How To Take Care Of Your Tax Preparation 

Tax Documents on Black Table
Even history proves the role of taxation. Taxes gained their place in political controversy throughout the former times. 

Filing taxes each year adds to the complexity of running a business. Raising additional funds in a war will safeguard a nation’s wealth and military expenditures in the ancient world. Taxes on land and houses gradually increased. The requirement that a tax system is efficient arises from the nature of a market economy. 

Taxation is one of the most evident manifestations of the powers of a public authority. Taxes on income, production, or on the consumption of goods have distortionary effects. These alter the judgments individuals and firms would create if the taxes were not in place. 

Taxation can also have substantial effects on economic growth and transition. When personal income tax is relatively high, individuals may favor spending their period on recreational activities instead of on additional work. When taxation on savings, including taxation on economic rents and real estate, is relatively high, individuals may favor consuming their income today rather than setting part of it aside for the future.

Here are seven beginner-friendly steps to manage your tax preparation that might help you, however, consult with your CPA and tax-professional for the most accurate assistance.

1. What are the Tax basics to keep in mind? 

An accountable authority administers the general principles of taxation. There are four general requirements for the efficient administration of tax laws: clarity, stability or continuity, cost-effectiveness, and convenience. Separate your business from your expenses. Get a separate bank account and credit card for running your business expenses. The IRS could start investigating your bills if the audit reveals that your costs are mixed with your business charges. 

  • Income tax. A levy is assessed on individuals or family units and corporations. Individual income tax is calculated based on income received. It is usually categorized as a direct tax because the limitation is presumably on the individuals who pay it. For example, if you earn $1,000 in a state with a flat income tax rate of 10%, $100 in income taxes should be withheld from your paycheck when you achieve that income.
  • Estimated taxes. It was used to pay income and other taxes such as self-employment and alternative minimum taxes. Estimated tax is a quarterly payment of the year based on the filer’s reported revenue for the period. Calculate your estimated taxes by adding your total tax liability for the current year and dividing that by four. The total liabilities include self-employment tax, individual income tax, and other taxes.
  • Self-employment tax. The self-employment tax rate as a percentage of your net earnings from self-employment. This rate consists of 12.4% for social security and 2.9% for Medicare taxes. This tax consists of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.
  • Employment taxes. Employers generally must withhold federal income tax from employees’ wages. Employment taxes are also called payroll taxes, as they often appear on employee pay stubs. This is a different kind of federal tax beyond ordinary income tax and consists of Social Security and Medicare taxes that are withheld from a person’s paycheck.
  • Excise tax. Excise taxes are taxes imposed on various goods, services, and activities. Depending on the specific tax, such taxes may be imposed on the manufacturer, retailer, or consumer. Like all taxes, excise taxes fund programs related to the purchased items. An excise tax is a legislated tax on specific goods or services at purchase, such as fuel, tobacco, and alcohol. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting. 

What’s the difference between net income and gross income?

Gross income and net income are business terms that most people quickly need clarification on. Gross income is the total amount you earn, typically a year before expenses. It is the pay you deserve before taxes and other deductions from employers or clients. This is not limited to income received as cash; it can also include property or services received.

Net income is the profit your business earns after expenses and allowable deductions.Net income refers to the money you may have available after taxes and deductions are taken out of your paycheck. For a business, net income is the money that’s left over after paying operating expenses, administrative costs, cost of goods sold, taxes, insurance, and any other business expenses.

2. Plot the important tax dates on your calendar

Mind your deadlines. Annual taxes are due April 15. Those that filed extensions will need to file by October 15. Plan the date when you will start your return. Make sure it’s early enough to plan for another session in case you need to spend time locating more documents or getting help. You can avoid tax-related identity theft and crime if you file earlier. 

Quarterly payments are due based on the payment period: 

  • January 1 to March 31 pay period is due April 15
  • April 1 to May 31 are due June 15
  • June 1 to August 31 are due September 15
  • September 1 to December 31 are due January 15 of the following year

Tax Day was first brought up in 1913 when the Sixteenth Amendment was ratified. Tax Day is when individual income tax returns are due to be submitted to the federal government. Since 1955, Tax Day has generally fallen on or just after April 15. 

The market for tax software is competitive, and providers often switch their fees throughout the year. In regular tax-filing years, costs go up during the 30 days before the usual April deadline, and not just for federal returns.

3. Save the proper paperwork all year long

The better arranged your records and ledgers are, the shorter time it will put up with a preparer to process your taxes. This will result in lower fees for their service and assistance. 

Follow your tax-related paperwork closely to ensure you’re up to date throughout the year. Keep receipts from charitable donations, work-related expenses, medical bills, or statements from student loans or investments and any grants or fellowships. The Internal Revenue Service (IRS) recommends keeping records for at least three years. 

Why do you have to gather your Receipts and list your Personal Information?

