With everything that happened during 2020, fundamental aspects such as health, the economy, well-being, work, and especially personal finances have been affected. This year, the last thing you want to do is think about tax preparation, yet here comes Tax Day 2021!
Unfortunately, whether you like it or not, tax season is approaching quickly, and the better prepared you are, the faster you can free yourself from that stress that overwhelms come each April. The deadline for filing your taxes in 2021 is April 15th, and according to statistics regarding tax season 2020, over 39 million people had already filed their taxes by this time last year.
Aren’t one of those who file ahead of time? No worries! Here’s a complete guide on what to keep in mind for Tax Day 2021 and how to walk yourself through your own tax preparation checklist.
What Information Do You Need to File Taxes?
Let’s break down the various types of information you’ll need to file your taxes (this is particularly helpful if you’re filing your taxes for the first time or are unsure of what you might need in your new financial situation).
Personal Information
Let's start with the most basic information on any tax preparation checklist. You’ll need:
- Last year's taxes, which includes both federal and state taxes (if you live in a state that collects state taxes). While they’re not necessary to file your 2021 taxes, they help give you a foundation from which to work on.
- Social security numbers for you, your spouse, and all dependents you’re claiming on your tax return. This is only necessary, though, if you’re filing together as a married couple or are filing as the head of a household.
Income
Weird that you need your income to file income tax returns, right? Gather all the documents that confirm the money you received during the previous year. This can include:
- W-2 forms. Employers must issue their W-2 forms to employees by January 31st, so keep an eye out in your email or in your physical mailbox.
- 1099 Forms. Depending on the type of work you did, you might receive a 1099 form for separate non-salaried earnings. Form 1099-MISC, for example, is for contract or freelance jobs. If you get paid through a third party, like PayPal or Amazon, you will likely get a 1099-K. Investing and making that cash money? You’ll get a 1099-INT for interest, 1099-DIV for dividends, and 1099-B for broker-managed transactions. Unfortunately, you’ll have to submit all of those when filing your taxes.
Deductions
Deductions help reduce your taxable income, which ultimately leads to you paying a lot less in the end. The key to claiming deductions is documentation. This means: KEEP TRACK OF YOUR EXPENSES! Ensure you’re keeping track of all of your expenses throughout the year so that you’re able to deduct them from your overall tax bill.
Research deductions in your industry to ensure you’re tracking the correct things and not tracking unnecessary expenses you ultimately won’t be able to deduct.
You don’t need to itemize information to benefit from some deductions, though. These are listed directly on Form 1040 for you to see, but here are some of the most common deductions to consider:
- Contributions to any retirement accounts. If you make contributions to a traditional IRA or a self-employed retirement account, you’re able to deduct that dollar amount. However, there are limits to these contributions and deductions, so be sure to read up on those, too.
- Education expenses. Students can claim a deduction for the tuition and fees they paid, as well as the interest they paid on their loans throughout the previous year. You’ll need a Form 1098-T to do this, which shows your educational transactions. If you have student loans, your lender should send you a Form 1098-E that contains details about your student loan and what you paid throughout the year.
- Charitable donations. To make sure your generosity pays off at tax time, keep receipts for charitable donations. The IRS may deny your claim if you don’t submit it with the proper verification.
- State and local taxes. Did you know that you can deduct state and local taxes from your federal tax bill (up to $10,000!)?. The IRS provides you with tables that feature average amounts you can claim, which is great because it means you don’t technically have to keep all of those receipts. However, the tax on a major purchase can be added to the amount in the table, so keep those receipts if you think you’ll go over or have purchased lots of large items this year.
Credits
Next on the tax preparation checklist are credits, which are the most valuable aspects of deductions. Here are some of the most common tax credits:
- American Opportunity and Lifetime Learning Credits. You’ll need Form 1098-T to claim education credits, but with both of these, you’re able to deduct thousands of education-related expenses as long as you meet the requirements.
- Child tax credit. This standard credit is worth up to $2,000 per dependent child. So, you’re gonna want to claim it!
Payments
If you’re not self-employed or the owner of a small business, you likely won’t have to worry about this, but if you’ve been making regular tax payments throughout the year, you’ll want to ensure you have that information on hand so that you’re able to deduct those payments that you’ve already made from your total amount.
Ready to File Your 2021 Taxes?
While it's important to properly file your tax return correctly in 2021 (and every other year), it’s also important to use this time to take a bigger look at your overall financial situation. Taxes are complicated, sure, but filing them provides you with a unique space and opportunity to really analyze what you’re earning and spending each year.
If you need additional help, an experienced financial professional can help you with your tax planning while keeping in mind your overall goals and financial plan. Don’t want to pay the money for that? We get it! Check out our guide on how to file your taxes for free and ensure that you’re not wasting money on paid services if you don’t need them.
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