5 Essential Steps For Tackling Your Income Taxes

5 Essential Steps For Tackling Your Income Taxes

Every year around this time, millions of Americans are focused on filing their tax returns. For those who haven’t filed before, the process and forms can seem daunting. Even for those of us who have been filing for years, the topic of taxes can cause anxiety. What records do I need to keep from last year? What forms do I fill out? Will I owe money?

Here are five important tips to help take the mystery out of tax preparation. Whether you need to brush up on your own knowledge or, like me, are looking to help your kids understand this process, these recommendations and resources show how a little preparation and organization can help ease the worry at tax time.

1. Get Organized
Whether you’re filing your tax returns independently or working with a tax professional, start by collecting all of the essential information you’ll need, including:

  • W-2s: Sometime in January or February, you should have received a W-2 form from your employer(s). With information on your wages, tips and tax withholdings, this form may contain much of what you need to complete the bulk of your tax return.
  • 1099s: If you earned interest on a savings account or you have income from an investment account, you should also have received a 1099 form from your bank or your broker showing just how much interest, dividends, or capital gains or losses your account has accrued over the past year.
  • Receipts and records for deductions: If you plan to itemize deductions (as opposed to a standard deduction; see tip #2 below), you’ll need to gather the receipts and records of all your tax-deductible expenses.

Additional tip: For more information on how taxes are calculated and withheld from your paycheck throughout the year, watch these videos on calculating your federal and state income taxes.

2. Choose Itemized Or Standard
One of the big choices you’ll need to make is whether to claim the standard deduction or to itemize your deductions. A standard deduction is a flat amount — based on your filing status and age — that the tax law allows you to deduct from your adjusted gross income. For the 2014 tax year, the standard deduction for individuals or married taxpayers filing separately is $6,300. For married couples filing jointly, the standard deduction is $12,600.

You might choose to itemize your deductions if the total of allowable expenses (including things like the interest you pay on your mortgage, charitable donations, certain medical costs and non-reimbursable business expenses) is greater than the standard deduction. Watch this video to learn more about calculating tax deductions.

3. Decide How To File
The easiest way to prepare and file your tax return (and to process your refund) is through IRS e-file. E-filing is easily available for those who file on their own or use online programs or tax professionals to prepare their returns. If your adjusted gross income is $60,000 or less, you may be eligible for free online tax-filing services.

4. Conquer The Tax Form
Now that you’re ready to dive in, don’t let tax forms intimidate you. The three main personal income tax forms are the 1040, 1040A and 1040EZ. The simplest of these and a good option if you have a fairly simple financial picture is the 1040EZ. The 1040 and 1040A forms are a bit more complex but offer additional tax credit options if you qualify. Refer to this simple IRS guide to choose and download the right form for you.

Additional tip: Watch this video for step-by-step instruction on how to fill out a 1040EZ.

5. Keep Records
Once you’ve completed and filed your tax returns, make sure to keep copies, either printed out or saved on your computer. Referring back to these can be helpful when preparing future tax returns or if you need to file an amended return later in the year. In general, you’ll want to hold onto your tax records and supporting documentation (W-2s, 1099 forms, receipts, invoices, etc.) for at least three years, which generally is the statute of limitations for the IRS to examine your return and assess any additional liabilities. Should you ever be audited, you’ll need your records to provide proof of your tax claims.

After your tax forms are completed, you’ll know if you have to pay additional taxes for the previous year or if you’ll get a refund on taxes that have already been paid. If you get a refund, think about how you may use this money toward one of your financial goals — such as saving for the down payment on a home, paying off debt or taking a vacation. No matter what your goal, a tax refund can be a great way to get a jump-start.

Even after years of doing it, getting started on a tax return can still seem intimidating. Staying organized and knowing what resources to use and how to use them properly can help make the process as painless as possible. For more in-depth information and helpful videos addressing tax-planning questions, visit the section on understanding taxes at BetterMoneyHabits.com.

Neither Bank of America nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

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The material provided on the video is for informational use only and is not intended for financial or investment advice. Bank of America and/or its partners assume no liability for any loss or damages resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment management.

Source: Huff Post

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