Do you itemize your deductions or claim the standard deduction? Sum up your itemized deductions and compare the outcome with your standard deduction; you should choose whichever produces the more significant tax deductions. 

For the 2022 tax year, the standard deduction for single taxpayers is $12,950, and for married couples filing jointly, it is $25,900. Those amounts boosted in 2023 to $13,850 for singles and $27,700 for married couples filing jointly. Itemize your deductions, and collect any backup you have for charitable contributions.

Receipts from insurance or reimbursements by any other health plan not covered by your medical expenses must also be kept. Medical costs include a flexible spending account (FSA) or a Health Savings Account (HSA), property taxes, and investment-related expenses. Your books and records with business income and fees can be reported on Schedule C. 

Aside from yours, you must also know your family’s Social Security Number (SSN), especially each dependent you claim. Prepare this together with the other documents. You must note and jot down all addresses and dates you bought or sold a property. Remember the amount you originally paid and how much you received from its sale. 

4. Watch for your income documents to arrive. 

Gather Your Documents. By the end of January, you must receive all the tax documents from your employers and everyone with whom you do business. All information on the files should match the records that you have. The usual forms that you will need are:

  • Form 1098-E for reporting any loan interest you settled for a student loan.
  • Form 1098-T is for college students, and this will show how much you paid in tuition. These are amounts you received from grants or fellowships to help you figure out deductions and credits related to education expenses.
  • Form 1099 in various kinds that report other income you received. If you are a freelancer or contractor, you will receive Form 1099-NEC. Form 1099-DIV is for dividends, while your interest will need Form 1099-INT, and a non-employee compensation paid to independent contractors must have Form 1099-MISC. Brokers must mail Form 1099-B, which declares gains and losses on securities transactions, in mid-February, so those may arrive a little later.
  • Form W-2G if you had certain gambling winnings.
  • Form W-2 if you have a job or are a full-time employee. It details your earnings, as well as which taxes were withheld.

5. Learn the credits and deductions you can claim

How Much Does Tax Preparation Cost?

The typical cost for tax preparation in 2022 using Form 1040 was $220, which is when the standard deduction was taken. The payments increased to $323 when removals were itemized. Here are some credits and deductions you can be eligible to consider.

Student loan interest

Deduction from your student loan interest allows the borrowers to subtract up to $2,500 of the interest paid on loans for higher education directly on Form 1040. You can deduct up to $2,500 in interest fees, relying on your modified adjusted gross income. It is a federal income tax deduction available for parents and students looking to overdraft for higher education needs.

Individuals who fall in the 22% tax bracket should be able to take the full $2,500 deduction. They can also pay the amount they paid in student loan interest, whichever is lesser. 

Starting in 2023, the modified adjusted gross income (MAGI) for single, head of household, or widower will range from $75,000 up to $90,000. While those who are married and filing jointly begin at $155,000 and end at $185,000.

What are the qualifications for a Student Loan Tax Deduction?

The student loan interest deduction adjusts your income on Form 1040. Unlike the other premises, you don’t have to fill out a Schedule A to itemize deductions and claim them.

  • The loan must be claimed during the enrolled academic period or at least half-time in a program leading to a degree, certificate, or other recognized credential.
  • The proceeds must be disbursed after 90 days it ends or within the 90 days before the academic period begins.
  • The student loan must be taken out for the Taxpayer, the Taxpayer’s spouse, or dependents. 
  • The loan can only be used for qualified higher-education expenses like tuition, fees, textbooks, supplies, and equipment. However,  room and board, student health fees, insurance, and transportation are NOT included.
  • The student must be enrolled in an eligible institution to be qualified. It must be an accredited public, nonprofit, and privately owned for-profit post-secondary institution participating in student aid programs.
  • Parents who help legal borrowers with repayment cannot claim the deduction.

Saver’s credit 

Another term for Saver’s Credit is the Retirement Savings Contributions Credit. You may be eligible for a tax credit if you contribute to a retirement plan if you are not a full-time student and are not being claimed as a dependent. The amount of the credit depends on your filing status and adjusted gross income. 

Can my Saver’s Credit reduce or even eliminate your tax bill? 

Unfortunately, only some workers know the Savers Credit and how it works. A significant percentage of eligible taxpayers need to take advantage of this break. If you are qualified, you can claim the credit for 50%, 20%, or 10% of the first $2,000 you contribute to a retirement account during the year. The figures depend on your tax filing status and adjusted gross income. It can reach the maximum credit amounts claimed to be $1,000, $400, or $200. 

The Saver’s Credit can be claimed for your contributions to a 457 plan, 403(b), 401k, SEP IRA, or Simple IRA. 

You must be 18 years or older, not a full-time student, meet the income requirements, make your retirement contribution during the tax year for which you are filing your return, and not depend on someone else’s tax return. 

