“In this world nothing can be certain, except death and taxes.” –Benjamin Franklin
Like it or not, we are nearing tax season here in the good old U S of A. If you are anything like me, taxes are not your forte and the mere mention of taxes might give you a feeling of dread.
Guess what? Taxes really are confusing. There is no one size fits all approach to taxes. With that being said, we provide some guidance towards understanding and simplifying your taxes below.
Note: I am not a licensed tax professional, and as such, you should do what makes sense for your unique situation. The opinions expressed here are merely a result of our own experiences.
Tax Software vs. Tax Professionals
To start out with, it rarely pays dividends to have a tax professional. Unless you own a business where you have a lot of write-offs and general complexity, it rarely makes sense to hire a professional. As most readers most likely have an employer, we will focus this demographic. Sure, you may get more money back on your return with a professional, however most people tend to spend more with the professional than they receive from the gain in refund amount.
We use online software (H&R Block or TurboTax) to submit our state and federal taxes. The cost is minimal, and the software is user friendly. Those of you who are highly motivated can file your own taxes and remove most filing fees altogether. My only problem with this approach is the time commitment and confusion level. Simplicity is king.
Prep and Organize
You will need to gather all your documents together before filing your taxes. Soon, employers will email or snail-mail documents containing your earnings statements for the previous year. Remember that you have to report all your income, including tips. Make sure you have a W-2 from each employer you worked for as well as any 1099 form for freelance work. Employers are required to mail out all forms by the end of January.
When Can I Start?
The IRS will begin accepting 2015 federal income tax returns on Tuesday, January 19th.
As soon as you receive your W-2 and 1099 forms you can create an account with one of the online tax software providers.
Most Americans (60 million, including us) file the simple 1040-EZ tax return. This is the route we go and it’s fairly straightforward with a lot of simple questions. We qualified for a variety of deductions. Common deductions include:
1) Student loan interest – $2,500
2) Saver’s credit associated with an employer’s 401(k) or IRA – $1,000
3) Home mortgage interest (form 1098)
4) Charitable donations (% of gross income limits)
While it’s great to receive a surprise tax refund, it’s not recommended. Getting a fat check back from Uncle Sam means you’ve had him hold more of your money, interest free, until the end of the year. You should adjust the withholdings amount on your W-4 form with the goal of having a return of $0 at the end of the year. That way you get more on your paycheck throughout the year and can invest or do whatever you want with it. Use this handy online tax withholding calculator.
Also, you should file early. This keeps the hackers/lowlifes/etc. from filling a fraudulent tax return in your name and then collecting the return.