Key Takeaways:
- Tax season can be a stressful time. Gather documents and key details early to avoid the pain of last-minute filing.
- Deductions and credits can reduce your tax liability. Consider working with an advisor to identify your eligibility.
- Watch out for common tax mistakes, including information errors, overlooked deductions and missed deadlines. These mistakes can cost you significant amounts of time and money.
For millions of Americans, tax season can be hectic.
There’s the stress of meeting tax deadlines, gathering documents and navigating complex requirements. Plus, the looming risk of improper filing and penalties. It’s enough to give anyone the cold sweats.
But don’t worry. With the right process you can tackle tax season, securing valuable deductions and maximizing your tax-free contributions. In this guide, we’ll walk through key details every taxpayer should be aware of moving into tax season.
This guide is provided exclusively for informational purposes. Nothing here should be considered tax advice. Consult with a tax professional before making any decisions.
Timing: The Key to Stress-Free Tax Preparation
When it comes to tax filings, timing is essential.
The major stress of tax preparation is the looming deadline. By managing your time efficiently and preparing early, you can avoid the pain of last-minute scrambling.
Documents
Start by gathering your documents early. In late January, many companies begin sending out tax documents. Keep an eye out for:
- W2: If you work for an employer, they will send you a Form W2, listing your earnings and deductions for the year.
- 1099: If you’ve engaged in any freelance or contract work, the company you provided services for will send you a Form 1099. The 1099 is also used for pension distributions and IRA Distributions.
- K1: If you receive income from a partnership, S corporation, estate, or trust, expect to get a Form K1.
- 1098: If you paid mortgage interest, student loan interest, or tuition payments throughout the year, this will be documented in a Form 1098.
- 1095: If you are covered by health insurance, your coverage and payments will be shown in a Form 1095.
- 5498: If you made contributions to an IRA or received rollover contributions, the financial institution that holds your IRA will send you a Form 5498, detailing these contributions and the fair market value of your account.
Note: You may receive additional documentation depending on your income, employment type, contributions and other factors.
It’s also important to gather critical information upfront. Be sure to have your Social Security number and personal information available. Also, review your previous year’s tax documents to see if you have any credits that can be applied.
Deadlines
Next, make sure you’re aware of deadlines and key dates. Preparing in advance for deadlines can help you avoid last minute challenges.
Here are the most important tax dates:
- January 31st. This is the deadline for companies to issue W2 and 1099 Forms. Expect to receive your tax documents around or shortly after this date.
- April 15th. This is the individual tax filing deadline, and you need to have your taxes filed by the end of the day. Exceptions include the following: The date falls on a weekend or state holiday, the IRS extends your filing date because you live in a covered disaster area, you are an American living and working outside the U.S. or you file an extension by April 15th. This is also the last day to make IRA contributions that can be counted toward the previous tax year.
- October 15th. If you’ve filed for an extension, this is the deadline. All tax filings must be in by this date to avoid penalties. See extension details below.
Additionally, if you are self-employed or pay your own taxes, keep an eye on quarterly deadlines. April 15, June 15, September 15, and January 15 are the due dates for quarterly estimated tax payments, unless these days happen to fall over a weekend.
Extensions
When needed, the IRS provides extensions.
The extension process involves filing a Form 4868, “Application for Automatic Extension of Time
To File U.S. Individual Income Tax Return.” This form extends your filing deadline until October 15th of the tax filing year.
However, there are important considerations. First, the extension applies only to tax document filings. It does not apply to your tax payments. Failure to pay your outstanding payments by the original April 15th deadline can result in fines or interest penalties.
Second, Form 4868 applies only to Federal taxes. If you need an extension for State tax filings too, you will need to review your state’s extension policy. Some states do not require an additional filing if you do not owe taxes.
The earlier you start preparing for tax season, the easier it will be.
Understand Taxable Income and Brackets
How are taxes calculated?
For many taxpayers, this question is difficult to answer. The U.S. Tax Code includes a range of tax deductions, brackets and other factors.
To simplify, here are key considerations to keep in mind.
Taxable income
An important starting point is taxable income. Taxable income refers to “money, property, goods or services” you receive throughout the year. The IRS uses taxable income as a baseline for calculating your tax bill.
Common sources of taxable income include:
- Employment (W2 or self-employed)
- Business income
- Investment income
- Benefits
For a comprehensive list of taxable income sources, consult the IRS website.