Freelance expenses

Not a full-time employee? Because freelancers are liable to pay their taxes, too, they can use their expenses to avail of certain tax deductions. Expenses like office furniture purchases, client visits, and travel expenses are directly linked to a freelancer’s job. The fees have to be entirely and exclusively for freelance work only. It should have been incurred during the tax year and must not be the freelancer’s capital or personal expenditure. In addition, the expense should not have been incurred for any purpose that is an offense or is prohibited by law. 

Charitable deductions

The best tax-saving opportunity is conducting charitable works and donations. The charity benefits many people, and taxpayers can deduct a part or all of their contributions on their tax income returns. The Charitable contribution deductions for cash contributions to public charities and operating foundations up to 60% of their adjusted gross income can be itemized on tax deductions on Schedule A. Deductions based on the type of property donated and the type of tax-exempt organization receiving the donation is limited by special rules. 

How do you plan for any refund?

Keep adequate records while preparing for any write-offs. A tax refund has multiple options for how to handle them. Please communicate with your Taxpayer and let them know what you want to do. 

  • Divide your refund among the direct deposit preferences by finishing Form 8888.
  • You can refer to some or all of the reimbursement toward next year’s taxes. If you usually pay estimated taxes throughout the year, that can assist in covering the first quarterly installment.
  • You can pitch in some or all of your refund to certain types of accounts like IRAs, health savings accounts, education savings accounts, or purchase U.S. savings bonds through Treasury Direct.
  • The administration can send you a paper check by mail or deposit the refund instantly into your checking or savings account.

Keep an eye on your income. There are certain levels of income to meet the eligibility for tax returns. Refer to your pay stub for the year-to-date income. Add up all your income and resources if you have more than one job. 

6. Decide how to file your tax return

Dealing with the task and organizing records in advance will conserve time and money. The earlier you initiate, the more smoothly it should proceed, and the sooner you’ll have put the method behind you for another year. Learn about several options for tax return filing and preparation to make the right choice. 

  • Make use of Tax Tools and Resources.

Creating a solid online presence is necessary for businesses of all kinds. A good reputation offers new opportunities to stimulate brand awareness, build relationships, and compete in a rapidly evolving global marketplace.

Tax preparation software provides guides on your returns and helps you figure out and determine deductions or credits you might be eligible for. 

Numerous free and premium tools and devices are available to alleviate both online-only entrepreneurs and owners to expand their brand in the digital world, and the inventory continues to develop. Businesses of all sizes and types need dependable and precise ways to track finances and manage taxes. There are also a variety of online apps that exist to fill the bill. 

  • Free File and IRS online forms

The IRS has a free online File provider. You can use the IRS Free File Lookup Tool to narrow your list of providers. You can also browse all offers pages to see a complete list of providers. After selecting one of the IRS Free File offers, you will leave the website.

Prepare your Adjustments to income, Income statements like W2s or 1099s, Dependent and spouse information, if applicable, and Prior Year AGI or Prior Year Self-Select PIN

  • Hire the right accountant

Choose the correct Taxpayer if you realize you need one-on-one assistance from an expert. Ensure the person you appoint has a preparer tax identification number indicating they are permitted to prepare federal income tax returns. 

Chandra Bhansali, co-founder, and CEO of Accountants World,  once said that your accountant should offer to do more than your financial statements and taxes preparation. They are not the best accountant for your small business if that is all they can offer. Bhansali added that your accountant must work with you until the year to track your income and expenses. You both have the responsibility to ensure the cash flow is going well. 

7. Decide Whether to File for an Extension

Do you need help chasing your deadlines? You can request an extension to fulfill your tasks. Prolong the date until October 15 for filing your tax return. Regardless, you’ll still have to calculate the amount of tax you owe and pay that amount by the regular April deadline to evade penalties and interest.

Your previous year’s tax return can have your previous information. These are examples from a recent document and how useful it can be as a reminder for the tax preparer and you. 

  • Charitable deductions with a list of organizations you donated to can guide you with possible gifts you might prepare for the current year. If you made small gifts, you might have yet to receive any acknowledgment from the organization, but you can still deduct these contributions as long as you have a receipt, check, or other proof. 
  • Last year’s return should demonstrate which banks, mutual funds, and other financial institutions sent you 1099 forms. Use that list to ensure you receive 1099s from them again this year unless you shut down those accounts or sold the investments.

Income tax returns are generally due on April 15, following the tax year. However, taxpayers have until April 18, 2023, to file their 2022 tax return. The IRS may also extend the filing deadline in certain non-holiday situations. Form 4868 will help you file for an automatic six-month extension. You’ll need to pay your taxes by the regular filing deadline for your tax return to avoid penalties and interest.

And as always, consult with your CPA professional for accurate tax advice. This article is just a summary of parts of tax code.

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