“My number one tips for getting ready for tax season is to make a checklist of tax documents you expect to receive,” says Bill Hendricks the CEO of tax software Common Form and a former product development manager at TurboTax. “As the documents start to arrive in the mail in late January, check them off your list and put them in a file folder that contains only the tax forms. Once you’ve received every document, you’re ready to file.”
Create your document checklist
In order to create your document checklist, Hendricks suggests that you look through your finances. Your money situation, as well as some of your major life changes, will provide you with insight into which documents to expect. Here are some of the most common situations that will result in tax filing documents:
Job situation: “Did you change jobs during the year?” Hendricks says. “If so, all jobs you had should issue you a W-2.” If you had two jobs during the year, you will receive two W-2 forms.
Don’t forget about contract work. If you do work on the side for extra income, you probably aren’t an employee. Instead of receiving a W-2, you will receive a 1099-MISC from clients that paid you at least $600 during the year. If payments were made through a third-party, such as PayPal, you may receive a 1099-K form, depending on how much business was transacted through the third-party.
Interest from your bank accounts: Many consumers have savings accounts and money market checking accounts that pay interest. “Banks aren’t required to supply you with a 1099-INT if you made less than $10 in interest through the year,” Hendricks says, “but you are still required to report it on your taxes.”
Check to see if you can expect 1099-INT forms from your banks. You can look at your latest statement to see a report of interest paid to you for the year. If you aren’t expecting a 1099-INT, put the final statement in your document folder, with the total interest you received highlighted so that you don’t forget to report it.
Investment income: Do you have brokerage accounts? If so, you can expect to receive paperwork from them. A form 1099-DIV will come if you’ve received dividends, and a 1099-B will come if you have capital gains (or losses) to report. Also, pay attention to paperwork from retirement plan accounts. Tax-advantaged retirement accounts will provide information about contributions, as well as information regarding the possibility of early withdrawal.
Mortgage interest: Look for a Form 1098 if you have been paying on a mortgage. “If you refinanced to a different bank during the year, you’ll receive a 1098 from each bank,” says Hendricks. He also points out that you should keep property tax statements that come in the mail, since those can be tax-deductible.
Education related forms: If you were in school this year, you should receive the 1098-T, sharing your tuition expenses. This information might be used for different tax benefits related to education. Even if you are done with school, you can still receive a tax break on your student loan interest. If you have been paying on your student loans, look for a 1098-E form which should provide information on student loan interest.
Other forms and documents: Don’t forget to gather up other forms and documents that back your claims. Receipts for business expenses, information about what you’ve contributed to a Health Savings Account, and receipts for charitable donations should all be kept. If you want to claim a tax benefit for the money spent on qualified child care, you will need to get a tax identification number from the service provider. Think about all of the things you’ve done this year, financially, and gather supporting documents in one place so that you have them ready when it’s time to fill out your forms and file.
Figure your taxes as early as possible
Even if you aren’t quite ready to file, it’s still a good idea to estimate your tax situation as early as you can. Use tax prep software to help you make your calculations if you want. Or, you can use forms available for free at the IRS website to get a rough idea of where you stand. Figuring your taxes early can help you prepare for what you owe. If you will owe more, you can start setting aside money to help you pay your debt. If that’s not possible, look into the IRS payment plan and your state tax payment plan to help you meet your obligation without straining your finances too far.
Stay organized throughout the year
The best defense is to remain organized throughout the year. Create a tax document file that you can use for the whole year. That way, you won’t have to dig up documents later on. You can also get a head start on being organized when you use tax prep software or have an accountant prepare your taxes. Most of the time, your information is saved for following years, which makes it easy to kickstart your tax preparation each season.
With a little planning, and by starting early and doing a little bit at a time, you can ensure that your taxes are accurate and filed on time.