adding that up, the individual would roughly owe $18,289.50 for their 2018 taxes.
Now, with a $20,000 deduction, the individual’s income would decrease to $80,000 and move them into the 22% tax bracket. They would only owe $13,539 in taxes.
If the individual had a 10% tax credit instead of a $20,000 deduction, the individual would still be in the 24% tax bracket and still owe $18,289.50. However, they’d be given a $10,000 credit, bringing the end payment down to $8,289.50.
Common Personal Credits Include:
- Residential energy credit for solar energy systems
- Credits for making contributions into retirement accounts
- Child tax credit for dependents
- Credit for child adoption costs and fees
- Credit for child or dependent day care
Common Business Credits Include:
- Credit for owning plug-in electric and electric business vehicles
- Family Leave Act credit for offering paid leave to employees
- Energy credit for environmentally-friendly business improvements
- Credit for making your physical location easily accessible by disabled patrons
- Credit for hiring new employees that are veterans, ex-felons, food stamp recipients, etc.
3. Meet With a Tax Professional to File Your Taxes
As a final step for getting ready for tax season, be sure to meet with a tax professional. If you’re filing your individual taxes, you’ll want to speak with your tax specialist. If you’re a business owner, take time to meet with your CPA. They’ll fill out the correct documents for you, your family, or your business and ensure nothing is overlooked. They’ll also take care of submitting your tax forms for you, relieving you of the burden of doing it yourself!
What To Do After You’ve Filed Your Taxes
The hard part is over! Now there are just a few things you’ll need to do to round out this year’s tax duties.
Track Your Refund
After filing, you should receive your tax refund within 21 days. However, that’s not always the case and it could come earlier or become delayed. To help with this, the IRS has created a “Where’s My Refund?” feature that provides updates on individual returns.
To use the “Where’s My Refund?” feature, you simply enter your Social Security number, your filing status, and your exact refund amount. You’ll receive updates in as little as 24 hours after e-filing or up to four weeks after you’ve mailed your return. Any updates on your refund are made daily and usually occur overnight.
Once you’ve received your refund, make sure that all the information on it is correct. If the refund needs to be fixed, you can file a Form 1040-X to correct it.
Get Insights From Your Tax Return
If there are no corrections that need to be made on your tax return, it’s wise to become knowledgable about what your tax return truly indicates.
The main purpose of a tax return is to report the amount of income earned in a year, applicable deductions and credits, and the amount of tax liability. It should include the following two most basic financial statements:
- Balance Sheet — Shows the assets and liabilities of a reporting entity with the difference being the net worth (or equity) of that entity.
- Income Statement — Shows the activity for the most recent period or year from an income and expense standpoint.
For many entities, an income statement is very valuable because it shows a picture of operations for a period of time. When businesses analyze their results, the first thing they generally look at is their income statement. They want to see how much revenue they earned in a period and how much was spent, leading to the bottom line of net income for the period. Based on how companies view those results, they will make decisions for the future to improve or maintain financial outcomes.
On the other hand, individual taxpayers may look at their personal income statement from a budgetary standpoint. They are often more focused on their personal balance sheet that indicates what they own and what they owe. An individual’s balance sheet gives a much clearer picture of one’s financial health.
