The Best Tips for Tax Preparation – 2020 (Updated)Susan Letizia
Tax Preparation: Step-by-Step Guide
Taxes are a fact of life, and we are taught from an early age that we all have to pay our fair share; though we think the IRS is very strict about how much and how often we pay taxes. The act of paying taxes would be straightforward if the tax code were simple and easy to understand. Yet tax laws are anything but simple. It’s easy to understand why tax codes are so complex. The IRS has to calculate and collect taxes from individuals and businesses across the land, and even some individuals who are located in other countries. With people having different incomes and tax responsibilities, incredibly smart people got together and devised intricate algorithms to determine which taxes are owed.
Instead of reading through all the tax laws and attempting to comprehend them, we will do our best to distill the information to easy-to-understand tips you can follow on your own. Whether you are preparing taxes for yourself, your family, or your business, here are some tax prep strategies that can save you time, frustration, and money. This advice comes from the tax experts of SCL Tax Services, helping you in and near the Bronx, Yonkers, Mt. Vernon, Eastchester, and Westchester, New York.
What is Tax Preparation?
Tax preparation is the act of gathering together all the information and documents required to settle your tax debt for the calendar year. You may be required to pay state tax, but everyone has to pay federal tax. These amounts need to be calculated using resources provided by the IRS. Your income will be taken into account to determine which tax bracket you fall within. Depending on that, you are taxed on the gross amount that you earn. However, the tax code isn’t so cut and dry as to tax you on your income. You have a chance to offset some of your tax burden by claiming deductions and by taking advantage of tax credits.
Deductions can be things like mileage and some of your cell phone bill if you use your vehicle and phone for work. There is also a standard deduction that allows you to take a bulk one in case your itemized deductions don’t meet a certain threshold. This is the IRS’s attempt to help you keep more of the money you earn. Tax credits can save you on your burden by allowing you to deduct the amounts you owe for having a child or falling below a particular earning threshold. Only by studying the tax code can you know which deductions and credits are valid for your situation, but make sure you find them as you may end up paying more than you actually owe without them.
Tax preparation involves taking documents provided by the IRS and filling them out using your income, deductions, tax credits, and all other pertinent information. You may also have to gather together documents that are sent to by organizations such as your employer or the holder of your student loans to show how much you have received throughout the year or paid in interest on your student loans, just to give two examples. All of this information should be calculated and factually checked before it is submitted to the IRS.
In some cases, your documents will accompany payment if you owe on your taxes for the tax year. For most, their taxes are taken out of their paychecks, which means they will most likely receive a tax refund at the end of the year, but only if they overpaid.
As you can imagine, preparing your taxes can get complicated. If you miscalculate them in any way, you could end up under or overpaying. Underpay your taxes and, if you are found out, you could face late fees and penalties. An audit is when the IRS double-checks your work and goes through the tax documents you submitted line-by-line to determine if your figures are accurate. Many people fear the dreaded audit, which is why it is common practice to hand your taxes off to a certified tax professional.
Can You Do Your Taxes All on Your Own?
Yes, it is possible to do your taxes without assistance, but taxpayer beware. If you only have a single job and make a moderate income, you might be able to get away with using tax softwares like TurboTax or a similar program. These types of systems can work if you have a simple tax framework without a lot of complicated deductions and other factors. However, if you have multiple dependents, a couple jobs, income from other sources, such as rental income, you might be biting off more than you can chew by doing your taxes all on your own.
Tax laws change constantly, so you will want to be sure that you have accurate information when filing your taxes all on your own. It can be done, as long as you do your due diligence and read up on the related code regularly. Hiring a tax professional gives you access to an experienced professional who can use their eagle eyes to make sure your taxes are prepared accurately year after year. Still, many people do their own taxes every year without issue. The key is to follow the steps, don’t deviate, and check everything over twice or even three times before submitting.
How Do You Do Your Own Taxes?
