A Basic Guide to Help Making Filing your Taxes Easier
Tax return season is here. And with the Tax Cut & Jobs Act (tax reform) that is now in effect, there are a number of notable changes.
If you visit the IRS website and have a look around, there really is no simple tax guide to get you started, and things can seem overwhelming. And if you’re a first-time DIY’er, nobody teaches you the basics of how to do taxes. So I wanted to do you the service and highlight a good chunk of the basics on how to do your taxes here.
When you’re ready to file your taxes, the following tips should help you with noteworthy dates, credits, deductions, reminders, and some of the most common deductions, credits, deadlines, best and cheapest e-file tap prep vendors, and more.
What’s New for 2018?
Where do I start? The Tax Cut & Jobs Act (tax reform) that was passed in late 2017 will go in to effect for the 2018 tax year, and it will bring a number of notable changes. Here’s a short list:
- many of the tax brackets were modified.
- the personal exemption deduction has been suspended.
- moving expenses and tax preparation are no longer deductible.
- you can no longer deduct interest on a home equity loan, unless you used the loan to buy, build, or significantly improve your home and the loan is secured by your home.
- the standard deductions were nearly doubled.
- “miscellaneous itemized deductions” like un-reimbursed job expenses have been suspended. These were deductible to the extent they exceeded 2% of a taxpayer’s AGI previously.
- No more 1040 variations (1040A, 1040EZ), but a bunch of new schedule forms have been added.
- AMT exemptions were increased.
- the child tax credit was doubled from $1,000 per child to $2,000, and the amount that is refundable increased up to $1,400.
- state and local property, income, and sales taxes (SALT) deduction was capped at $10,000 – versus no prior limit.
- there is a new a 20% deduction for incomes from “pass-through” entities (partnerships, S Corps, sole proprietorships) for most business types.
What Tax Forms You Need to do your Taxes?
Before you get started, you’ll need to get tax forms from your employer(s), bank(s), brokerage(s), and more. Without proper forms, you can’t do your taxes. Here is a full list of tax forms, but a few of the more common ones include:
- W2: covers income, withholding, etc. from your employer
- 1095A: if you bought health insurance on a state or federal exchange.
- 1098: covers mortgage interest paid, over $600.
- 1098-T: higher education expenses paid.
- 1098-E: student loan interest paid.
- 1099-MISC: miscellaneous income exceeding $600 from any one source (i.e. freelance or consulting.
- 1099-B: investment brokerage statement that covers gains/losses from trades.
- 1099-DIV: investment brokerage statement that covers any taxable capital gains or dividends paid out to you.
- 1099-INT: taxable interest exceeding $10, typically from a savings, checking, CD, or money market bank account.
If you have not yet received forms you are expecting, I would recommend logging in to the respective account online and trying to find the form there to download.
Do I Need to File a Tax Return?
You may be wondering “Do I need to file a tax return?“. In fact, there may be scenarios where you do not need to file a tax return, including if your income is below specified minimum income thresholds. However, even in these scenarios, it may still be advantageous to file a federal tax return, as you may be eligible for at least one of a number of refundable tax credits from the IRS.
File your Taxes Early to Help Prevent Identity Theft
Once you have everything you’re expecting, get started! There is incentive to file early. For starters, if you are owed a refund, the sooner you file, the sooner you will receive your refund.
Second, e-file tax identity theft fraud is a problem. This occurs when fraudulent tax returns for refunds are filed in your name. The longer you wait to file a return, the greater the chance someone could fraudulently beat you to it and claim a refund in your name.
This has become an epidemic in recent years. In just the 2016 tax year, the Government Accountability Office estimates that thieves attempted to claim $12.2 billion in fraudulent tax refunds.
If you have self-employment income, you should also consider using an IRS EIN number in place of a Social Security Number to help limit the possibility of SSN theft.
How Should I File my Taxes?
Last year, 135,154,000 of 153,383,000 (88.1%) of returns were e-filed. E-filing is the quickest, safest, and most reliable way to file.
Where Should I E-file?
There are many cheap or free ways to e-file. Here are a few deals from the best vendors (with steep discounts via affiliate links):
My two favorite (and my pick for the two best tax software programs) are:
- H&R Block (25% off at that link)
- Turbotax (up to $20 off paid online versions at that link – ends 2/18/19)
Other popular tax prep programs include:
- TaxAct: 20% off at link
- Taxslayer: 20% off at link, with code “Offer20”
- Liberty Tax: 20% off at link
- eSmartTax: 20% off at link
- E-file.com: 30% off at link
How Should I Pay My Taxes?
