It's Not Fun, but It Has to be Done Benjamin Franklin wrote a 1789 letter that states, “But in this world nothing can be said to be certain, except death and taxes.” Even at the United States’ early beginnings, federal taxes were a necessary evil to fund various public projects and administrative costs. Today, federal taxes serve much of the same purpose. While virtually no one likes to prepare and file their taxes, it is a necessity if you want to avoid fines and further hassle. It is no secret that preparing and filing your taxes is notoriously complicated. Many people lament that it should not be so difficult to pay the government. However, some of the complications allow people to save money if they discover specific tax benefits. Knowing how to file your own taxes may be a good option if your tax situation is relatively straightforward, or if you are willing to learn the process. Why Do You Need to File Your Taxes Every Year? The short answer is that federal law requires that most individuals file taxes annually. Income taxes are assessed every year based on your income earned during that period. You then pay a percentage of that income to the government, less any deductions, adjustments, or credits that you qualify to receive. If you do not file (and pay) your taxes, then you may be assessed penalties and interest. The Internal Revenue Service (IRS) can even go as far as garnishing your wages and repossessing your property if you do not file and pay as required. The Benefits of Filing Your Own Taxes If you are one of the 43% of Americans that are doing your own taxes, you are certainly not alone. Roughly 53 million people prepared and filed their own taxes in 2018. There are many benefits to filing your own taxes, including: Saving money: Hiring a tax professional is expensive, and many people can prepare and file their returns on their own, completely free of charge. Control: Some people like knowing the exact information that is included in their return and being able to control the data, and for some, knowing precisely how the numbers work out, is comforting. Gain helpful information: When you prepare your taxes, you can see what items saved you money this year or which issues you should address so you can save money next year. While filing your own taxes is complicated, it can be beneficial under the right circumstances. There are several programs online that walk you through the process to help ensure you are taking advantage of all of your available deductions and credits. The Drawbacks of Filing Your Own Taxes In addition to the benefits, there are also some disadvantages to filing your own taxes. These include: Time and effort: Preparing and filing your taxes takes time and work You have to sift through financial information and deal with concepts that you may not understand well. The process can be frustrating and take a considerable amount of time. Error risk: If you do not completely understand how your taxes work, you run the risk of making a mistake because of misconceptions. If that happens, it could lead to underpayment and audits down the road. Questions: Even if you use a tax preparation software, you may still have questions that will remain unanswered unless you do significant research or reach out to a tax professional. For some people, the risk of having a substantial error that triggers the IRS’s attention is enough to scare them away from preparing their own taxes. Preparing for Filing Your Taxes When you begin work on your taxes, you should have information gathered throughout the year. Some of the most common items that you will need include: Social Security numbers for you, your spouse, and any dependents Information about wages, such as W2s or 1099s Investment income information Documents that represent any other source of income Information regarding adjustments to income, such as student loan interest paid, IRA contributions, and health savings account contributions, just to name a few Information regarding potential credits, including, for example, child care expenses, education expenses, or retirement savings contributions Data about any tax payments that you may have made throughout the year Keeping good records will help make tax preparation easier at the beginning of the year. [youmaylike] The Basics About What You Can Claim When Filing You must pay income taxes on all your income earned throughout the year. However, that income is reduced by a few things. The further you can reduce your taxable income, the less you tax you will pay. There are three general categories of tax reduction methods: Standard or Itemized Deductions Everyone can claim either the standard or itemized deductions. Standard deductions are a set amount that is based on your filing status. Itemized deductions are based on actual expenses that you incurred throughout the year. You can choose to use the higher deduction. The higher the deduction, the less tax you will have to pay on your income because your income decreases on paper. Itemized deductions include things like medical expenses, state and local tax payments, and home mortgage interest deductions. Itemized deductions will only decrease your income by a certain percentage, or up to a specific point. Adjustments Some adjustments to your income may also be available. These include things like paying student loan interest or alimony. Adjustments are more valuable compared to deductions because they decrease your income dollar for dollar. Credits A credit decreases your taxable income as well. Some credits are refundable while others are not. For example, you get a child tax credit simply for having children that qualify for that credit, but that credit will not be paid out to you if you do not have any tax obligations. On the other hand, the Earned Income Credit, which is available for low-income filers, will be refunded to you even if you do not owe any taxes. There are a wide variety of deductions and credits available. Take a look at the federal forms and related schedules to determine whether you might qualify for any of these. How to File Your Own Taxes If You Live Overseas If you earned income in the United States as a U.S. citizen or resident alien, you likely need to pay taxes on that income. This is true even if you live overseas. You can still choose to e-file or mail your tax return to the IRS once you have it prepared, just as if you physically lived in the United States. In some cases, you will be taxed on the income that you earned throughout the world. However, you may be able to deduct a portion or all of the revenue that was not made in the United States in some circumstances. Filing Online The IRS offers an online filing option that is free for individuals that have an adjusted gross income below a specific threshold. Generally, your income must be below $66,000 to qualify for this service. You can also file online by using a commercial tax preparation software. Examples of this type of software include: H&R Block TurboTax TaxCut TaxSlayer There are many programs available that will file your taxes for you, often for a fee. Knowing how to file your own taxes can be a great way to save money, but it can be tricky as well. If you want to file your taxes yourself, be sure to read the form instructions thoroughly and get familiar with various tax saving opportunities before you begin preparing your return.
