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February 2021: Now is the Time to Get Ready for Tax Filing Season

Don’t look now, but tax filing season is right around the corner. Tax Day — or the deadline for filing your 2020 federal and (if required) state income tax return — will fall on the traditional date of April 15 this year, which is a Thursday.

While you have until this date to prepare and file your tax return, it’s usually smart to not wait until the last minute to get started. It’s not uncommon to encounter roadblocks or obstacles when preparing taxes, so the sooner you get started, the more time you’ll have to complete your return — and the sooner you’ll get your tax refund if you’ve got one coming.

Getting Started

As you get ready to prepare your federal and state tax returns, start by tracking down last year’s returns. This can help you remember which tax forms and other documents you’ll need this time around. Last year’s return will also include information like Social Security numbers for all of your family members and bank account numbers for direct deposit of your refund.

Next, start pulling together everything you need to document all your sources of income in 2020. For most people, the main form documenting income is Form W-2, which lists wage income from your employer(s). Employers are required to send out W-2 forms to all employees by January 31. 

Other income forms are Form 1099-MISC, which substantiates freelance or gig work earnings, awards and prizes; Form 1099-INT, which lists interest earned on savings accounts and CDs; Form SSA-1099, which substantiates Social Security income; and Schedule K-1 if you’re a partner in a business, which lists each partner’s share of business earnings, losses, deductions and credits.

Tax Deductions and Credits

You’ll want to make sure you take advantage of all the tax deductions and credits you’re entitled to when filing your tax return in order to potentially lower your tax bill. Deductions reduce your taxable income (and thus your tax bill) while tax credits lower your tax liability on a dollar-for-dollar basis. So the next step is to gather documents supporting potential tax deductions and credits. 

These typically include statements from charitable organizations listing any donations you made during the year; Form 1098, which lists the amount of mortgage interest and taxes you paid last year; Forms 1098-T and 1098-E listing deductible educational expenses and student loan interest, respectively; and Form W-2, which lists any contributions you made to a qualified retirement plan and the state and local taxes you paid last year.

Form W-2 will also list how much income tax was withheld from your gross pay last year. If you’re self-employed and made estimated tax payments each quarter, gather documentation to substantiate these payments, such as canceled checks made out to the IRS.

Finally, if you’re self-employed or had income from a freelance, consulting or gig job last year, you should receive a 1099-MISC form from each client that paid you at least $600 during the year. Even if a client didn’t send you a 1099-MISC form, you still must report earned income on your tax return. Failure to do so could result in underpayment of income taxes, which could lead to penalties and fines from the IRS.

Which Tax Forms Will You Need?

Now it’s time to determine which tax forms you’ll need to file. Form 1040, the U.S. Individual Income Tax Return, is the basic tax form used by most Americans to file their federal income taxes. It includes basic personal information like your name, Social Security number, address, filing status, and taxes you paid last year.

Note: Starting with the 2018 tax year, Form 1040A and Form 1040EZ — which were simplified versions of Form 1040 — have been eliminated. Instead, the IRS created a new shorter Form 1040 to be used by all individual taxpayers.

Depending on your tax situation, you might also have to file a few more tax forms, including the following:

  • Schedule A — You’ll use this form to list all of your deductions if you choose to itemize. The standard deduction for 2020 is $12,400 for singles and $24,800 for married couples filing jointly. If your itemized deductions add up to more than this, you should consider itemizing and filing this form along with Form 1040.
  • Schedules 1, 2 and 3 — Schedule 1 reports additional sources of taxable income not reported on a W-2 form, such as rental income, alimony and tax refunds. Schedule 2 must be filed along with Form 1040 if you’re subject to the alternative minimum tax (AMT). And Schedule 3 is filed in order to claim certain nonrefundable tax credits such as education credits, residential energy credits and the foreign tax credit.
  • Schedule SE — If you had earnings from a freelance, consulting or gig job last year, you’ll file this form along with Form 1040 to report your self-employment income.

Filing Your Tax Return

When you’ve finished preparing your tax return, you can file it by paper or electronically. The IRS strongly encourages electronic tax filing and direct deposit of tax refunds in order to expedite processing and speed up receipt of tax refunds. Visit the IRS website to learn more about the various e-filing options available.

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