Tax Preparation Guide

Please note that the content in this article is purely informational and should not be taken as professional or legal advice. Tax laws and regulations are subject to change without notice. Consult an experienced accounting team like John Freeman CPA before making any serious financial or legal decisions.

All taxpayers are required to file their federal income taxes to the IRS in April before the set deadline. Regardless if you are preparing your taxes yourself or hiring a certified tax preparer, there are several things you need to do in regards to tax preparation. 

The following guide takes you through the most common steps needed to get your tax return started and submitted. 

Gather Your Personal Information 

There are a few documents that you will need to find to kick-off the tax preparation process:

  1. Previous years taxes – both federal and state (if applicable)
  2. Social security number for yourself, your spouse and all dependents OR your tax ID number 
  3. Routing and account numbers to receive your refund by direct deposit or pay your balance due to the IRS

If applicable, you will also need the following additional information:

  1. Your spouse’s full name and date of birth
  2. Identity Protection Pin for you, your spouse or your dependent(s) 
  3. Your Economic Impact Payment (i.e. stimulus payment) – (IRS letter 6475) 

If you have a dependent(s), you will also need the following information: 

  1. Date of birth and social security numbers or tax ID numbers of all dependents 
  2. Childcare records (including the provider’s tax ID number, name and address) 
  3. Income of dependents 
  4. Form 8332 showing the child’s custodial parent is releasing their right to claim a child you, the noncustodial parent (if applicable)
  5. IRS Letter 6419 showing the details you need to report for your advance Child Tax Credit (CTC) payments\
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Gather Your Income Forms 

You will need to gather all documents regarding any taxable money you received during the applicable tax year. 

Every employer must file a Form W-2 for each employee and issue it to the employee by mail or electronically by January 31. 

Other forms of income are captured through 1099 forms, which have several variations depending on the type of payment received. These documents capture different types of payments made by an individual or a business that typically isn’t your employer. The payer will fill out the appropriate 1099 form and send a copy to you and the IRS. 

Types of Income covered by the 1099 forms include but are not limited to: 

  • Unemployment (1099-G)
  • Self-employed work (1099-NEC)
  • Miscellaneous (1099-MISC)
  • Pension/IRA/annuity income (1099-R)
  • Interest, dividend income (1099-INT, 1099-OID, 1099-DIV)
  • Income from sales of stock or other property (1099-B, 1099-S)

Don’t forget to report additional revenue streams, such as transactions involving cryptocurrency or rental income. It is your responsibility to report all income to the IRS, failure to report income can lead to serious consequences. 

It is very important to verify that you have received all documents related to your income for a given tax year before filing your tax return. It can be helpful to look back at your previous tax return to verify that you have all the documents you need. 

Determine Your Deductions

Deductions play a key role in the tax preparation process as they can help reduce your taxable income. A tax deduction is an item that you can subtract from your taxable income.

There are two ways to claim tax deductions when preparing your taxes.

  1. Standard Deduction
  2. Itemized Deduction 

 You must choose one option when preparing your taxes. 

The standard deduction is a flat-dollar reduction against your adjusted gross income that depends on your filing status. An itemized deduction allows you to reduce your taxable income by applying any available tax deductions that you qualify for. The key to this option is documentation. The itemized deduction is a far more time-consuming and labor-intensive choice, as it requires proof that you are entitled to each deduction.  

The approach you take will depend on several factors, such as your tax bracket and record management skills. If you select the itemized deduction route, a key part of the tax preparation process is gathering records and receipts related to potential deductions you are eligible for. 

Common Itemized Deductions Include: 

  • Child tax credit 
  • Child and dependent care tax credit 
  • Student loan interest deduction
  • Charitable donations deduction 
  • Medical expenses deductions 
  • Deduction for state and local taxes 
  • 401(k) contributions deduction 
  • Home office deduction

Determine Your Credits

Tax credits provide a dollar-for-dollar reduction of any tax you owe. Credits are commonly associated with incentives that encourage behaviors beneficial to the economy or environment. 

In order to claim a tax credit, you are required to provide documentation proving that you qualify. 

Examples of tax credits include: 

  • Earned Income Tax Credit can help low to moderate-income earners reduce the amount of tax they owe. 
  • Child Tax Credit (CTC) can reduce the amount of money you owe based on your income and the number of qualifying children. 
  • Tax Benefits for Education can help with education-related expenses, including tuition for college, elementary and secondary school. 
  • Energy Tax Incentives can make home and business improvements more attractive and affordable. Eligible expenses include purchasing energy efficient appliances and making energy-saving improvements. 
Photo by Kelly Sikkema on Unsplash

Understand Payments and Taxes You’ve Already Paid 

It is in your best interest to properly document the taxes you’ve already paid. 

Most individuals have taxes withheld from their paycheck to help cover tax liabilities. This information is captured on the W-2 forms. However, if you happen to make federal estimated tax payments during the year, it is important that you have that information readily available. 

Other taxes you may have paid include state and local income taxes, real estate taxes and personal property taxes. Keeping track of the taxes paid to help you from overpaying in the long run. 

Final Steps to File a Tax Return 

Once you have gathered all the required paperwork and documents needed to prepare your tax return, there are a few decisions to be made that will determine how your taxes are filed. 

  1. Choose your filing status based on your marital status 
  2. Determine if you want to claim a standard deduction or itemized deduction
  3. Decide how you want to file your taxes (e.g. tax preparation software or tax preparation professional)
  4. If you are hiring a tax preparation professional, ensure they have all the documents needed to file your taxes 
  5. File your taxes before the deadline 

The following provides a standard guide for the tax preparation process based on the average taxpayer. However, not everyone’s taxes are this simple nor is their situation (e.g. recently divorced, out of state taxes). It is important to tailor this guide to your specific needs, especially if your situation involves casualty losses, audits, back taxes, or retirement plan distributions. 

Our yeam at John Freeman CPA (a professional tax preparer Cedar Rapids Iowa) can help minimize your tax liability and maximize your savings. Contact us today for a FREE financial and tax consultation – 319-396-5660!

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