How To Do Your Own Taxes
If you work for an employer, are self-employed, or receive taxable money from any source, you may be legally required to file your taxes with the IRS each year. More than 152 million Americans filed taxes in 2020. 102 million of those filers received a tax refund because they overpaid their federal taxes. The average refund was $2,741.
If you don't file your taxes, you may be in violation of federal laws. You also won't get a refund unless you file, even if you overpaid. Do you want to know how to do your own taxes? Then keep reading.
How to Start Filing Your Own Taxes
No matter which method you choose to file your own taxes, you'll need to gather some paperwork. Make sure you have copies of the following:
- Last years tax returns
- Income documents that may arrive in the mail or electronically, including: W-2 forms from employers, form 1099-NEC from freelance or contract clients, forms 1099-DIV or 1099-INT from banks or institutions that paid you interest or dividends, and/or form 1098-T from education-related entities.
- Receipts for charitable donations
- Receipts for non-reimbursable work-related expenses
- Medical bills
- Social Security numbers and birth dates for joint-filers and anyone you'll claim as a dependent
It's smart to keep all of your tax-related documents in one place. You'll receive income-related documentation in January and February each year.
You have several options when it comes to filing your taxes.
IRS Free File
If you want to file your taxes using IRS Free File, you'll need last year's adjusted gross income (AGI) from your previous tax return to verify your identity. Many tax preparation software companies offer IRS Free File.
Tax Preparation Software
Tax software allows you to do your own taxes by simply answering a series of questions. The tax interview feature included with many tax preparation software packages makes getting your maximum refund a sure thing.
A good tax software program starts at $20 but could cost much more depending on your circumstances.
If you had a major life event, own a business, want to itemize your deductions, or need to report securities transactions, you may want to invest in professional tax preparation. In 2019, the average cost of professional tax preparation was $203. If you have complicated taxes or are intimidated by the idea of doing your own taxes, you may be better off seeking help from a professional.
How to Get Extra Time to File Your Taxes
If you can't meet the IRS deadline for filing your taxes, you can ask for a tax deadline extension. It takes about five minutes to fill out the simple request form. Even if your income exceeds the maximum allowed for the Free File system, you can electronically request an extension.
The IRS automatically extends the tax deadline to October 31 each year for taxpayers that request extra time to do their taxes. You'll have to estimate how much you'll owe the IRS and pay that amount, but you'll have extra time to properly prepare your tax filing paperwork.
How to File Past-due Tax Returns
If you were required to file taxes with the IRS in the past but didn't meet the deadline, go ahead and complete past-due tax returns, now. Filing past-due tax returns mean you'll avoid further interest and penalties if you owe taxes.
Your refund may be lost if you don't file tax returns in a timely manner. You can still get money owed to you by the IRS if you file a late return within three years of the original deadline. This includes tax credits like the Earned Income Credit.
If you need help filing your past-due tax return, call 1-(800)-829-1040. You can get wage and income information to help you file your past-due returns by filling out Form 4506-T, Request for Transcript of Tax Return.
Do It Yourself, or Hire a Tax Preparer?
Of the 152 million taxpayers that filed a tax return with the IRS in 2020, more than 69 million decided to do their own taxes. Whether you choose to do your own taxes or hire a professional to help you with the paperwork is up to you. Taxpayers aren't legally required to hire (and pay) someone to do their taxes.
Qualifying taxpayers can get free help with tax filing. The Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs offer free services for basic tax returns. To qualify, you must make less than $57,000 per year, have a disability, or have a limited ability to speak English. People over the age of 60 can get help with questions about retirement or pension-related tax issues.
If you prefer to do your own taxes, it's wise to invest in tax software. Tax codes are updated every year, so you'll need the most recent version of the software you choose to help you file correctly.
Compare costs when deciding whether to do your own taxes. For some people, the process is intimidating, so they prefer to hand over their records to a professional. Other people don't mind going through the steps with help from tax software. In years past, doing your own taxes meant piles of paperwork and time-consuming calculations. Now, it's easy to get tax software to do the heavy lifting. You just have to plug in the numbers.