It is that time of year again; the tax return deadline is imminent.
The months of March and April often strike apprehension into many who must file their taxes. At first the process seems overwhelming; however, it can be an easy undertaking when presented in an overly simplistic fashion. After all, there is something to look forward to: the vindication of a tax refund hitting your bank account. In order to eliminate any irrational fear that surrounds the tax season, we provide this insight on Massachusetts tax preparation.
Tax preparation is not complicated
To begin, it is helpful to understand some of the notation regarding many tax documents.
Everyone knows the W-2 (the standard form noting net income from any given job), but most people will receive many other documents. Most common are the 1099 and 1098 forms. In general, a 1099 denotes an income while a 1098 denotes an expense. There are a few exceptions to this rule, but it is a good concept to guide your taxation comprehension. Some common documents relating to income include:
- 1099-DIV—for an individual that owns stocks and receives more than $10 in dividends
- 1099-R—for those who receive a distribution from a retirement plan such as an IRA
- 1099-MISC—income concerning the function of an independent contractor
- 1099-G—income pertaining to unemployment compensation
*The standout exception to the income rule is a 1099-HC; this is not a form of income, rather a statement indicating proof of healthcare insurance for a given year.
Alternatively, the most common expense forms include:
- 1098—a mortgage interest statement indicating how much interest and mortgage-related expenses were paid for that year
- 1098-T—a form pertaining to college tuition and education-related expenses
*It is typical for an individual to receive multiple 1099s while only getting one or two 1098s
Attached to each statement, the IRS provides instructions on how to interpret and act on the form. Although they are meant to help, reading the text-dense information may only create further confusion and uncertainty. This is mainly due to the fact that the IRS tries to reach a broad cluster of taxpayers, leading them to include paragraphs of circumstantial guidance. For someone that is new to filing taxes, it is more effective to leave these supplemental pages aside and focus on the statement itself.
Make sure you have accounted for all income
When tax forms arrive throughout the spring, it is crucial to ensure that you have accounted for each stream of income. The most common reason the IRS will come after you is for failing to file a tax return or for failing to provide all substantial income records within your tax return. This could result in unforeseen penalties, which will become more expenses as interest accrues on these fees. If you forget to file your taxes by the deadline (April 17, 2018) it is important to call the IRS so that you may set up a payment plan for owed taxes.
To prevent tax complications it is in your best interest to stay on top of tax documents. Ensure that all statements are accounted for and are submitted for approval before the April deadline. Finally, be sure to get a copy of each tax return; you will most likely need to refer to the information in the future. Before you file though, don’t forget about an opportunity to lower your taxes or increase your refund with a contribution to an IRA. For more info check out ur recent Blog on IRA’s here!
Resources are available for tax assistance
You will receive multiple forms that need to be processed, but do not let this intimidate you. There are many resources at your disposal:
- TurboTax—Tax preparation software that enables you to file your taxes online. For most new tax filers, the software is free, just go to turbotax.com and set up an account. For more complicated returns (those that include forms such as 1099-DIV) you will have to pay a small fee to successfully file your returns on both the state and federal level.
- VITA—a program offered by the Internal Revenue Service that offers free tax return help to those who make less than $54,000 a year, are disabled, or have limited English speaking abilities. This underutilized program permits certified volunteers to help you electronically file both state and federal taxes.
- Certified Public Accountant: You can send your tax documents to a CPA and they will take care of the filing for you. This does come at a financial cost, but if you do not have the patience or time to file taxes then this is a good option. Depending on the complexity of your taxes, the hourly rate a CPA charges could amount to hundreds of dollars.
*On a side note: If you do choose to go with a CPA, inquire as to whether they have an electronic transferring system. If you are able to scan all of your tax documents and send them as an e-file, you will be saving yourself a great deal of money; otherwise you may simply send your physical documents through the mail for them to scan.
Who needs to file taxes?
The following charts categorize who needs to file: