How To Make Your Tax Season Less Taxing

Tax season is here! It’s the perfect time to get everything in order so you can worry less about taxes and spend more time with loved ones this month. 

Step 1: Learn the terms 

Most people don’t know what words like “exemption” and “deduction” mean, but they are important for you to understand when you’re filing. Here’s a quick rundown of the important terms to know: 

• Filing status is your relationship status that determines how you file and what (if any) tax breaks you’re entitled to. The most common options are single, married – filing jointly, married – filing separately, or head of household. 
• Exemption is an amount the IRS lets you subtract from your income to reflect the people who count on your income. This can include yourself, your spouse, and your dependents. 
• A capital gain occurs when you sell an asset (stocks/bonds, real estate, personal property) for more than what you originally paid for it. 
• A capital gain is a type of earning that counts towards your gross income. This can be applied if you purchase and restore an old car and sell it for more than its original price or if you bought stock and sold it for more than when you purchased it. 

• Gross income is all the money you make in a year (before deduction and taxes). This includes salary, wages, tips, capital gains, interest, and dividends. 
• Adjusted gross income, also called AGI, starts with your gross income and then is reduced by certain allowable deductions such as 402(k) and health savings account contributions, student loan interest and educator expenses. Because of these adjustments, your AGI will never be more than your gross income. It’s the first step in finding your final federal income tax bill. 
• Deductions are the expenses the IRS allows you to subtract from your AGI to calculate your taxable income. Examples include certain taxes, charitable contributions, home mortgage interest and medical/dental expenses. See the full list of deductions here. 
• A tax exemption is the right to exclude all or some income from taxation. You can check an organization’s eligibility to receive tax-deductible charitable contributions and search for information about an organization’s tax-exempt status and filings here. 
• Withholding is the portion of your paycheck that your employer sends to the government each pay period as partial payment of your income tax. The amount is based on the number of allowances you claim on your W-4. 

• Tax credits can reduce the amount of tax you owe or increase your tax refund, and some credits may give you a refund even if you don’t owe any tax. Examples include earned income tax credit, American Opportunity tax credit, Lifetime Learning credit, child and dependent care credit, and savers tax credit. See the full list of credits here. 
• Taxable income is your overall income reduced by adjustments, deductions, and exemptions. It’s the final amount of income you use to calculate how much you owe in taxes. 

  

Step 2: Gather paperwork 

Now it’s time to gather all the paperwork and forms you need to have before you sit down to file. Most employers don’t send W-2s until late January so make a note of what you have and what you’re missing so you’re ready come filing day! 

Source: H&R Block Tax Prep Checklist 

Personal Information 

• Your social security number or tax ID number 
• Your spouse’s full name, social security number or tax ID number, and date of birth 
• Information about your stimulus payment — also known as an economic impact payment (EIP) — if applicable — you may have IRS Notice 1444 or other records showing your EIP amount 
• Identity Protection PIN, if one has been issued to you, your spouse, or your dependent by the IRS 
• Routing and account numbers to receive your refund by direct deposit or pay your balance due if you choose 

 

Dependent’s Information 

• Parents and caregivers should gather this information as they review what they need to file their taxes. 
• Dates of birth and social security numbers or tax ID numbers 
• Childcare records (including the provider’s tax ID number) if applicable 
• Income of dependents and of other adults in your home 
• Form 8332 showing that the child’s custodial parent is releasing their right to claim a child to you, the noncustodial parent (if applicable)   

 

Sources of Income 

• Employed: Forms W-2 
• Unemployed: Unemployment (1099-G) 
• Self-Employed 
  • Forms 1099, Schedules K-1, income records to verify amounts not reported on 1099-MISC or new 1099-NEC 
  • Records of all expenses — check registers or credit card statements, and receipts 
  • Business-use asset information (cost, date placed in service, etc.) for depreciation 
  • Office in home information, if applicable 
  • Record of estimated tax payments made (Form 1040–ES) 
• Rental Income 
  • Records of income and expenses 
  • Rental asset information (cost, date placed in service, etc.) for depreciation 
  • Record of estimated tax payments made (Form 1040–ES) 
• Retirement Income 
  • Pension/IRA/annuity income (1099-R) 
  • Traditional IRA basis (i.e., amounts you contributed to the IRA that were already taxed) 
  • Social security/RRB income (SSA-1099, RRB-1099) 
• Savings & Investments or Dividends 
  • Interest, dividend income (1099-INT, 1099-OID, 1099-DIV) 
  • Income from sales of stock or other property (1099-B, 1099-S) 
  • Dates of acquisition and records of your cost or other basis in property you sold (if basis is not reported on 1099-B) 
  • Health Savings Account and long-term care reimbursements (1099-SA or 1099-LTC) 
  • Expenses related to your investments 
  • Record of estimated tax payments made (Form 1040–ES) 
  • Transactions involving cryptocurrency (Virtual currency) 
• Other Income & Losses 
  • Gambling income (W-2G or records showing income, as well as expense records) 
  • Jury duty records 
  • Hobby income and expenses 
  • Prizes and awards 
  • Trust income 
  • Royalty Income 1099–MISC 
  • Any other 1099s received 
  • Record of alimony paid/received with ex-spouse’s name and SSN 
  • State tax refund 

  

Step 3: File before Tax Day 

There are a few ways you can file taxes and one is the IRS Free File Program. This is only applicable for taxpayers whose AGI is $72,000 or less. It’s easy, free, but only applies for your federal return (not state). 

Another way is to work with a tax preparation service. This method is great because they can work with you to make sure you’re maximizing your tax return. This would be a solid option for a business owner, someone who owns a lot of assets, or someone who wants to make sure they are taking advantage of all the deductions and credits they are entitled to. 

The last way you can file taxes is to use a do-it-yourself tool like TurboTax or H & R Block’s tax software. These tools walk you through one item at a time and can make it relatively easy to load your documents and complete your state and federal returns. 

  

Step 4: What to do when you get your tax refund 

You’ve filed your taxes and have an idea of how much money you’re getting back — now what? Well, here are a few ideas for how to use your refund dollars: 

• Get caught up on bills 
• Add to your emergency fund 
• Save for retirement 
• Set it aside for a future vacation 
• Invest it 

Get more ideas here. 

 

On the flip side, if you happen to owe Uncle Sam money, don’t panic! We can help you sort through your options when it comes to paying your taxes, so come talk to us as soon as possible.  

That’s it! You now have all the tools you need to make your tax season less taxing so you can spend more time with loved ones this month. Happy filing! 

Farmers & Merchants Bank content is intended to be used for informational purposes only. Please do your own research to determine the best way to file.