Like the old cliché goes, there are two things in life that you cannot escape in life: death and taxes. Yes, the dreaded tax time comes around without fail every year. There is a huge market for tax preparers, especially during what we refer to as tax season. People all over the United States are contributing, unwillingly, to paying the wages of high-priced CPA’s, particularly from January to April 15th every year in order for a few straightforward forms to be completed.
Some people firmly believe that this is the best way to do taxes. Why? Well, for one, this simple three letter word can invoke fear, cause anxiety and induce more stress than parenting. Or maybe, we just think that we cannot competently complete this task. The case may be that it simply feels easier to just hand over that shoe box full of receipts and your W2 or 1099 to a professional. I mean, that sounds like the most responsible thing to do, especially when we can’t tell the difference between a W2, 1099, or form 8843.
Maybe nightmares of the IRS hopping out of a white van, clad in full riot gear with a battering ram in hand trying to bust down your door and take everything you own will initially occur. But with a little bit of knowledge, taxes can be conquered and conquered correctly. The best way to do your taxes is to do them with care. After figuring out if you have to file, gathering the essential documents and following a few rules, you can easily do your taxes without the assistance of a certified professional, and do them right.
The first thing you have to do is figure out if you even have to file. How do we figure out who has to pay taxes? There are a few common ways to do this. If you are employed and filled out a W4 upon the commencement of your employment, your employer will mail you a W2 before January 31st to ensure that you will have ample time to file by the dreaded deadline of April 15th.
Your employer will also provide the IRS with a copy of your W2. If you had more than one employer for the calendar year, you will receive more than one W2, and you will need to report all information on your tax return. All W2’s are created equal, regardless of your employer.
Every W2 you receive will contain information about your earnings from the previous year. So, if you are receiving your W2 in January of 2018 the wages reported are from January–December of 2017. Your employer’s identification number (EIN) will be on this form, which you will need to file your taxes. This form will also show the federal, state, and other monies that were withheld from your wages. A W2 is separated between federal and state sections since you will have to file both federal and state taxes.
Some information will be the same in the federal and state sections, but there will be some differences. For example, your earnings are the same no matter what, but your federal income tax, social security wages, state tax, and tips may differ. The sections will be labeled, and maybe not so clear to the human eye, so be sure to look over this form before entering any information when filing.
Another form that may be found in your mailbox during that bitter cold month of January is the 1099-MISC. This 1099 is anticipated with a bit of horror because there are no federal or state withholdings reported. What this means is that in order to not be indebted in some way to the IRS, you should have been putting a portion of your earnings in a safe spot for tax time, or paying the IRS directly throughout the year. You will receive a 1099 if you were employed as a subcontractor.
In this situation, you should have completed a Form W9 when this work was started. If this is the case, a 1099 will be mailed to you and the IRS before January 31st showing all of the wages received from the company you provided services for if you earned more than $600 from that company. If you find yourself buried in tax money owed, you may want to submit payments throughout the year in the future. So where do you send IRS payments? It all depends on the state you live in.
You can look up your state IRS location and mail the payments to the address provided. There are a few other 1099 forms that you could receive, which would mean that you have to file taxes. These 1099’s may be a creditor who canceled a debt, withdrawals from a retirement account, or interest and dividends from investments.
Who else needs to file taxes? The IRS also requires all nonresident aliens to file a Form 8843 if they were in the US for even one day during a tax year. If you are a Non-Resident Alien (NRA) and in F, J, M or Q visa status, you are exempt. Resident Aliens (RA) do not complete this form, regardless of visa status. Form 8843 is an information statement that is filed with the IRS, which shows that you should not be taxed on your worldwide income. If you did not make any money in the United States during your stay, you do not have to file a federal income tax return. However, if you were in the US for a minimum of one day on a nonimmigrant visa, you must complete and submit Form 8843.
If you are required to file a federal income tax return because you acquired wages during your presence, such as a 1040NR EZ or 1040NR, you must submit form 8843 with your tax return. You will attach the 8843 to your income tax return and mail the two forms together. Form 8843 instructions are pretty self-explanatory. Part one of Form 8843 requires that you input information such as your name, address in the US and in your home country, your US tax ID number (if you have one), your passport information, days you were present in the US of the past three years, and days you can exclude for the presence test. You will fill out one of parts 2 through 5 based on which category you fall into.