For reasons I just highlighted, I recommend that you pay your taxes online – it’s quicker, safer, more reliable, and can help prevent identity theft tax fraud.
There are ways to actually pay your taxes with a credit card and profit. With estimated tax payments, there are abundant opportunities to do so (if you do it wisely).
When can I Start Filing my Taxes this year?
You could start filing your taxes as soon as January 28, 2019. So long as you have all of the required income, deduction, and other tax forms you are expecting, you can begin filing your return ASAP.
When is the Tax Deadline?
This year’s tax filing deadline is Monday, April 15, 2019. No weekend extensions to push it beyond the 15th this year, as in recent years.
3 exceptions noted thus far: with Patriots’ Day holiday on April 15 in Maine and Massachusetts and the Emancipation Day holiday on April 16 in the District of Columbia, taxpayers who live in Maine, Massachusetts, and DC have until April 17, 2019 to file their returns.
Your tax filing deadline AND payment deadline, if you are out of country, is Monday, June 17, 2019.
Note that this is the date that you must have your return postmarked or e-filed.
What if I Need to File a Tax Extension?
If, for one reason or another, you are unable to file your tax return by the April 15 tax deadline, you can file for an IRS tax extension. Note that the extension must be postmarked by the April 15 deadline also.
Also, a key disclaimer – an extension of time to file is not an extension of time to pay. Any taxes due are still due on the normal filing deadline date.
How to File a Tax Extension
In order to file a tax extension, you will need to fill out IRS form 4868. Note that filing the extension does not get you off of the hook, you still need to pay any estimated taxes by the April 15 deadline. If you don’t you will owe interest and possibly a penalty on your taxes owed.
Important note: filing the extension does not mean you don’t have to pay expected taxes for 6 months. You still need to pay estimated taxes by the original deadline. If you don’t, you could owe interest and possibly a penalty on taxes owed.
Can I Still Lower my Tax Obligation for Last Year?
Yes. Even after a calendar year is over, there are still last minute tax deductions and credits that can lower your taxes, up until the tax deadline.
You can contribute to personal retirement accounts, such as a traditional IRA, Keogh Plan, HSA (believe it or not), or SEP IRA. Contributions are considered tax-deductible since you will pay taxes on that income when you withdraw funds. The IRA contribution deadline and HSA contribution deadline are the same date as the tax deadline.
Contributing will lower your overall adjusted gross income (AGI) and potentially bring you a bigger return or cut the taxes you owe. And it’s an “above the line” deduction, which means that you do not need to itemize to claim it.
Make sure your income is eligible for these contributions, based on income level, before you contribute. If your income is low enough, you might also qualify for the Saver’s Credit for contributing to one of these types of retirement accounts.
However, it is too late to take advantage of many tax deductions for 2018, such as charitable contributions or employee contributions to tax advantaged accounts (i.e. 401K’s, 403B’s, 457B’s). The deadline to contribute was the final day of the calendar year.
Should I Take the Standard Deduction or Itemize My Taxes?
If you have a sizeable amount of tax credits and deductions, it wouldn’t hurt to run the numbers to see if itemizing your taxes could result in a lower tax obligation for you versus a standard deduction. Itemizing deductions could even put you in to a lower tax bracket.
With the Tax Cut & Jobs Act, the standard deductions have nearly doubled, and I would expect that significantly fewer taxpayers will be itemizing their deductions this year.
The standard deductions for 2018 are:
- $12,000 for single filers
- $12,000 for married, filing separately
- $24,000 for married filing jointly
- $18,000 for head of household
- $0 personal exemption
If your itemized deductions don’t surpass those amounts, the standard deduction is the way to go (and it’s simpler).
The Most Popular Tax Deductions and Credits
If you did any of the following during 2018, it could impact your return:
- If you made home energy efficiency improvements? You could qualify for an energy tax credit. The credits for efficiency-improving items like windows, doors, furnaces, etc. have not yet been restored for 2018. The 30% credits for solar, fuel cells, wind, and geothermal live on. Note that aside from solar, these were late retroactive additions, due to Bipartisan Budget Act of 2018 – signed in February of 2018
- Pay interest on a mortgage or property tax? Both are deductible.
- If you have earned income below certain levels, you might be eligible for the Earned Income Tax Credit (EITC).
- If you sold investments at a loss and those losses were greater than your gains, you could claim a capital loss tax deduction.
