Anyone else feel absolutely stumped by taxes? If you’re anything like me, you’re watching April 15 approach with nervous anticipation. Some time in the next month, you have to track down all those documents you’ve been getting in the mail and tackle a mound of confusing paperwork. Thankfully, help is on the way! My dear friend Nicole, a CPA, is graciously offering her advice on how to file your taxes to us (me included!) today. Here are her thoughts!
Meet Nicole
When people ask what I do and I say I’m a CPA and I do taxes, I get that look. You know the look. The “Oh…. you’re one of those” look. I get it. Taxes are complicated and frustrating and kind of weird. But they don’t have to be this big terrible thing that you dread each spring. In today’s post, I’ll break down how to file your taxes without getting overwhelmed.
We’ll cover:
- The tax forms you’ve gotten in the mail
- What tax form you’ll use to file your taxes and how it works
- The vocabulary you need and how taxes are calculated
- Options for filing your taxes and which method will fit your needs
- How to file taxes on your own
Let’s get started!
What are all the tax forms I’m getting in the mail?
These forms fall into several different categories. The most important thing to know? As they come in, you should be putting them all together in one spot. That way, when you’re ready to do your taxes, you already have everything set aside.
Here’s a breakdown of the types of forms you might receive:
Income-Related Forms:
- W-2: This is a form from your employer that shows how much you made and how much tax you had withheld from your paychecks this year.
- 1099-MISC: This is the freelancer-version of a W-2. If you’re self-employed, the people who paid for your work will give you this form if they paid you more than $600 during the year.
Investment-Related Forms:
- 1099-INT: Shows how much interest you were paid during the year, as long as it was more than $10.
- 1099-B: Shows the money you made from stock sales during the year.
- 1099-DIV: Shows the dividends you received during the year as a shareholder of a company.
- K-1: If you’re an owner of an S Corporation or a Partnership, the K-1 tells you your portion of the business’s income and expenses.
- 1099-SA: Shows how much you took in HSA distributions during the year.
Deduction-Related Forms:
- 1098: Shows how much mortgage interest you paid during the year.
- 1098-T: Shows how much tuition you paid during the year.
- 1098-E: Shows how much student loan interest you paid during the year.
- Form 5498: Shows your HSA contributions for the year.
Other Forms:
- 1095: Shows what portion of the year you had health care coverage.
What form do I use to file my taxes?
You’ll be using form 1040, or the individual income tax return. This tells the government how much money you made and how many deductions you are claiming. (We’ll dive more into deductions later!) The form uses that information to calculate your tax due (what you owe the government) or your tax refund (what the government owes you).
Whew – feeling overwhelmed yet? If you need to take a quick break, try my top tips to calm down, in 5 minutes or less.
How do I file taxes using the 1040?
The basic formula is this:
Total Income
– Deductions
= Adjusted Gross Income (AGI)
– Itemized or Standard Deduction
= Taxable Income
x Tax Rate
= Tax
Federal Income Tax Withheld
+ Other Payments Made
+ Credits
= Total Payments
Tax
– Total Payments
= Tax Due/Refund
What terms should I know as I file taxes?
Total Income
Your total income is the total of the income shown on your W-2s and various 1099s.
Deductions
Deductions reduce your taxable income. They include things like the student loan interest deduction, tuition and fees deduction, or the HSA deduction.
Itemized vs. Standard Deduction
Itemized Deductions are calculated on Schedule A. Within the 1040, there are a few schedules that give the government more detail on what you’re reporting. One of those is Schedule A, which totals up your itemized deductions. Itemized deductions include things like mortgage interest, state taxes paid, charitable contributions, and medical expenses. If your total of these expenses (which are subject to limitations) is more than $12,200 if you’re single or $24,400 if you’re married, you can take your total number and subtract it from your Adjusted Gross Income.
The Tax Cuts and Jobs Act (President Trump’s tax bill) significantly increased the standard deduction amount and placed pretty strict limitations on itemized deductions, so it’s now much more difficult for people to benefit from the itemized deduction. If you don’t own a house that you’re paying a mortgage on, it’s very unlikely that you’ll be itemizing.
If the total of your itemized deductions is less than $12,200 (single) or $24,400 (married), you’ll take the standard deduction instead. This lets you subtract $12,200 (single) or $24,400 (married) from your adjusted gross income.
Taxable Income
This total gives you your taxable income, which is then multiplied by your tax rate to get your tax amount.
Federal Tax Payments Withheld
After your tax is calculated, you’ll need to create a total of all of the payments you’ve already made throughout the year. The most common payment is federal income tax withheld. This number comes from your W-2 and tells the government how much money you’ve already given them from your paychecks.
Other Payments
If you’re self-employed, you may have made estimated tax payments throughout the year. Those will show on this “other payments” line. If you extended your return and made an extension payment, this will show there as well.
Credits
The difference between a deduction and a credit is that a deduction reduces your taxable income, while a credit reduces the tax you pay. Two of the most common credits are the Earned Income Credit and the two education credits. The earned income credit is available to those who are working but have low income. If you’re single with no children, you must make less than $15,570 to qualify. If you’re married with no children, you must make less than $21,370. Those limits increase if you do have children – do a quick Google search to see if you’ll qualify.