Deductions
With your taxable income in hand, it’s next time to look at deductions. Deductions allow you to remove a portion of your taxable income from the final calculation. The IRS breaks deductions into two categories: standard or itemized.
A standard deduction is a set amount of money based on your filing status. The standard deduction simplifies the deduction process and is used by many taxpayers.
The standard deduction for 2024 is:
- $14,600 for single or married filing separately
- $29,200 for married couples filing jointly or qualifying surviving spouse
- $21,900 for head of household
However, if your expenses and losses are greater than the standard dedication, you can choose to itemize. This process involves listing out all expenses and losses from the calendar year and can be time intensive.
Work with a tax professional to identify the best deduction for your situation.
Tax brackets
Once you’ve calculated taxable income and deductions, it’s time to look at tax brackets. The U.S. Tax Code includes an escalating tax percentage based on income levels. As you earn more taxable income, additional dollars may be taxed at a higher rate.
Importantly, moving up tax brackets does not mean your full income is taxed at the higher level. Only the amount of income that spills into the next bracket will be taxed at that increased amount.
To view 2024 tax brackets, including taxable income levels for single filings, married couples filing jointly, or qualifying surviving spouse, visit the IRS website.
The U.S. Tax Code can get complex. Start with the relationship between taxable income, deductions and tax brackets.
Maximize Your Deductions and Credits
The U.S. Tax Code includes a number of deductions and credits. To reduce your tax bill, take full advantage of available tax exemptions.
Common deductions include:
- Mortgage interest. For homeowners, payments for mortgage interest may be deductible up to the first $750,000 of debt.
- Student loan and qualified education expenses. Tuition, work-related education expenses and student loan interest may be deductible based on income levels and expense amount. To file education deductions, take a look at student loan interest forms 1098-E and 1098-T.
- Medical and dental expenses. Where medical or dental expenses exceed 7.5% of your adjusted gross income, you may be able to deduct them.
You may also be able to take advantage of credits, including:
- Child tax credit. Parents and guardians may be eligible for a tax credit for dependent children.
- Earned income tax credit. Low to moderate income households may be able to take advantage of earned income credits if they meet requirements.
Many taxpayers choose to work with professionals to maximize their tax deductions and credits.
Know the Significance of Retirement Contributions
Contributing to retirement accounts is a meaningful way to plan for your later years and realize an immediate tax benefit. Under the current U.S. Tax Code, taxpayers can contribute income into their employer-sponsored or individual retirement accounts.
With traditional IRA and 401k accounts, contributions are paid pre-tax. This action essentially removes the contributions from taxable income before calculating your tax bill—with taxes paid at the time of retirement. Importantly, traditional IRAs include income limits if one of the spouses is covered under an employer pension plan.
Meanwhile, with Roth IRA accounts, contributions are taxed immediately. However, at the time of retirement, the contributions can be withdrawn without any tax impact. It’s also important to note that Roth IRAs include income limits.
For taxpayers looking to reduce their tax bill, IRA contributions can be a valuable tool. The IRS sets annual contribution limits, which can be maximized to realize the full tax savings.
In 2024, the contribution limits for traditional and Roth accounts are $7,000 for individuals under the age of 50, and $8,000 for individuals 50 or older. Note: You cannot contribute more than your earned income. Contribution limits may be different for employer-sponsored plans.
Traditional or Roth IRA contributions can offset taxable income, resulting in significant tax savings and long-term financial health.
Avoid Common Tax Filing Mistakes
Tax filings can be complex. Every year, taxpayers make small mistakes that slow down their returns and cause significant headaches.
To avoid mistakes, keep an eye out for these common issues:
- Incorrect information. Typos in your social security number, address or other key pieces of information can result in a returned filing. Double-check your details before submitting your final documents.
- Overlooked deductions and credits. Every year, taxpayers miss out on millions of dollars in available deductions and credits. To avoid this, review your eligibility and consider working with a tax professional.
- Miscalculating income and deductions. Accurate tax filing requires calculating your taxable income, deductions and tax brackets. Be sure to carefully walk through this process, and get a second review before you submit.
- Missing deadlines. Tax deadlines are essential, and often have little wiggle room. Make sure you know your upcoming deadlines and plan ahead. Don’t wait until the last minute to prepare your tax documents.
Minor errors can cost you time and money in the tax-filing process.
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