Part 2 will be completed if you were a teacher or trainee, and Part 3 if you were a student. These sections ask you to identify the academic institution you were a part of and the director of said institution. Here you will also have to identify the type of visa you had over the previous years, and if you are a student, if you applied for permanent residence. Part 4 will be completed if you were a professional athlete, and Part 5 if you have a medical condition that prevented you from leaving the United States.
Best tax software to use
So now that you know you have to file, how do you go about doing it? There is a plethora of tax preparation software services available for use, and when filing your own taxes, software can be your best friend. This is probably the best way to do taxes yourself. One of the most commonly used tax software services, TurboTax by Intuit, can make the process of do-it-yourself taxes the least painful. You can easily import your tax information from your W-2 or 1099 by taking a snapshot of the document from your phone, or manually enter the information following simple guided instructions.
Either way, you choose, TurboTax makes it simple to enter the right information in the right place. The software is almost fun as the interactive questions, comically at times, asks you for your personal information that would possibly affect your tax situation, and then puts that info exactly where it belongs. You also have the option of getting support through a one-way Q&A video service, which will give you additional guidance through the process. There is a free version for those of us who are only filing forms 1040A or 1040EZ, but if you need additional forms completed, for example, Form 8843, you may need to pay an additional fee of up to $100.
Another highly acclaimed tax software is Tax Slayer. This software is the most budget friendly, costing nothing if you made $64,000 or less for the filing year, and only plan on filing a form 1040ez. Like TurboTax, Tax Slayer has a mobile app that allows you to capture an image of your W2 and neatly places all of the required information in the correct box on your Form 1040 or 1040ez. They offer tech, not tax support free of charge through phone or email, but the premium version at around $30 can give you access to a real live human with any questions you may have, and provides audit assistance. Tax Slayer will assist in preparing forms in case of an audit, but will not represent you if it happens.
If you are still a little worried and think that there will be a time when you will need assistance during this process, you may want to go for one of the big wig software services like H&R Block. Frankly, doing your taxes can be an ulcer-inducing experience, so you may want to have a professional on call.
H&R Block beats all the other competitors as they will prepare all forms of the 1040 (1040, 1040A, 1040EZ, or regular 1040 with a schedule A) for $0. All other areas are on the pricey side compared to the others, but you get the added real-life 3D human in the flesh with H&R Block. You will have the ability to complete more complicated forms with the option of walking into any existing H&R Block office and screaming for help. The price for this add-on starts at $40, a small fee for such a big blanket. They also offer audit support, which will help prepare and represent you if the situation arises.
The difference between employed and self-employed when filing
What’s the difference between employed and self-employed when filing? For starters, if you were employed, you were automatically forced to make regular federal and state tax payments. These installments were deducted from every paycheck that you received the previous year, and your employer took care of the rest. As an employee, you are only responsible for half of social security and Medicare tax; the company pays the rest. Your employer calculated the amount of these deductions based on the W4 that you filled out upon getting the job. Besides clocking in and getting a paycheck every week, you will know that you were employed because you received a W2 in the mail.
You will take the information from the W2 and place it into the correct box on the 1040 form you are most likely going to fill out. The tax software will make this very easy for you. After the form is complete, you will sign it and mail it to the IRS. If you are using tax preparation software, you will have the option to e-file, which will simplify the process. E-filing is probably one of the best ways to do taxes; your forms are electronically sent and your returns come quicker. But there are cases where even though your employer deducted your taxes throughout the year, you may be responsible for having to come up with an additional payment for the IRS.
This may be due to a deduction error on your W4, or you may have breached a tax bracket because you had more than one employer. You can still file electronically if this happens, but you must send IRS payments to your state treasurer in order to avoid penalties.
