Yes it’s that time again, the tax man is coming. If you’re like most people you haven’t thought about taxes since the check cleared your bank account last year. But, a little up front effort will help keep you from the inevitable scramble on April 15.
First, pull out your return from last year. Unless there have been some significant changes in your life this really should be a good guide. If you haven’t filed last years return that should really be your first step before doing anything else for this year. If you file a 1040, an individual income tax return, start at the top and pull together any relevant information. Last years return should already have all of the personal information as well as the dependant information, unless you’ve added a dependent e.g. had a baby (or two in my case).
Next is the income section which for most people consists of wages and possibly interest income. Other forms of income that are common are rental income, IRA or pension distributions, dividends, and unemployment. Also, if you itemize your state refund is taxable and if you have any business income. Business income requires filing a Schedule C, so you’ll have to figure out the income and expenses for the business separately and enter them on Schedule C. Wages are reported to you on a W2 and a lot of the other types of income are reported on 1099’s so watch for these in the mail. W2’s are due to you by the end of January and 1099’s should be mailed by the end of February.
Now that you have all this income you want to think about how to offset it with credits and deductions. The most common deductions are for interest reported on 1098’s, taxes and children. Mortgage interest and points are deductible for 2 homes, including in most cases mobile home loan interest because they have a cooking areas and bathrooms. Student loan and investment interest is also deductible. Personal interest such as interest on credit cards and car loans is not deductible. Taxes that can be deductible are your state and local income tax (if you itemize), real estate taxes, and personal property tax such as your vehicle licenses tabs. If you have children you get a dependent credit per qualifying child and child care is deductible, but it’s offset by any amount you’ve used out of a flex spending account through your employer. There are many other deductions for charitable contributions, unreimbursed employee expenses, IRA deductions etc.
The most important thing when getting organized for tax season is work with your tax preparer. They will be able to answer your questions, and let you know what to watch for. In most case like at my firm they’ll have handy organizers already made up for you. So work with a professional it’ll make you life easier, and by the way tax prep fees are deductible.