If you were a student and paid tuition during 2019, you should have received a 1098-T from your school. You can use this 1098-T to see if you’ll qualify for one of two education credits: the American Opportunity tax credit or the Lifetime Learning credit. The amount of your credit depends on how much you paid for tuition and if you’ve ever received an education credit before. Form 8863 is what you’ll use to calculate this – it may be worth reading the instructions for that form to see if you qualify.
Total Payments
This total payments line adds up your federal income tax withheld, your other tax payments, and your credits.
Tax Due/Refund
If the total of your payments and credits is less than your total taxes already paid, you’ll need to make a tax payment to the government for the difference. If the total of your payments and credits is more than your total taxes paid, you’ll get a refund back from the government.
One thing to note – if you’re getting more of a refund back than you’d like or if you’re left owing the government more than you like, you can adjust your W-4 if you’re an employee. The W-4 tells your employer how much tax to withhold from your paycheck. If you received a larger refund than you’d like, claim more exemptions on your W-4 so that less is withheld from each paycheck. If you owe more than you’d like, claim fewer exemptions so more is withheld.
How do I actually file my taxes?
You have three basic options: DIY, the Middle Ground, and Pro.
DIY:
- Old School – You can order the forms from the IRS and fill them out by hand. You just mail them back to the IRS when you’re done.
- TurboTax – You can use their software to file online. Depending on the complexity of your return, this may be free.
- H&R Block Online – You can use their site to file online. Depending on the complexity of your return, this may be free.
Middle Ground:
One neat option that’s available is H&R Block Tax Pro Go. To use this, you upload your documents to their site electronically, and a pro prepares the return for you. This costs between $49 and $249, depending on the complexity of your return.
Hire a Pro:
- H&R Block In Store – You bring your documents into a physical store, and they’ll prepare the return for you. The cost depends on your return, but they are up front with their pricing when you make your appointment.
- CPA Firm – You can hire a CPA or a tax preparer to file for you. This will likely be the most expensive option. Pricing and the process for how it works depends entirely on who you hire.
So, which method should I use?
When to DIY:
If your return is fairly basic, there’s no reason you can’t file your return yourself – though “basic” can be subjective. If you just have a W-2 or you’re self-employed, organized, and know what your income and expenses are, you should be able to do this.
When to try the middle ground option:
This is a good option for people who are self-employed, have their income and expenses organized, and don’t have the time to file themselves. This can also be good if you have significant investment activity that’s shown on 1099s.
When to hire a pro:
If you’re self-employed, your business is pretty complicated, or you’re not the most organized, it might be easiest to hire a pro to do the work for you. This is also the case if you have a lot of investment activity or receive K-1s.
If you sold a house during the year, moved between states, or worked in more than one state, you should also consider hiring a pro. State tax law varies wildly, and more often than not it’s worth the money to let someone else sort it out for you.
One other time to consider hiring a pro is if you were left owing a lot of tax last year. “A lot of tax” is subjective, but if you want someone to look through what you’ve been doing and make recommendations on what you could be doing differently so you owe less tax at the end of the year, you should hire a pro. In this situation, I’d consider going with a CPA firm rather than somewhere like H&R Block.
I’m ready to DIY. What should I do?
Great! Here’s how to file your taxes on your own.
- Get last year’s return out, so you can compare as you go. Unless you’ve had big life changes since last year, your return this year should be pretty similar.
- Gather every single tax document you’ve received in the mail. Use what you received last year as a good checklist for what documents to find.
- Pull together information on your charitable contributions and medical expenses. One thing to note on charitable contributions: organizations like Goodwill won’t tell you the value of your non-cash donations, but there are plenty of free guides online that you can use to help you estimate values.
- Set aside a few hours for this. It’s going to be easiest if you can do it all in one shot.
- Choose your method, and start entering your information on whatever platform you choose!
- Breathe! If you’ve gathered your forms, you have everything you need. Getting started might feel overwhelming, but it’s doable. Get organized, get a cup of tea, and revel in the knowledge that you’re truly adulting.
Anna’s note: If you are totally overwhelmed, consider asking a responsible adult in your life to have “office hours” where they’ll be on call to answer your questions. My dad used to pick a day when he’d do a Google Hangout with me and my siblings so he could answer all our tax questions at one time. Even though I was filling out my own return, it helped to have someone who would tell me what specific words meant. Sometimes being a responsible adult means knowing when to ask for help!
What if I need more time?
That’s okay! Form 4868 is the individual income tax return extension form. Taxes are due April 15, but if for whatever reason you’re not able to get your tax return done by then, you can file Form 4868. Then you have until October 15 to file the return.
This is a great option if you think you’re going to get a refund, but you don’t have your paperwork together yet. If you think you might owe tax, it gets a little more complicated. The extension gives you more time to file, but it does not give you more time to pay. If you think you’ll owe and want to extend, you’re going to need to try to figure out roughly how much money you’ll owe. Then pay that amount with the Form 4868. One way to do that is by doing a rough draft of your tax return but not filing it. Another way is to hire a tax professional and let them do those calculations for you.
Nicole’s Disclaimer
While I am a professional, everyone’s tax situation is different. The goal of this article is to answer basic questions on basic tax returns. If you have any questions about your specific situation, seek out a CPA in your area.
Good Luck!
Thank you so much to Nicole for sharing her expertise with us today!
Looking for more advice on how to be a functioning adult who does hard things? Check out this post on how to save your hard-earned dollars by shopping at Aldi.
Other adulting problems got you stumped? You might also like how to meal plan or my favorite organizing tricks.
