Taxes have always been a difficult thing to understand, and the recent tax reforms have made everything so much more confusing. Whether you’ve been filing your taxes for years, or next April will be your first time doing this, this tedious task is never easy. See Tax Brackets in 2020 Explained
The numbers get mixed up, the paperwork is overwhelming, and you’re never sure whether you’ve done everything correctly.
This is the reason why this job is typically best left to the professionals. Hiring tax services is often your best choice since the pros can help you ensure that all of your finances are in order.
But, regardless of whether you want to do it yourself, or pay for the tax services, it’s always in your best interest to learn the basics of filing taxes.
So, read on to learn more about why filing taxes is important, what information you’ll need to collect, which tax form can cause the most headache, and whether you should file your taxes yourself or pay for tax services.
The Importance of Filing & Taxes Services
It is your civic duty to pay your taxes, and there’s no going around it. If you don’t pay your taxes, you can face steep penalties and will either have to pay a hefty fine or go to jail. So, it’s in your best interest to always pay your taxes, and if you want to ensure your financial stability, you should always pay your taxes on time.
While it is a tiring process, paying your taxes on time is crucial, and it’s in your best interest to start preparing for tax day in advance.
If you’re late with your tax payments, you will encounter a few fines. Primarily, you’ll be charged a failure-to-file penalty. You will have to pay an additional 5% of the amount that you owe, and each month you’re late, you’ll pay 5% more, up to 25%.
In addition, if you file your taxes 60 days late, you will either have to pay 100% of the taxes that you owe, or $135.
In case you file your taxes but fail to pay them, you will face the failure-to-pay penalty, which will cost you less than the failure-to-file penalty, but it’s still not a good thing. This penalty is 0.5% for each month that you don’t pay, and it can go up to 25%.
Don’t forget, you’ll also have to pay the interest if you don’t pay your taxes on time, so it’s crucial that you start preparing for tax day early.
Details & Information You’ll Need to Gather
Whether you’re filing your taxes yourself or hiring tax services, you’ll need to get your details and information in order. Here’s a quick checklist of everything you’ll need to have on hand:
- Personal information. This includes your social security number or tax ID number. If you have a spouse or any dependents, you’ll need to provide their social security numbers as well. Don’t forget to include your, your spouse’s, and your dependents’ dates of birth.
- W-2 form. The W-2 form is used to show how much income you’ve earned in the previous year, and how much taxes you’ve paid for already. If you have more than 1 job, you’ll probably have to file more than 1 W-2 Forms.
- 1099 Forms. These are records that show that a person or entity (other than your employer) has given you money.
- Property taxes
- Mortgage interest
- Miscellaneous income records. These can include lottery payouts, gambling winnings, or other prize winnings and awards.
- Bank statements
- Retirement account contributions
- Education expenses
- Classroom expenses
- State and local taxes already paid
- Previous year’s federal and state tax returns
- Charitable donations
One of the most important forms that you need to fill out when you’re doing your taxes is Form 1040. Commonly regarded as the “mother of all tax forms,” this form reports your income to the IRS, allows you to claim your deductions and credits, and is used to calculate your tax bill and how much tax refund you’ll get.
Primarily, Form 1040 collects your basic personal information, and you’ll need to state your tax filing status, as well as how many tax dependents you have. Then it’s time to do the math.
You should tally up all of your annual income and claim all of your deductions. You’ll calculate your taxable income, subtract any tax credits you’re qualified for, and subtract the taxes you’ve paid through your salary.
If your tax credits and withholding taxes are high enough to cover the bill, that’s it. However, if they’re not, you will have to pay the rest that you owe. If it happens that you’ve paid more than you actually owe, you’ll get a tax refund.
Schedules on Form 1040
Now, the most confusing part of Form 1040 is the schedules. Everybody has to use the basic Form 1040, but if you have any additional deductions or credits that you’d like to claim, you might need to file one of the following schedules:
You’ll file this if you have additional income or adjustments to your income. This includes, but isn’t limited to alimony income, student loan interest, farm income, rental income, business income, prize or gambling winnings, etc.
If you owe alternative minimum tax or excess advance premium tax credit repayment, you’ll need to file Schedule 2.
If you want to claim a foreign tax credit, dependent care expenses, general business credit, education credit, or more, you’ll need to file Schedule 3.
This schedule is filed when you owe Medicare taxes, self-employment taxes, net investment income taxes, or more.
If you want to get a tax extension or claim a refundable credit that’s not connected to your earned income, additional child, or American Opportunity tax credit, you’ll need to file Schedule 5.
Lastly, Schedule 6 is for when you have an address outside the US, or when someone else is in charge of discussing your tax return with the IRS.
Tax Refund Card Offers
Also, check the Secured Cards Section.
DIY or Hire a Professional for Tax Services?
With the form that we’ve just discussed and the countless paperwork that needs to be gathered, you might be wondering if it’s best to do your taxes yourself or pay for tax services. Of course, the easiest thing to do would be to hire a professional, but this is not necessarily your best choice.
Doing your own taxes is much cheaper, so if you don’t have much money to spare, this is obviously your best option. You can buy tax software for about $20 to $50 and significantly cut down on time spent on calculating taxes, deductibles, refunds, etc.
If your financial and tax situation is very straightforward and simple, you might even be able to get free tax software. The IRS also offers free file program to those whose income is lower than $66,000.
However, if you’ve noticed that there was something wrong with your tax returns in the past few years if filing taxes is simply too time-consuming and confusing, or if your tax situation is complicated, it’s best to hire professional tax services.
This can cost you upwards of $150, but it’s well worth it.
Professional Tax Services
There are a few different types of professional tax services, and you can hire different people for the job.
Enrolled agents are highly experienced and can help you handle a variety of different tax issues. They’re excellent for businesses or those with a complicated tax situation.
Certified Public Accountants (CPA) are extremely useful for tax preparation and planning. They must undergo continuous training and education, so you can rest assured that you’ll be in good hands with a CPA.
Tax attorneys are typically hired when you’re concerned about the legal implications of your tax situation, so an average person will probably not need to hire such a tax service professional. Although, if you’re in a complex situation or you’re dealing with serious tax issues, this professional can help you.