This nuts-and-bolts guide to filing your taxes will clue you in on how to prepare for and pay the latest round of federal taxes without making costly mistakes. From getting prepared before you fill out any forms, to choosing the right filing status and optimizing your deductions, to enlisting the assistance of software developers or tax professionals, this post has the information you need to file your taxes in 2021.
Filing taxes can be nerve-racking and frustrating, and it can result in a lot of headaches. The process involves a lot of tax forms, schedules, and financial documents that may seem hard to gather. And that’s where this blog post comes into play; it provides you with information that can guide you step-by-step on how to file taxes in 2021. Whether you’re looking for some tips at the end of the tax year, or just trying to make sure you don’t make any costly mistakes when filing, this article will point you in the right direction.
By the end of this article, you’ll have developed a thorough understanding of all the steps involved, and learned about all the tools and resources that are available that you may be able to use to make the process stress-free, straightforward and accurate. Let’s get started.
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How to prepare for the 2021 tax season
Here are four simple steps you can do today to ensure your tax preparation is on point.
Organize your tax documents
Whether you store your tax documents digitally or in paper form, it pays to keep them all together. Ideally, you will keep similar documents grouped to make searching for them easier.
Personally, I scan all paper documents and download digital copies into folders based on the type of income or expense they are. For example, I have separate folders for W-2s, 1099s, mortgages, daycare expenses, and medical expenses.
Keep prior-year tax returns handy as well for your tax prep. Information from previous returns can impact your current tax return, such as tax-loss carryforwards.
In the following section, we’ll list some of the documents you need to get a hold of, so that you can successfully file your taxes.
Meet with your tax professional
If you decide to hire a tax professional, you need to maintain contact with them. Before year-end, reach out to them and ask if there are any year-end moves that they recommend.
Many tax professionals charge by the hour, so prepare questions ahead of time to keep the conversation on track. If you sold stock, received a bonus, or experienced major life changes, there may be opportunities to reduce your tax bill before the end of the tax year. During your appointment, you should also schedule your tax appointment before their calendar fills up.
This article will explore some of the other methods, aside from hiring tax pros, that you can use to file taxes, even if it’s your first time.
Make retirement account contributions
Setting aside money for your future can reduce your tax bill today. Speak with your tax professional or financial advisor about available options. Consumers can open accounts and make IRA contributions through April 15th. However, business owners must have their accounts established before year-end to count for the current tax year.
Track business income and expenses
Whether your business is a side hustle or a full-time endeavor, you must track your earned income and expenses. Most business expenses are easy to identify, like inventory, rent, and wages. However, there are many business expenses that entrepreneurs overlook, such as automobile expenses, home office deductions, conferences, and continuing education. These expenses are just as important to running your business, and there is an opportunity to deduct them when you file your taxes. Speak with your tax professional if you have questions about what is and isn’t considered a business expense.
What you need to file taxes
You need to arm yourself with the right documents to make sure you have a hassle-free tax filing process. Lacking some important documents can lead to various errors, and you may end up repeating the process a couple of times. You can prepare a tax prep checklist to make sure you file returns with minimal headaches.
Here’s what you need for tax preparation:
- W-2 forms — If you’re employed, you probably receive your W-2 by the end of January every year. It’s a form that details how much you’ve earned, showing the amount of federal income tax that’s been deducted from your salary. If you work for multiple companies, you need to gather all the W-2s you receive from them.
- 1099-forms — They vary according to the payments you receive. Their suffixes represent what they stand for. For instance, Form 1099-DIV and Form 1099-INT report the dividend income and interest income you’ve earned. If you’re an independent contractor, you can file Form 1099-NEC, which details your earnings working in a non-employee capacity.
- Form 1098 — You’ll receive this form from your lender if you paid at least $600 as home mortgage interest in the previous tax year. Mortgage interest is a deductible — a deduction that helps decrease your taxable income.
- 1095 forms — You’ll receive these forms if you or any of your loved ones had health insurance in the previous year. They come in three versions: Form 1095-A, Form 1095-B, and Form 1095-C.
- Records of the previous year’s refund amount — The IRS normally considers state refunds to be taxable income. So when you’re itemizing, you need to collect any records of the refunds.
- Documents detailing other alternative incomes — Money you win when gambling, or when participating in award shows, also falls in the category of taxable income, and you need to keep its records.
When do you need to file a tax return?
You have a limited period for filing your taxes. For 2021, the deadline is on May 17, extended from the initial date of April 15 by the IRS. Note that this due date only applies to federal taxes. For state tax, you’ll have to confirm the tax deadline with your state to avoid missing it.
Even though the due date has changed, taxpayers can still expect to get their tax refund within 3 weeks of completing the filing process. A tax refund is a payment you receive from the IRS if you’ve paid more tax than you owe. According to the IRS, e-filing can help you get your tax refund more quickly, as opposed to manual filing. The latter often leads to a delay in the release of funds by the IRS, as the agency reports refund delays and other problems whenever too many manually filed returns require processing.
