I worked in a tax office seasonally for more than 4 years and absolutely loved helping individuals and business owners get the tax deductions they deserved. But even for someone like me, who has the background in tax prep, I found the whole process of filing taxes to be overwhelming and time-consuming.
To help, I came up with some simple steps to streamline that process. Like with any other big projects you take on, creating a simplified list will help break down this huge mountain and make it more attainable.
As you face tax season and wonder how to do your taxes, use these steps to get organized. These tips will help ensure you’re not making costly mistakes and paying more taxes than absolutely necessary.
Step 1: Choose the Right Tax Software
The most secure way to file your own taxes is by using tax software that has the capability to e-file your tax return. This keeps your sensitive tax forms from getting lost in the mail or getting into the hands of identity thieves. The IRS has a list of recommended e-file services that you can use to file your taxes, some of which are even free.
In the past, I’ve personally opted for a tax service like H&R Block’s software or Intuit’s TurboTax, as those are the most trusted names in the industry. The goal, though, is to choose the right tax software for your personal situation and one that you feel most comfortable with. This means looking at how much income you may have, the complication of your tax return (or lack thereof), and making sure they are an IRS-approved e-filer.
Try using this free questionnaire from the IRS to help determine the best free file software, based on your personal situation.
Step 2: Collect All Income Documents
As a self-employed freelancer, my income documents are a bit more complicated than simply receiving a W-2 from a day job. Every year I receive numerous 1099 forms from clients, plus loads of documents from financial institutions like PayPal and payroll services. I also have investment accounts and a Roth IRA that I contribute to, so my tax form pile is quite high during every tax season.
To help keep this organized throughout the current tax year, I make a new file folder that collects all of my income documents, receipts of sales, and other income I’ve received thus far. That way when tax season rolls around, I only have to go down the list and check them off or follow up to find a tax document I haven’t received yet. The income documents you may need include:
- W-2 from any employers
- 1099-MISC from freelance clients
- 1099-K from PayPal payments and sales
- W-2G from gambling income
- Personal receipts or reports for other sales and income (such as Amazon Affiliates)
- Interest earned on various bank accounts, savings, CDs, etc.
- Dividends or sales of stock on investments
- Income from pensions, Social Security, IRAs
- Rental property or royalty income
- Hobby income, prizes, bonuses, and other awards
- Record of alimony received
- Any other tax forms for income earned throughout the year
Do your best to gather up all income documents and fill in the gaps when needed. The IRS will fine you if you don’t include all of your income on your tax return, whether or not you received a tax form for it.
So, if you’re missing any forms from an employer or past client, put in a request that they resend this information. To help with this, the IRS provides substitute forms that will help you put together an estimate of your taxes if you’re unable to get documents from past employers.
Step 3: Record Any Big Life Changes
Thankfully, none of us have to pay tax on the full gross amount we earn every year. Instead, we can qualify for certain tax deductions, exemptions, and credits that help reduce our taxable income. This is determined by several factors:
Your Filing Status
There are five different kinds of filing status: Single, Married filing jointly (MFJ), Head of Household (HH), Married filing separately (MFS), Qualifying widow/widower
Any Big Life Changes
Life changes such as buying a new home, moving to a new state for your job, having a baby, or getting divorced are some of the most common things that can change your tax situation.
Your Personal or Professional Pursuits
Other expenses that may affect your taxes include starting a new business, going back to school, or opening a retirement account.
Don’t place unnecessary pressure on yourself to remember all of these life changes by the end of the tax year. I have personally found that my tax years get all mixed together, especially when a big change happens in the spring of the prior year. It’s harder to remember important events the further back they are. Make note of all the things that change in your life throughout the year, and keep this with your current year’s tax folder.
When my husband and I moved across the country for a job, I kept all of our receipts related to moving costs. All of our gas receipts, hotel stays, food costs, truck rental, and even an extra lock for the trailer are qualified moving expenses that we deducted on our tax return. Keeping good records of the exact expenses shaved $3,235 off our taxable income in 2015.
Step 4: Know your Tax Deductions and Credits
As mentioned, gathering up your income and expense documents are both equally important. As you collect proof of eligible expenses, you can use them to offset your taxable income. This means reducing the income that will be subject to federal and state taxes, leaving more of your hard-earned money in your pocket.
In my case, I own a freelance writing business so I have business-related expenses that help keep my business going. Things like PayPal fees for receiving payments from clients and paying an assistant to help with administrative work are all deductible business expenses I can claim to reduce the taxes I owe. The most common types of tax deductions and tax credits are related to:
- Home ownership
- Charitable donations
- Medical expenses
- Health insurance
- Childcare expenses
- Education costs
- Job-related expenses
- Tax prep fees
- State and local income tax
- Retirement contributions
- Starting or maintaining a business
For example, if you own a home, any interest you pay on your mortgage payment is a tax deductible expense. An extensive list of tax-deductible expenses you could qualify for are on Schedule A, so be sure to look that over if you need a quick checklist.
Step 5: Set Aside Time to File Your Taxes
Depending on your financial situation, your taxes will likely take a good chunk of time to input everything into the tax software. I use the same tax software every year since this allows me to import my information from last year, which ends up saving quite a bit of time. However, this process still takes a few hours, not to mention the initial prep of organizing everything and double checking the numbers.
Because of this, I dedicate an entire weekend to preparing and filing my taxes. You may want to do the same. Whether it’s an entire evening or a whole weekend, set aside time in your calendar to file your taxes.
Just like you schedule in other important appointments, such as getting your teeth cleaned, make filing your taxes a priority. In many cases, I’ve had to ask for corrected tax documents or needed to gather up more expense receipts before finalizing my return. That means more time spent waiting to receive the right documents.
I was glad I started early because I had to put my taxes on hold until I could get the information necessary to move onto the next steps. Start early and make an appointment with yourself to file your taxes sooner rather than later.
Step 6: Double Check the Numbers
During my time working at the tax office, I saw numerous correct tax returns get rejected by the IRS for small mixups and incorrect Social Security numbers. Because of this, I view the review process as one of the most important steps on this list, and it’s where I invest most of my time when filing my taxes.
Having your return rejected by the IRS for erroneous numbers or names can cause a delay in processing. This could cause you to pay penalties and fees for a late return. In addition, you could be fined interest fees for misreporting your income or forgetting to include income documents.
But worst of all is when you rush through a tax return and realize you left money on the table because you forgot to include a tax deduction or credit you qualified for. Don’t give the IRS more of your hard-earned money than you have to. Take the time to double and triple check the numbers to be sure everything is correct. The few extra minutes could mean big tax savings or avoiding last-minute penalties.
How to Do Your Taxes
The process of doing your taxes is never fun, but it’s a necessary part of being an adult. As you tackle doing your own taxes this season, follow these steps to ensure it’s as smooth and stress-free as possible.
And if you get stuck, you can always reach out to a qualified tax professional via the IRS, or the customer services that is provided for free with the tax software you choose. Don’t be afraid of the IRS representatives, they’re people too. And in my personal interactions with them, they’re genuinely helpful and care about getting your taxes done right.