As 2020 continues to fly by, April 15 – the deadline for filing income taxes – draws closer. Are you ready? If you fall into the basket of people who are annually stressed about compiling the tax information required for filing, perhaps it’s time to consider making taxes a year-round endeavor.
With some 47% of Americans not paying income taxes, there’s pressure on those who do to file in a timely fashion. Failing to file or paying too little in taxes can increase your audit risk. If your income is derived primarily from a 1099-Misc for freelance work, it’s vital to allocate a portion of your earnings to taxes or to pay. The IRS explains which wage earners have to pay estimated taxes.
Record-keeping makes filing taxes simple
If you use an accountant and have been with the same firm for a number of years, most will issue a tax planner. A tax planner is a guide to all the salient data used to compile your return. If you don’t have an accountant, downloads are available to help you through the process.
The tax planner should show the previous year’s (or multiple years’) data for reference. Typically, a taxpayer will provide handwritten notes to the tax preparer or use their own notes to input data into a tax preparation software program. With the latter, you can modify inputs and get instantaneous results showing potential refunds or the amount you owe.
One potential pitfall of using software is that you may be inclined to “reverse engineer” your return, in effect targeting the amount of refund you want. Proper diligence and documentation should be your object irrespective of how you or someone else prepares your returns.
To compile even the simplest return, you’ll need information about dependents. This includes Social Security numbers and wage information reported (and unreported) to the IRS related to W-2 and 1099 forms. Life events such as a move, sale of a home, divorce, large medical bills, tuition payments, retirement account distributions and other irregularities require you to provide documentation with your return.
It goes without saying that you should take a home interest deduction, although the government has scaled back the eligible amount in recent years. You should also be prepared to stay current and research some of the more esoteric deductions available to you. Examples include union dues, qualified childcare expenses and certain forms of bad debt write-offs. For deductions, it’s important to provide all relevant account information, including statements, agreements and any legal documentation available.
If you have multiple potential deductions, it may make sense for you to itemize them. Itemizing requires you to provide line-item detail for a variety of expenses. These can include depreciation of investment properties, uninsured medical expenses, large donations to charities and more. In general, if the total of your itemized deductions exceeds that of your standard deduction, you should undertake the extra effort to itemize.
At First Centennial Mortgage, we provide all types of home loans to help you find the home of your dreams. Being able to deduct mortgage interest is one of the many benefits of owning your home, and with tax season upon us, it pays to prepare.