Preparing to File Your Tax Return

In this topic, you'll learn:

• Understanding the documents and forms required by many taxpayers.
• Exploring potential tax deductions and credits.
• Understanding tax filing options, from free software to professional services.

---

Filing income taxes can be a stressful experience, but with a little bit of preparation, it doesn't have to be. In this article, we will explore the steps you can take to get prepared to file your income taxes and cover some options regarding choices about how to file.

To begin, it's important to note that you'll need to provide personal information when completing your taxes, including the Social Security number of yourself and others on your return. And if you choose to file your return electronically, you'll need the account and routing numbers of your bank or credit union account. 

Note that there are many additional forms, credits, and deductions that may apply to your unique situation that aren't covered here. So, the content below focuses on forms and documents that apply to most (but not all) taxpayers.

Step1: Gather Your Documents
The first step in tax preparation is to gather all the necessary documents. The exact documents you'll need will vary based on your financial situation, but many people will need at least a few of the following documents:

Form W-2 – Employment Income
W-2 forms are important tax documents for those with a job. These forms provide information on your total earnings, taxes withheld, and other contributions made to your retirement plan, if applicable. You should receive a W-2 from each employer you worked for during the previous tax year. 

1099 Forms  – Income from Self-Employment
If you're self-employed or work as an independent contractor, you'll receive a 1099 form instead of a W-2. 1099 forms provide information on the total amount you were paid by each client or company, including any taxes that were withheld. 

1095 Forms - Health Insurance Information
If you had health insurance during the tax year, you'll need to report this on your tax return. You should receive a Form 1095 from your insurance provider, which will provide information on the type of coverage you had and how long you were covered. This documentation is especially important for those who may qualify for a health insurance-related tax credit.

Form 1098 - Mortgage Interest 
If you paid mortgage interest or student loan interest during the tax year, you may receive a 1098 form. This form provides information on the amount of interest you paid during the year and can be used to claim a tax deduction if itemizing.

Account Statements
If you have any taxable investment or savings accounts, you'll receive statements from your financial institution detailing your earnings and losses, dividends received, and interest received. Any earnings from these accounts must be reported as income.

Records of Expenses and Taxes Paid
If you're self-employed, you'll need to keep track of all the expenses related to your business. This may include receipts for office supplies, travel expenses, and equipment purchases and will be used to complete the Form 1040’s Schedule C. Self-employed will also need records of estimated taxes paid over the year.

For those who aren’t self-employed, some expenses may also qualify you for a tax deduction or credit. Examples include childcare expenses for parents, out-of-pocket spending for classroom supplies by teachers, student loan interest, and certain educational expenses. 

The vast majority of taxpayers choose to use the standard deduction (see below), but if you choose to itemize expenses instead, other expenses could include state and local sales taxes, healthcare expenses that exceed 7.5% of your income, plus more. 

Step 2: Explore Potential Adjustments, Deductions and Credits
There are numerous deductions and credits that may apply to your situation. In many cases, it’s best to seek the advice of a professional or use tax preparation software to determine your eligibility.

A partial list of commonly used deductions and credits include:

• Child and dependent-related tax credits and deductions
• Earned income tax credit
• Educational expenses adjustments and credits
• Educator expenses adjustment
• Health savings account contribution deduction
• Mortgage interest deduction (if itemizing)
• Retirement account contribution adjustment 
• Saver’s tax credit
• State and local tax deduction (if itemizing)
• Student loan interest deduction

In addition, if you purchased an electric vehicle or installed a solar power system in your home, you may be eligible for tax credits. Make sure you take the time to review all the potential deductions and credits that may apply to your situation - they can significantly reduce your tax bill.

Step 3: Determine How You’ll File
Determining the best way to file your taxes depends on your individual circumstances, including your income level, sources of income, deductions, and credits. There are several options for filing your taxes, including:

Do-it-Yourself Tax Filing
If you have a relatively simple tax situation and are comfortable with tax forms, you may choose to file your taxes on your own. However, if you have a more complicated tax situation or are unsure of which forms to fill out, this may not be the best option.

Tax Preparation Software
There are a number of tax preparation software programs available, such as TurboTax, H&R Block, and TaxAct, which may be free to use or charge an annual fee. The IRS offers free filing software for individuals who earn less than a certain income level, which can be a cost-effective option. These programs can guide you through the tax filing process and help you find deductions and credits you may not have considered. 

Tax Professionals
If you have a very complicated tax situation, own a business, or have significant investments, you may choose to work with a tax professional, such as a Certified Public Accountant (CPA). A CPA can provide personalized advice and help you make strategic tax decisions that can save you money in the long run. 

The Takeaway
Gathering all the necessary documents, exploring potential deductions and credits, and determining how you'll file your taxes are all important factors to consider. Keep in mind that the exact forms and documents needed may vary based on your individual circumstances, and it's important to seek professional advice if you are unsure or have a more complicated tax situation.