Filing your income tax returns seems quite challenging, whether you do it on your own or hire someone for the job. You can’t leave the tax preparation to the last minute. It’s not just filling out form 1040 and emailing it to the IRS. The process is rather complex and requires attention to detail. You need to gather the necessary forms, fill them out, subtract deductions, and submit them to the IRS before the deadline of April 15th.
The most common question of taxpayers is “how to do my taxes.” You have got tax forms from your employer or clients. Now what? Unless you are using tax prep software or working with a tax accountant, filling out these forms will be time-consuming and stressful. Knowing what documents you need during the tax season can make the job easier. Let’s check out the tax preparation checklist.
Documents Needed to File Taxes
Here’s a list of the documents needed for 2022 tax returns. You need the same documents if you are married and filing your income tax jointly.
Personal Information
This shows the IRS who’s filing the tax, your filing status, how to contact you, and other personal information.
1. Your Personal Information: Start with your full name, occupation, home address, date of birth, social security number, and bank details if you are expecting a refund. The same details are needed for your dependents, including spouse, children, and elders.
2. Last Year's Tax Bill: Using your last year’s tax bills to file this year’s income tax returns can be of great help. Although the IRS doesn’t need your previous year’s tax bills, you should use them to know what documents you used last year and how much you paid in federal and state taxes.
Sources of Income
You may have to file a standard form 1040 for tax returns, in addition to other forms depending on your sources of income.
W-2: Those working for an employer will receive a form W-2 by 31st January. Your taxable income is already withheld from your paycheck. This form is just to notify you of the amount withheld. Ask your employer to issue a W-2 form before 31st January and send a copy to the IRS.
1099 Forms: IRS has launched a bunch of 1099 forms for self-employed individuals. Freelancers, people with a side gig, and business owners fall into the self-employment category and are required to file these forms with the IRS. You will get it from your clients who paid $600+ in the financial year. If you did a contract job, you would receive a form 1099-NEC. Those who are paid via a third-party payment platform, like PayPal or Amazon, will get a 1099-K. There are many variations available, and depending on your sources of income and how you got paid, you may have to file different forms.
Deductions
Once you have mentioned your sources of income and the total earnings for the year, the next step is to subtract business expenses. Deductions are a great way to reduce your tax bills. The most crucial element of deductions is gathering all the receipts and documents showing your business expenses. Store these receipts safely, as they will protect you if you ever get audited.
Besides, keeping track of your expenses makes calculating deductions easier during the filing season. If you don’t have time to itemize everything, a simpler and more effective way to lower your tax bill is to take a standard deduction. For 2022, you can deduct $12,950 from your taxable income. Here’s a list of the deductions allowed on your tax bills:
1. Retirement account contributions
2. Medical and dental expenses
3. Charitable donation
4. Interest on mortgage
5. Expenses for learning a new skill or taking a course relevant to your line of work
6. State and local taxes
Credits
Credits work like deductions, but these are much better and can prove more cost-effective in the long run. It’s a dollar-for-dollar reduction from your tax bill. However, like other deductions, it’s important that you have the necessary documents to claim tax credits.
For example, if your tax bills are $1000 and you are eligible for $200 tax credits, you must pay only $800 after subtracting the credit. In some cases, the taxpayers are eligible for a refund after applying credit.
Estimated Tax Payments
Your tax will be withheld from your quarterly paychecks and paid directly to the IRS. So, you have nothing to worry about. But, if you are self-employed and manage your taxes on your own, you should pay income tax every quarter. You need to calculate your estimated earnings for the year and pay taxes on the 15th of every fourth month. Make sure you include the estimated tax payments in the annual tax returns, so you don’t end up paying double.
Also Read - Steps for Preparing Yourself for the Tax Season in Advance