- Have a child this year or act as guardian for at least half a year? You could claim a child tax credit.
- Have self-employment income? You may be able to deduct business related expenses and your home office and can contribute a portion of your income to self-employment retirement accounts, such as a solo 401K or SEP IRA. And you may still be able to contribute for last year.
- Participate in the sharing economy? The IRS has created a sharing economy tax guide to help you make sense of deductions (and income) that you should report.
- Contribute to an HSA outside of payroll? That’s deductible.
- Pay tuition or have other education related expenses? There are education tax credits and deductions that you can claim.
- Make charitable donations? You can still deduct them. Note that there is a IRS maximum charitable donation limit, which is based off your income level and what type of organization you contribute to.
What if I Got a Refund?
Getting a tax refund is not a good thing. A refund is the equivalent of loaning your paycheck to the federal government, interest-free, over the prior year. And refunds typically result in a spending spree that I like to call Tax Refund Windfall Syndrome.
The average tax refund last year was $2,825. That’s an average of $2,825 in interest-free loans from 110,806,000 lenders (aka taxpayers), for a combined $312 billion. This works out to just over 72.24% of returns resulting in a refund.
If you want to stop giving out an interest-free loan to the government, change your withholding tax allowances through your payroll department. Aim for a slight amount due back to the government, without having to pay a penalty. That way, you’re the one getting the interest-free loan, and you have more money over the rest of the year that you can save in employer sponsored retirement accounts.
How Can I Check my Tax Refund Status?
If you start getting worried or just plain impatient, you can check on your tax refund status.
Beware of scams in the form of helping you check your refund status. Keep in mind that the IRS will never send you an email with this option. To check it, you should go to www.irs.gov and click ‘where’s my refund‘.
What is the Presidential Election Campaign Box on the 1040 Form?
Ever wonder what the ominous Presidential Election Campaign box on your 1040 form does and if it has an impact on your taxes due (or refund)? It has no impact on your tax filing, and the funds are the only source of public financing for Presidential primary and general elections. Funds also go towards pediatric cancer research through the NIH. So go ahead and check that box!
How Long Should you Keep your Tax Records?
There are varying opinions on how long to keep your tax records. I tend to err on the side of caution when it comes to being ready for possible audits. The IRS has a 3-year period of limitations, within which you can be audited or amend your returns.
However, if they have reason to believe that you have filed a fraudulent return or no return at all, they can audit you at any time. Some states have a statute of limitations that is longer that 3 years as well. So, I personally recommend keeping 3 years of paper documentation, but then going the extra step of digitizing documentation and keeping it stored securely in the cloud. It will help you sleep easier at night.
Tax Tips from Readers
Here are a few tips from readers from the H&R Block contest that I recently ran:
“There are so many tax benefits out there for working parents. My two favorite are the flexible spending account and the dependent care flexible spending account. You pay no taxes on several thousand dollars worth of income, and if you’re in the 22% tax bracket you can save over $1000 on your taxes, just from those two above the line deductions.”
“File your taxes early. You will be better able to get help from busy accountants early if you need it and you don’t have to deal with deadline stress. I adjust my withholding to ensure a refund just big enough that I’ll want to do my taxes early to get that money.”
“I love doing my own taxes, despite the time it takes, because it forces me to be extra aware of all our expenses and investments and where we can do better. It ties nicely into our annual financial self assessment we do in our home every January. And using the same software and importing prior data has made things easier every year- even as our complexity (and family!) grows. My tip? We do a lot of small charitable donations throughout the year, so I have a folder in my email that I store all the e-receipts. Easy and ensures we don’t miss any deductions!”
“My W-2’s imported electronically using TurboTax in the past. Interestingly, I went from a small refund with my information inputted to owing a significant amount after inputting my wife’s information! It had me stumped for a little, but eventually I found that her W-2 imported incorrectly. Tip: Double check the import when you first go through and it will save you a headache!”
“It took me a while to realize this, but as a self-employed person, it’s important to realize conferences + training are good expenses (and write-offs come tax time) that I should prioritize! I know this isn’t really a ‘tip’, but if you’re worried about investing in your business, like I was for a while, read up on taxes, what’s deductible and what’s not – and then act on it! And keep receipts, of course.”
Thanks all, and happy filing!
Tax Return Discussion:
- Have you started or finished your tax return yet?
- How did you first learn how to do your taxes?
- Are you expecting a refund or taxes owed?
- What are your favorite tax tips?