Keep an Organization System
It is much easier to do your taxes if you have all the information readily available and know the tax planning strategies. The problem is that most people scramble at tax time and try to organize what would have been organized throughout the year. As early as you can, as in starting today, designate a place in your home or office to keep all your tax documents. This could be a filing cabinet or a folder inside a cabinet, even a box in the closet. Inside this folder or box, include any receipts from the bank regarding interest statements and those for charitable donations, and tax documents like W-2s and 1099s.
Keeping all these materials in a single location can keep you from having to dig around to find them when you want to file your taxes.
Keep Copies of Tax Returns
While you are keeping tax information handy, make sure you hang on to previous year tax returns. You will need that information to complete your tax return for the coming deadline. Your return could be physical or digital as long as you can reference it easily. Be mindful that if you use a tax preparation service, some of them charge for access to previous returns. You can potentially save money by printing your returns out.
Consider Factors That Contribute to Deductions and Tax Credits
As you go through the year, you may want to keep a ledger that lets you list your deductions and credits for easy reference come tax time. You might want to keep this checklist handy to help you determine what is usable and what is not.
- Have you contributed the maximum to your retirement accounts?
- Can you add an HSA (Health Savings Account)?
- Did you make any charitable donations?
- How much interest did you pay on your student loans?
- Do you have college expenses?
- Did your employer withhold enough tax from your paycheck? If you are self-employed, did you pay enough in estimated taxes?
Some tax deductions have a deadline. An example is deductions on charitable contributions, which you have until December 31 of the tax year to claim. Others you can claim on Tax Day, such as contributing to an IRA.
For tax credits, the IRS may change these from year to year. In 2019, you can get tax credits for having or adopting a child, being elderly or disabled, and when you have a low income or income outside of the United States. There are also medical tax credits, student tax credits, retirement, and credits for American citizens working abroad.
Having this information will make it easier to complete the necessary tax forms. Keep in mind that, depending on where you live, you may have to file a federal tax return and a state tax return.
Make Important Decisions
Preparing your taxes requires you to make some critical decisions that will impact your tax burden, like choosing your filing status. Will you be filing as a single taxpayer, as a married couple together with your spouse, or as married filing separately?
You will also want to review standard deductions versus itemized deductions so that you can choose the right option for you. The standard deduction amount for 2019 is $12,200 for individuals, $18,350 for heads of household, and $24,400 for filers who are married filing jointly.
The easiest way to do your taxes is with a tax program that can keep you up to date with new tax laws and codes. These programs also make filing your taxes much easier. You simply plug in the figures and the system does the rest.
Again, these programs are meant for those with simple tax preparation requirements. Make sure you e-file and select direct deposit to get any tax refunds you are owed quickly.
Tips for Preparing Your Taxes Manually
If you don’t want to use a program, you will need the necessary tax forms. You can collect them from your local library or post office, or you can get them off the IRS.gov website.
Read and Complete the Forms Carefully
Each tax form has specific instructions. Read through each box and insert the information in black ink. Start by filling in the spaces related to income from your job, assets, equity, and contractors. Only then move on to any deductions that can minimize your debt.
Once your forms are filled out, check for math errors, and then check again. If you are married, you might want to see if filing joint or separate returns might be more beneficial in the long run. If you are single and have a dependent living with you, ensure that you can qualify as head of household. You must claim any dependents who rely on you, such as elderly parents living in your home.
Determine How Much You Owe
The forms include a section that helps you calculate your taxes owed. You may be able to apply tax deductions and credits depending on how you filled out the other sections. If you owe money, you can pay your taxes by authorizing an electronic funds withdrawal from a bank account. Or you can pay by credit or debit card. You can also mail a check or money order made out to the US Treasury and using Form 1040-V.
Other ways to pay include a payment voucher or enrolling in the Electronic Federal Payment System or EFTPS, which is a secure government website that allows you to pay your taxes online or by phone.
Of course, you may find that you don’t owe anything at all, and that the IRS actually owes you money.
Why Does the IRS Give Refunds?
You will get a tax refund if you pay more in taxes to your state government or the federal government. The usual ways to overpay is through payroll withholding, whereby your employer takes money out of your paycheck each month to cover your tax debt. If the amounts withheld go over the amounts you find that you owe on your tax forms, you will get a nice check in the mail refunding you for the overage.