Failing to file your tax return on time can cause severe penalties, as we’ll see later. But if you’re due a refund, you won’t suffer any penalties for missing the deadline.
If you’re like most taxpayers, you often find yourself scrambling to organize things at the last minute. Such cases typically cost you money, as you may end up paying the IRS penalties. To avoid this, you can consider opting for tax extensions or setting up an online payment plan with the IRS.
A tax extension gives you a 6-month grace period, from the normal April 15 deadline, to get your documents in order if you’re normally very busy or disorganized. You can get one by submitting Form 4868 to the IRS. Note, however, that this extension only allows you to file your return at a later date. It doesn’t allow you to pay your taxes due at a later date.
Requesting an extension may be the ideal course of action for you if:
- You’re having a difficult time locating your tax forms, and you need more time.
- An unfortunate life event happens and leaves you incapable of filing your taxes
- You’re too busy at the moment
What will happen if you’re late to file taxes?
If you miss out on the May 17 deadline, you’ll have to pay a fee. Typically, the IRS charges you, after every 30 days, a 5% fine on the amount of unpaid income tax you haven’t reported. And unfortunately, the 30-day fine still kicks in even if you’ve filed your taxes only a few weeks later.
Let’s say, for instance, you owe $1,000 as unpaid income tax. If you’re late to file taxes by 2 months, you can expect a fine of about $100. ($1,000 x 0.05) x 2 = $100
How to get your tax deductions for 2021
Deductions on taxes reduce your taxable income, thus lowering the amount of taxes you have to pay. Basically, you subtract the deduction amount from your total gross income. With a lower earned income for the IRS to tax you on, you’ll pay lower taxes. These tax deductions and credits come from the expenses you incur throughout the year.
You can choose from two deductions options: standard or itemized.
Almost 9 out of every 10 US taxpayers opt for standard deductions when they file taxes. These are the fixed amounts that the government offers to taxpayers, and they vary from year to year.
What makes them very attractive to most taxpayers is that they’re much easier to claim; you don’t have to jump through hoops to calculate them. There’s no need to store loads of receipts for all your expenses.
Standard deductions are also available to everyone. Even if you haven’t incurred enough expenses to claim itemized deductions, you can still take the standard deductions. Another benefit is that they increase in amount depending on your filing status. For instance, for the 2020 tax year, if you’re blind or age 65 or older, your standard deduction rises by about $1,350. And this figure can further increase to $1,700 if you’re either single or the head of the household.
Here are the standard deduction amounts for the 2021 vs. 2020 tax year:
|Head of Household||$18,800||$18, 650|
|Married (Joint Taxpayers)||$25,100||$24,800|
They’re deductions that are based on the amount of the expenses you incur during the tax year. The IRS doesn’t include all expenses, though. They have to be for services, donations, or product purchases that the agency approves.
Here are some of the types of tax credit that you can itemize:
- Homeowners interest expenses
- Loan interest on home mortgage
- Medical or dental expenses
- Charitable contributions
- Premiums for long-term care
- Home-equity loans
To claim your itemized deduction, you have to keep track of the above expenses during the entire tax year. You need to store every receipt — from health insurance premiums to charity donations — in case the IRS ever audits you. While taking standard deductions seems like the less tiring option, you may save a lot more money by itemizing. Itemized deductions often exceed the standard ones; the only drawback is that they require much more effort and time when you file your tax return.
Even if your tax situation makes standard deductions your best option this year, you might be able to deduct some charitable donations separately, provided you’ve kept the records for them. And, in case this special tax deduction returns again next year, it couldn’t hurt to start saving records of your charitable donations going forward.
Standard deduction vs. itemizing
The perks and downsides of both options are clear. So, what option should you pick to get a more favorable tax bill? It all boils down to this: if you calculate your itemized deductions, and they’re more than the standard one, then opt for them.
If you want to save time, you can get tax software or hire a professional specializing in taxes to do the hard work for you. When using software, you can answer all questions concerning itemizing to see which option suits you best. The software can then tell you what tax credit you can claim if you use one or the other method. Then you can select the method that saves you more money on taxes.
How to choose the right filing status
The filing status you choose when you file your taxes affects a lot of things like tax rates, tax credits, and standard deductions. If you select the right status, you may get reduced tax rates and higher tax refunds.
For the most part, choosing a status is the easiest part of filing a tax return, especially if you’re currently single and never had a spouse. But it can get complex real quick when your life situation changes. Suppose you’re currently unmarried but are adopting a qualified dependent, for instance.
Here are the 5 main options you can choose from:
- Single — If you’re not in a marriage and don’t meet the qualifications for other options.
- Head of the household — If you’re unmarried and paying a portion of housing costs, ideally at least 50%.
- Married filing separately — If you earn a lot of money, or if your spouse has several issues with their taxes.
