Tax season is fast approaching, and you know what that means: it’s time to start making preparations for filing your taxes. Whether you’re an individual looking to boost your refund, a small business owner hoping to take advantage of tax breaks and incentives, or self-employed confused about how best to go about filing your taxes, it’s no secret that filing your taxes can be a headache.
But it doesn’t have to be. If you’re like most people, and you dread filing your taxes, fret no more: we’ve put together a list of 5 helpful tax tips that can make the 2021 filing season a breeze. Try these tips out, max out your refund, and get your tax returns in on time this year.
Here’s what we’ll cover in this article:
- Get started early
- Use professional tax software
- Be sure to account for all sources of income
- Remember all deductions, exemptions, and credits
- Remember to account for any COVID-related assistance you received
It’s not the tip you wanted to hear, but we’re not going to lie to you: the sooner you get started filing your taxes, the better. Between multiple W2’s, tons of potential tax breaks, and other documentation you’ll need to provide, it’s no wonder why so many people struggle to do their taxes every year. Starting early helps you ensure that you get everything you need together in time.
As you prepare, here’s what you should have on hand:
- Your social security number
- Your address and phone number
- A copy of your ID
- W2s from every place where you worked during the past year
- A copy of the previous year’s tax returns
- Routing and account numbers for bank accounts
- Statements of earnings from other sources (such as investments or sale of property)
Not sure where you left each of those important documents, don’t worry. You still have some time left. The important thing is that you start early enough to gather everything you need so that, when the deadline for filing your taxes does roll around, you have everything ready.
It can actually be that simple. Many people make mistakes on their taxes simply because they attempt to do them by hand — especially small business owners and self-employed people who may have significantly more complicated tax circumstances than your average individual with a full time job.
Using small business tax software can make a huge difference. Just be sure that you use one of the more well-established and widely-trusted brands. After all, when you do your taxes, you submit a lot of highly sensitive information. You don’t want to work with a tax professional (or use software) that does not properly store your sensitive data.
When looking for the right tax software, keep these features in mind:
- Simple, intuitive user interface
- Capacity for diverse job and income situations
- Secure and encrypted information processing
- Can file and submit returns for you once you are finished
- Gives you real-time estimates about the size of your return
Once you know where you’ll file your taxes, it’s smart to start considering your various income sources.
Most people have more than one source of income. Whether that’s because they work a side hustle on top of their full time job, they gain dividends from investments, receive money as part of a friend or loved one’s planned estate, or they sell some asset and collect money from that, it’s common to have a few different income sources.
However, not all income sources are taxed in the same way. For example, inheritance is only taxed over $5.3 million, and under that, is not taxed at all. Income earned from freelancer or contract positions must be paid quarterly, but your returns are still due on April 15 along with the tax returns for your other jobs. In some states, capital gains are taxed as income; in others, it has its own set of brackets.
As you can see, accounting for all your various income sources can be something of a headache. That’s why we always recommend giving yourself plenty of time to manage and file your taxes, as mentioned in the first section.
Another aspect of filing your taxes that can potentially take quite a while is figuring out which deductions, exemptions, and credits you might qualify for. After all, it’s by applying for these forms of tax relief that taxpayers are able to secure a refund once their taxes are submitted.
Common forms of tax relief include deductions on charitable donations, exemption from taxation for certain kinds of earnings, and credits for things like lower-income households, childcare, or elderly care. Depending on your situation, you may be able to claim a fairly large number of tax relief strategies, so be sure to spend time looking through which ones might apply to your case.
- Pro tip: high-quality tax software will actually help you find every form of tax relief available to you by asking you clear questions about your financial situation — yet another reason why working with a professional or with high-quality software is a recommendation for most taxpayers.
2021 taxes are a little different: they include income that was earned through some of the various parts of the relief packages that were passed through congress. For example, congress temporarily expanded unemployment insurance benefits by $600. If you earned unemployment money during 2020, this is considered taxable income.
However, the stimulus checks that were sent out at various points in the pandemic are not considered taxable. It’s important to take note of every form of COVID relief that you made use of, that way, when tax filing season comes around, you’re not feeling surprised that you have to pay taxes on a particular form of relief you used.
Taxes are a headache, but the sooner you get started — and the more careful you are about getting the information that you need — the easier they can be.
Matt Casadona has a Bachelor of Science in Business Administration, with a concentration in Marketing and a minor in Psychology. He is currently a contributing editor for 365 Business Tips. Matt is passionate about marketing and business strategy and enjoys the San Diego life, traveling and music.