6 Tips for Mastering your Taxes
Even though the United States Treasury Department and Internal Revenue Service recently announced that this year’s tax filing due date will be automatically extended from April 15, 2020, to July 15, 2020, due to the impacts of COVID-19, it will still be here before you know it. You may not be ready to file your return just yet, but that doesn't mean you shouldn't start thinking about your taxes. Here are a few things you can do to prepare.
1. Make a list of all your income sources.
These days, almost everyone has a side hustle. Whether your side hustle is a small business, a part-time gig, or contract work, you will need to pay taxes on the money you earn. You can prepare for tax season by making a list of all of your income sources. Then, make sure you have proof of income from each of those sources. For a job, this would be a W-2. For a contract position, you'll generally be issued a 1099. If you run your own small business, a profit and loss sheet is a good choice.
2. Collect and organize your receipts.
Hopefully, you've been collecting your receipts for anything that could be considered a work expense. One of the best tax tips to follow is to organize these receipts by category before tax season arrives. This way, you and your accountant can easily figure out how much you can deduct.
3. Find a tax prep service.
Unless you have a formal educational background in accounting, it really is best to hire someone else to file your taxes. Tax prep professionals can save you an arm and a leg by finding credits and deductions you may not have realized you qualify for. They also usually offer free support if you happen to be audited.
If you have a really simple return, such as if you are single and have income from only one job, you can probably get by using tax prep software. But research your options, and don't be afraid to pay a little more for professional tax prep if you find yourself uncertain whether you're using the software correctly.
4. Gather mortgage and property tax payment records.
If you own a home, take a minute to gather records showing how much you paid towards your mortgage and property tax for the year. Make sure the records show how much you paid towards your mortgage principal versus interest, since sometimes interest payments are deductible. Money paid towards property taxes is also tax-deductible.
5. Record your charitable donations.
Did you make any charitable donations in the previous year? One of the best tax tips is to gather records of these donations, since you can deduct them on your taxes. If the donations were monetary, you can deduct the total amount you donated. If you donated items to charity, you can use this IRS publication to determine their value. (If you hire an accountant to do your taxes, you should be able to provide them with a list of items you donated; they can compute the value.)
6. Gather proof of retirement contributions.
Make sure you print out records showing how much you contributed to various retirement funds. If you contributed to a SEP or traditional IRA, your contributions are tax-deductible up to a certain amount. If you made withdrawals from a retirement account, that is also something your tax preparer will need a record of.
Tax season can feel stressful, but if you follow the tax tips above, it does not have to be. Spend some time gathering your paperwork and documents, so that when you meet with your tax preparation team, things go smoothly.