Keep in mind that there are circumstances where your refund can be redirected to pay off a debt, such as if you are behind in child support or you have a government lien against you.
How to Get an IRS Refund
Many people love that check from the IRS and attempt to maximize the refunds they receive each year. According to statistics by the IRS, nearly 75% of taxpayers received a tax refund for the previous year, and the average direct-deposited refund was more than $3,000.
You can ensure that your check from the government is a big one by itemizing your deductions instead of taking the standard deduction and by claiming a relative you have been supporting. Try to take any above-the-line deductions, such as if you are a teacher and paid for your students’ school supplies, and don’t forget about any tax credits you may qualify for. Finally, contribute as much as you possibly can to your retirement to get a significant refund and other important benefits.
What is a certified Tax Preparer?
A certified tax preparer is one who has the training and experience to file your taxes correctly every year. These professionals follow annual changes to the tax code as they are released. The preparer keeps your account organized all year round. When it comes to preparing your taxes, a certified tax professional takes his or her time to ensure everything is factual and correct. The IRS estimates that taxes take around 15 to 16 hours to complete. A certified pro will put in the necessary time to sort and calculate the taxes you owe.
Unlike the simple tax programs on the market for consumers, certified tax preparers use expensive and sophisticated tax software that is unavailable to consumers. These programs can cost upwards of $6,000 or more and can scan all your records in seconds. They can find patterns and deductions and tend to eliminate a lot of common human errors.
Working with a certified tax preparer isn’t just about having correct tax returns. The professional can also assist you if you ever face an inquiry or audit from the IRS. Many find that having a trained tax expert by your side during these stressful situations is well-worth the fees for the tax professional’s services.
Qualities of the Best Tax Preparers
The best tax preparers are problem solvers and have excellent attention-to-detail, but they may also be personable. You want a tax expert who has cultivated his or her communication skills and is confident about his or her knowledge of the updated tax code.
When searching for a tax preparer, take advantage of the free consultations many of these experts offer and ask plenty of questions. The answers you get and the confidence level when answering those questions can usually let you know if you will be able to work with this individual in the future.
Finding the ideal tax preparer may take time but searching for a good one is worth the effort if you can save money, time, and frustration when filing your taxes.
IRS Tips for Small Business Tax Preparation
Filing your small business taxes will be much easier if you can keep to the same organizing habits as when filing your personal taxes.
Gather together any gross receives from sales or services you provided throughout the year. Include any sales records, returns, and allowances, and interest from business checking and savings accounts.
Cost of Goods Sold
If you sell actual goods, your beginning inventory total dollar amount and inventory purchases should be listed, along with your ending inventory total dollar amount. Include any items removed for personal purposes, as well as your materials and supplies.
Keep a list of all your advertising, phones, computer, and internet expenses that you accrue throughout the year on behalf of your small business. Include transportation and travel expenses, commissions paid to subcontractors, depreciation, business insurance, interest expenses, office supplies, rent, and wages paid to employees.
If you have a home office, you should calculate the square footage of your office space compared to the square footage of the rest of your home. Include the hours you spend and how much rent or mortgage you pay each month. Make sure you don’t forget renters’ or homeowners’ insurance, utilities, and the cost of the home, as well as any improvements that have been made.
Other expenses can include repairs, estimated tax payments made, and other business-related expenses like health insurance, premiums paid to cover the sole-proprietor and family, and premiums that were paid on behalf of partners and S corporation shareholders.
Tax Preparation Accounting Advice for New Business Owners
Separate Business and Personal Expenses
Blurring the lines between personal and business transactions can make taxes a complicated affair, especially if you are a sole proprietor. Make sure the IRS sees your business as exactly that. Keep a personal account and business account and use credit cards in your business name. Be sure to prepare regular accounting statements, which include an income statement, balance sheet, and cash flow statement. This ensures the IRS does not see your business as a hobby as opposed to a profit-generating venture.