- Married filing jointly — If you’re in a marriage where you fully trust your spouse.
- Widow or widower — If you’ve lost your spouse and you have to take care of your child on your own.
You can use the IRS’s free online Interactive Tax Assistance if you’re finding it difficult to determine your filing status.
What are the tax filing methods?
Manual filing is the least used option among American taxpayers. The old-school way of filing tax returns, it requires that you manually complete Form 1040 and mail it, along with a check (if you owe money), to the IRS. Alternatively, you can pay by direct deposit. Receiving your refund (if you’re owed money) could take about eight weeks.
The method’s most obvious benefit is that it’s free. Hiring accountants can take a huge toll on your finances, and using software isn’t always cheap either. Manual filing also helps build your expertise on federal tax, since you see all the calculations. This contrasts with using tax tools, where the process is automated, and you aren’t filling out the tax forms.
The traditional option may also have some surprising security benefits. You don’t have to submit important financial information — such as bank account numbers like those for your savings account — online, where hackers and identity thieves might gain access to it.
The downside, though, is that it’s more susceptible to errors. According to the IRS, almost 21% of mailed returns contain errors — a far cry from the 1% for online returns.
Filing your tax return by paper can also quickly become overwhelming for inexperienced taxpayers. Collecting every receipt for deductions and credits, mortgage interests, and capital gains can be a tiring affair when you file taxes.
There are some instances, however, when paper filing may be a superior option to e-file.
Paper filing may be for you if:
- You have tax forms that may be difficult to submit online, e.g., multiple support agreements
- You’re an American citizen currently residing or working in another country
- You have dependents who have been claimed by another taxpayer
- You try to e-file, but you’re constantly getting rejections
- Your social security number has already been used by another taxpayer
Using online tax software
Filing taxes using online programs can set you back anywhere from $20 to $50, though some simple programs offer free services. Utilizing tax software can be likened to having an experienced CPA offering you their years’ worth of expertise.
Unsurprisingly, tax programs offer greater accuracy than manual tax filing. They minimize guesswork when you file your taxes, checking for any errors you might make. Consequently, there’s little chance of getting audited by the IRS. And if any calculation errors occur, some of the top tax apps compensate you for the penalties you’re fined.
Tax software mostly suits people who have few income sources, investments, properties, and tax credits. There’s no need to pay truckloads of cash to accountants if your filing process is very straightforward.
And if you find record-keeping difficult, investing in tax software may also be a worthwhile solution for you. You can use tax programs to store records of your taxes, and you’ll have minimal headaches when tracking your paperwork. These programs allow you to access your records anywhere at any time, provided you have a stable internet connection.
Hiring tax professionals
Professionals such as accountants, lawyers, and IRS agents can help you file your tax return accurately. According to the IRS, enlisting the services of a tax professional was the most popular option for most taxpayers in 2020 — almost 80.6 million tax returns were filed by pros.
Generally, you should opt for tax preparers when you have an overwhelming tax situation. If you’re filing your tax return for the first time; if you don’t understand most of the complex tax lingo; if you’ve gone through a major life change, then outsourcing may be the best solution.
Other scenarios where tax specialists may come in handy include:
- You’re an independent contractor — When you’re self-employed, you’re required to track all your expenses and income yourself. This can quickly exhaust you.
- You’ve recently purchased rental property — Rental property depreciates in value every year. Accounting for these losses can be complicated.
- You have investments in foreign countries — Foreign investments often have their own tax filing requirements.
Having to deal with the IRS is a dreaded experience for any taxpayer. But with a proper understanding of how to file taxes, it can be much more hassle-free. This guide offers you all the tools and information you need to tackle the task with minimal headaches.
Frequently asked questions
Is it easy to file your own taxes?
This depends on your tax situation. In general, though, the answer is “no.” They don’t the call the IRS a bureaucratic agency for nothing. Still, with care and the right tools, most people can file their own United States taxes successfully. Many do so every year.
Can I do my taxes myself?
Many people successfully do their own taxes every year. If your tax situation is complex, or if you’re not detail oriented and don’t like keeping records, you should consider seeking professional assistance or using professional tools.
Is it illegal to file your own taxes?
While it’s perfectly legal to file your own taxes (federal, state, and local), doing so incorrectly might cause you to violate a law or two. Even if you don’t violate any laws, you might make mistakes that incur penalties you’d rather not pay. Be careful!
What are the 3 main ways to file your taxes?
You can prepare your return and file your taxes yourself. You can have a tax professional prepare and file your taxes for you. And you can use tax-preparation software (or accounting software that includes tax-preparation functionality). With each of these 3 methods, you can either file paper returns (printed out or completed by hand) or file your returns electronically.
Lee Huffman is a former financial planner and corporate finance manager who now writes about early retirement, credit cards, travel, insurance, and other personal finance topics. He enjoys showing people how to travel more, spend less, and live better.