Filing your own tax return is easier than ever. Follow these five simple steps to avoid scams, overpayment, and potential audits.
1. Choose your tax software wisely
The drastic increase in email schemes, 400 percent in 2016, requires extra vigilance on your part. You may receive communications from tax software companies that are really phishing schemes designed to steal valuable information. Rather than clicking on email links, diligently research tax preparing software before entering any personal information.
Once you find a legitimate company, make sure you don’t pay more than is necessary. Many companies offer free software for both federal and state returns. The IRS offers a free software lookup tool to help you choose the one that is right for you. Popular offers include the following:
These are sufficient for most simple 1040 returns. If your return needs more advanced software, carefully compare offers to find the best deal.
2. Gather and organize documents
Make sure you have all the necessary documents before you start your return. This should include the following:
- Social Security numbers for you, your spouse, and any dependents
- Income from jobs (W-2)
- Interest from bank accounts/certificates of deposit (1099-INT)
- Dividends and capital gains from stocks/mutual funds (1099-DIV)
- Earning from sold stocks/bonds/mutual funds (1099-B)
- Debt cancellations (1099-C)
- Unemployment compensation and state or local income tax refunds (1099-G)
- Payments from credit card or third-party processors (1099-K)
- Withdrawals from retirement accounts (1099-R)
- Self-employment or independent contractor income (1099-MISC)
- Social Security benefits (SSA-1099)
- Rental property income
You may qualify for income adjustments and tax credits. Gather all receipts or proof of contributions that may relate to the following:
These deductions are subtracted from your income before tax is assessed, lowering your adjusted gross income. The most common income adjustments include the following:
- Qualified student loan interest
- Health savings account contributions
- Educator expenses
- Moving expenses
- Self-employment deductions
- Qualified business expenses
- Qualified traditional IRA contributions
These credits are applied to the amount of owed taxes, lowering your tax liability. The most common tax credits include the following:
- Earned income tax credit
- Child and dependent care credit
- Child tax credit
- Adoption credit
- Lifetime learning credit
- American opportunity tax credit
- Savers tax credit
- Residential energy tax credit
For additional credits visit the IRS’ website. Once you have all your tax documents and applicable receipts you are ready to start your tax return.
3. Verify dependents and filing status
The IRS has strict rules for claiming dependents. Dependents are typically either qualifying children or relatives. General rules include the following:
- Meets citizenship requirements
- Has NOT filed a joint return
- Has a social security or taxpayer identification number
- Lives with you half the year or more
- Is related to you (child, stepchild, foster child, adopted child, sibling, stepsibling, grandchild, niece, or nephew)
- Is under 19 (or 24 if a student)
- Is younger than you (unless he or she disabled)
- Lives with you the entire year
- Has a gross annual income of less than $4,050
- You provide over half of his or her total support
Dependents can only be claimed by one person. In cases of divorce or legal separation, a child can only be claimed by one parent, typically the custodial parent. If you are filing taxes for the first time, you need to verify that your parent or guardian is not claiming you as a dependent if you seek a personal exemption.
You can use the IRS’ Interactive Tax Assitant to help you determine whom you may claim as a dependent.
Often filing statuses are straightforward. The five filing statuses are as follows:
- Married filing jointly
- Married filing separately
- Head of household (designed for unmarried persons who pay over half of household expenses with a qualifying dependent)
- Qualifying widow(er) with dependent child (provides benefits of married filing jointly status for two years after a spouse’s death)
You may qualify for more than one status. For instance, if you are married, you have the option to file jointly with your spouse or separately. Note that choosing to file jointly makes both spouses equally accountable for any tax debt and legal liability. If you must choose between two options, pick the one that has the lowest tax liability and greatest savings.
4. Compare itemized vs. standard deduction
As you prepare your tax return, you will need to choose between a standard or itemized deduction. For the 2017 tax year deductions are as follows:
- Single or Married filing separately: $6,350
- Married filing jointly or Qualified widow(er) with dependent child: $12,700
- Head of household: $9,350
There are additional deductions if you are 65 or older or blind. They are either $1,250 (Joint or Widow(er)) or $1,550 (Single or Head of household).
Choosing to itemize deductions makes preparing your return more difficult but is worth it if will save you money. The single determining factor is whether or not the itemized deduction is higher than the standard deduction. You can itemize the following:
- Charitable donations
- Medical expenses
- State and local taxes
- Real estate taxes
- Home mortgage interest
- Casualty and theft losses (i.e. damage from car accidents or natural disasters)
- Miscellaneous expenses (i.e. union dues, tax preparation services, supplies for work)
5. Final check and submission
Once you have gone through all the steps to complete your tax return, double check your numbers. Computers make errors so make sure everything adds up. Make sure you are maximizing your savings by applying all relevant credits and deductions. Don’t forget to sign your return!
If you are eligible for a refund, you can either have a check mailed to you or have a direct deposit into your bank account. If you owe money, try to pay your tax debt right away. If you are unable to pay it in full, you can negotiate a payment plan with the IRS. However, if it beyond what you can pay or you have concerns, you can talk to a tax professional and discuss your other options.
Once it is submitted, save a copy of your return and relevant documents (W-2s and receipts). Though your chance of being audited is low, it is important to hold on to all relevant documents. Keep your records for at least three years.
Congratulations, you’re done!