Maintain an Organized System
Keep documents of all entertainment, travel, meal, home office, charity, health insurance, and start-up expenses. Doing so will make it easier to list your deductions when it comes time to file your taxes.
Review Accounts Receivable and Inventory
Before you close your books at the end of the year, review any receivable accounts for collectability. If you determine that any cannot be collected upon, those accounts should be written off. Performing this action will reduce your revenue and your tax liability. The same goes for your inventory. Obsolete or unusable inventory should be written down to scrap value. If you have raw, in process, or finished inventory, you will want to review its value for marketability.
Keep Documentation for Equipment Purchases
You may be able to deduct your equipment costs, leasehold improvements, retail improvements, and restaurant property. Make sure you track asset depreciation, as well.
Check Eligible Tax Credits
Tax deductions may be possible for research and development, promoting energy-efficiency, having a significant number of disabled employees, hiring veterans, and for covering employee health care premiums under the Affordable Care Act (ACA).
Double Check Tax Preparation
Before you file your taxes, ensure that all employees have updated their W-4 information or 1099 for contract workers. Make sure that expense statements, invoices, and receipts are properly collected, and encourage employees to keep expense diaries for automobiles, entertainment, and travel.
Tax Preparation for Self-Employed Businesses
Tax situations vary from one type of business structure to another. When you’re running a self-employed business, you should understand your tax situation clearly and prepare yourself to file the taxes effectively. If you do some advance planning, you can take advantage of several tax deductions.
As a self-employed worker, staying on top of your paperwork is crucial. Whether you’re working for yourself already or planning to do it soon, you should start gathering and reporting all sources of income to avoid facing tax problems.
Whether or not you receive 1099 forms, you should keep a good track of all your income as well as expenses. Have you bought a computer? Do you travel to meet and discuss business projects with clients? Not just this, but you should also keep a record of expenses such as printer ink. While employees have limited tax deductions, self-employed businesses can take considerable advantage of tax deductions. You just need to gather all the paperwork properly.
Tax Payment: Annually or Quarterly?
How will you pay the taxes? Make this decision on the basis of the estimated tax amount that you owe to the IRS. After you’ve done the calculations, try to pay the taxes on a quarterly basis.
There are two key benefits of paying your self-employment tax on a quarterly basis. First, this enables you to avoid penalties or interest. Second, this will prevent you from the temptation of spending the tax money that you have designated for your taxes. This is also important to understand that this tax amount is not exactly the amount that you’ll need to pay, because it is just a rough calculation. You may be required to actually pay more than the estimated amount.
Separate Tax Amount
Don’t let your tax bill become a last-minute surprise. A good idea to avoid this issue is to create a separate account where you’ll keep the money you think you owe to the IRS as self-employment business tax.
Many self-employment businesses have to borrow money from their savings account to pay the taxes. This happens because they don’t have a separate account where tax money can be kept. So, create a separate account and send 20-25% of your income to that account. In this way, you’ll have the money ahead of time.
Self-employed businesses can take advantage of many tax deductions and bring down their tax bill as a result; so, it is important to know what kind of tax deductions are there for you and how you’ll be eligible.
Most self-employed businesses have a work space. If you work from a home office, you can qualify for getting deductions on utility bills, internet bills, telephone bills, insurance payments, etc. To find out whether you are eligible for this deduction, you’ll need to complete IRS Form 8829.
Get Affordable Tax Preparation Advice & Help
Whether you are faced with filing your taxes or those of your small business, SCL Tax Services in the Bronx, New York, wants to help you manage your tax liability by providing you with the best tax services you can imagine. Each year, new tax codes are written, and old ones changed, making it difficult to know how to calculate your taxes accurately.
As certified tax preparers, we give you the personalized dedication you need to find all deductions and credits to minimize your taxes each year. We can stand beside you in the face of inquiries or audits from the IRS and stand behind our work when filing your taxes.
Call now for a free consultation (15 minutes) and get the tax preparation help you need throughout the Bronx, Mt. Vernon, Yonkers, Eastchester and Westchester, New York, and anywhere else around the country.