March 28th, 2011

Tax Basics: What you need to know before you file

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** It’s Credit Karma Tax Week! Every day we’ll have tax-related posts to keep you in-the-know as you file your taxes. **

Let’s go over some tax basics.

Start by figuring out if you need to file taxes at all this year; refer to Publication 501 for details about who should file and special requirements for filing.

The IRS puts you into one of five filing statuses: single, married filing jointly, married filing separately, head of household, or qualifying widow(er) with dependent child. For those who fall into more than one of these categories, the IRS advises to choose the one that gives you the lowest tax.

After determining your filing status, you’ll need to collect your documents and choose how you’ll file. Here we’ll outline these two steps to help you start filing with ease.

1) Gather your documents.

Collect your W-2s, which are forms issued by your employers that state how much you were paid in a year. If you’re self-employed, you’ll need any 1099-MISC forms you have from the previous year that show your income.

Also, gather documentation for any other tax-related expenses, such as receipts for moving expenses, bills for college expenses, medical and dental bills, and receipts for donations to charities.

Keep in mind that the IRS receives copies of most of your statements, so it’s critical that you use their figures when filing, instead of adding up paychecks, for example.

If you filed last year, make sure you have your 2009 tax return handy, too. You may need to refer to it for information. If you can’t find last year’s return, the IRS has a copy, and you can request it by submitting Form 4506.

If you’re filing for dependents, gather any documentation pertaining to them, such as receipts for childcare costs. The IRS defines “dependent” as a child under 19 (or under 24 if enrolled in full-time school) who has lived with you for more than half of the year and relied on your financial support for at least half of the year.

Finally, have Social Security numbers of yourself, your spouse, and any dependents handy.

2) Pick your filing style.

There are three choices when it comes to filing your taxes: mail-in filing, e-filing via online tax software, or through an accountant.

It’s best to file on your own if you have uncomplicated taxes. If you worked one job all year, have no tricky investments, don’t need to itemize your deductions, and don’t have any dependents to claim, you’ll likely file by pen and paper or e-filing.

The pen-and-paper route might be best for you if you prefer relying on yourself rather than software. However, you’ll risk any mistakes you might make when calculating your taxes and. you’ll also have to wait longer for your tax refund.

Choose e-filing if your taxes are slightly more complicated or if you prefer to handle your taxes online. For basic tax needs, TurboTax offers free tax software. If you made less than $58,000 last year, you can get free income tax software from the IRS website.

For $50-$150 you can get a paid version of TurboTax, like the “Home & Business” version which might work well for a self-employed musician, for example. E-filing will also ensure a quicker tax refund.

For some, taxes are more complicated. If you own stocks, run a small business, or have several rental property investments, you may want to call on an accountant to help you with your taxes. An accountant can help you make sure you get all of the deductions you should.

If you’re going the electronic route, all of the tax forms you need will be included in the software you use. Otherwise, make sure you have the appropriate tax forms in hand. Most of the forms you’ll need are available at post offices and libraries, or visit the IRS’s website for all required tax forms.

Finally, don’t worry!

If you’ve taken these steps to prepare for filing your taxes, you’ll shave significant time off of the process. Have all of your paperwork and information handy, and even for first-timers, filing won’t be so intimidating.

Did you know? This year, Tax Day is April 18 because Emancipation Day will be celebrated on April 15. But don’t use the extra few days as an excuse to put off filing your taxes!

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