If you are self-employed, you will file similarly, but you will be affected differently. As stated above, those who are employed have the responsibility of paying about half of all taxes, while the employer pays the other half. When you are self-employed, you will be responsible for 100% of the taxes owed. The 1099 that self-employed contractors receive will include the total amount earned without any deductions. If you were a sole proprietor, small business owner, or partner, you were also self-employed.
When you began your business, you should have decided what form of business entity you wanted to establish. This determines which tax form you have to file. As a business owner, you need to use a Schedule C or Schedule C-EZ to file your annual tax return. This document will be used to report your income or loss from the business you ran during the tax year, or the profession you practiced under sole proprietorship. You will then file form 1040 in order to report your Social Security and Medicare taxes.
You will use the income or loss calculated on the Schedule C or Schedule C-EZ to calculate the amount of Social Security and Medicare taxes you should have paid during the year. This is also referred to as the self-employment tax or the SE tax. You will also be responsible for paying both federal and state income taxes. To make this process easier, you should be paying your taxes quarterly. This is only an estimated payment, and you may pay too much or too little and have adjustments to make when filing, but you will not be left with a huge lump sum to pay all at once. If you did not submit quarterly payments, you will be responsible for all that is due by the filing deadline, which in most cases is April 15th.
Tax breaks often overlooked
When we do our taxes, we want to pay as little as possible, or even better, get as big a return as possible. This often requires finding as many tax breaks, or deductions attainable. There are your standard tax breaks like children and interest paid on your mortgage, but there are so many tax breaks that are often overlooked. In these cases, you will most likely have to itemize your deductions, but your tax won’t cost an arm and a leg.
One of the most overlooked tax breaks is job-hunting expenses. If you spent money on a headhunter, an outplacement agency, or mailed thousands of copies of your resume in order to find a job, you can deduct some of those expenses. You cannot do this if you are searching for your first job, but if you have to relocate in order to take your first job, the moving expenses can be deducted. And if you have to move your pet because of a job move, the pet moving expenses are an additional deduction.
There are many tax breaks for enlisted military, but if you are a member of the National Guard or part of the military reserves, you can benefit from your service as well. The cost of travel to drills and meeting may be written off if you had to travel over 100 miles and stay overnight. In addition, you can write off your miles to and from drills and meetings, if you used your own car, and half the cost of meals while attending.
Students both young and old(er) can receive tax breaks as well. The American Opportunity Credit is an available deduction for those who have qualifying college expenses and make $80,000 or less. This deduction maxes at $2,500 a year, but it is a tax break nonetheless. For those who took a little longer to take the college road, The Lifetime Learning credit of up to $2,000 is good for an unlimited number of years. The credit can be applied towards 20% of up to $10,000 spent on postsecondary school courses that result in new or improved job skills. There is no age limit to receiving this credit, but there is an income limit. Those who make up to $65,000 individually or $130, 000 jointly can apply for this credit. Surprisingly, students may also receive a tax break for college expenses paid by their parents.
The cost to stop smoking is a tax break often overlooked. For those of you who have taken the plunge to give up the nicotine habit, you will be rewarded financially. If you participated in a smoking cessation program or received prescription drugs to help the process along, you can claim this expense as a medical tax deduction. Additionally, if you attempted to battle the bulge, this can be a tax break as well. Although the Master Cleanse or Hot Yoga may not be deductible, if you participated in a weight-loss program or surgery due to medical issues reported by a physician, you will most likely receive a tax break. Medically related breast surgery expenses are another write off that may be overlooked.
This deduction will not be valid for cosmetic procedures, but if you needed reconstructive surgery as a result of cancer treatment, you can certainly claim this as a medical expense. If you experience hair loss due to a medical condition, such as cancer, the wig suggested by your doctor can be a medical deduction as well. A small expense, but another break comes when you deduct your pregnancy tests, which is considered a medical expense. And after the baby arrives, breast pumps and supplies can be a tax deduction. Other medical tax breaks that may often be overlooked are the cost of diagnosis and care, mitigation, treatment, and prevention, including equipment, supplies, diagnostic services, insurance premiums, and travel costs.
Have you volunteered at all this past year? If so, you may be entitled to some tax breaks. If you traveled to help out an organization, those expenses may be a tax deduction. Also, if you worked with an organization and had to use your vehicle to transport goods or people, you probably will find a break there as well.
Believe it or not, you can also deduct your state income or sales tax paid. If you happen to live in a state that does not require an income tax you can still receive the benefit of this deduction through the use of itemizing the sales tax you paid throughout the year.
Sometimes there are errors that weren’t your fault and can lead to an additional refund or abatement of penalties. IRS Form 843 will assist in the attempt to get back any money that might be owed to you. You will fill out and submit Form 843 for several reasons.
Most commonly, you would use this form to request that the IRS claim a refund or to ask for an abatement of specific kinds of taxes, penalties, fees, and interest. Form 843 instructions include entering your Social Security Number and your spouse’s Social Security Number if filing a joint return. Then, you must enter the tax period that you are requesting a refund or abatement. Next, you must identify the reason why you are filing Form 843, and provide the IRS code if you are requesting a refund or abatement on a penalty issued by the IRS. Form 843 instructions also require that you provide any written documentation that will support your case.
You must include your name and Social Security Number on all additional pages that you submit. The IRS provides detailed Form 843 instructions, which can be accessed by contacting the agency or visiting their website.
When filing your own taxes, you want to follow some best practices. For starters, using tax software is probably the best idea. There are professionals behind the scenes leading the way. Using a tax software like TurboTax can ensure that you are completing all of the steps accurately, avoiding some detrimental mistakes. Their detailed questions will ensure that you are providing the right information at the right time. They will even guide you through itemized deductions if you choose to take that route.
If your financial situation is pretty straightforward and you do not have a lot of assets or dependents, the free versions of the tax software would be ideal for your situation. Be prepared to have patience and give up some time. Make sure that when you are filing your taxes that you give your undivided attention to the situation.
Although music and other background noise can sometimes be a nice addition to your workplace, they can be a detrimental distraction in this situation. Use the IRS website. They have a ton of valuable information. Any question that you have can be answered with a little research. Form 8843 instructions are available with step-by-step guidance. Take the time to investigate this site if you have any questions. Also, be sure to have all necessary documents.
This includes receipts, mortgage and bank statements, and any other documentation of investments or funds. Finally, and probably the most important, have someone double check your forms. We are all human, and with that comes error. If this is your first go at filing your taxes by yourself, it is imperative that you have someone with knowledge that can verify the accuracy of your entries. Do not press that submit button or seal that envelope without getting a second opinion.
Overall, the best way to do taxes is the one that you are most comfortable with. Doing your own taxes can seem like an impossible task. When you first start, some aspects can seem daunting, but you will get through it, I promise. Just be sure that you do not make simple mistakes. Double check that you are using the right form for the right purpose. Make sure that you are completing all of the forms required by your status. If you are employed, self-employed or visiting the US there are different forms for each purpose.
Follow the current year’s instructions on what forms to fill out and how to complete them correctly. You do not want to have to go through the stress of filling out another form if you do not do it right the first time. Make sure that you triple and quadruple check your numbers. Even if you used the assistance of software or even a real live human, make sure that the numbers not only match but feel right. After you complete the forms, look at the bottom line and play a game of Goldilocks, ask yourself “Is this too much, too little or, just right?”
Receiving a refund that is too large will require you to pay it back in the future. The IRS is no dummy. They will catch that mistake and often penalize you with fees if you receive too much of a refund. Also, you want to make sure that you aren’t paying too much. You may lose that money forever if the IRS overlooks that mistake. Double check that you reported all of your income. If you received more than one W2 or 1099, or a combination of both, you must make sure that you document the total amount earned on your return. If you received a documented income form, the IRS received it too. Remember to file both your federal and state income taxes.
All states have different requirements; some don’t require an income tax but may have other requirements such as capital gains tax. The tax software will have the appropriate knowledge to lead you through that process. Stay updated on deductions for tax breaks. You want to make sure you save as much money as possible or get a larger return. Filing taxes can be a rewarding experience, giving you an opportunity to reflect on your earnings and expenses from the prior year. But, don’t forget there is help if you need it. If you used software most likely there is help available. But if you are still not sure, go to a professional.