You have three extra days to file your taxes this year, until April 18, but that doesn’t mean you should delay starting the process. Steps taken in January and February can save you hassles, headaches and even cash. The Internal Revenue Service (IRS) will begin processing returns on Jan. 24.
“Some people will kind of procrastinate because they don’t want to deal with it, but it’s better to just get it out of the way,” says Catina Downey, a CPA in Richmond, Virginia.
To help you get motivated, we break down some ways to get a jump on your tax return and gather what you’ll need, whether you are filing on your own or using an accountant.
1. Be organized
Time is money, and the longer it takes an accountant to sort through your disorganized documentation, the more you may pay as a fee. Harlan Levinson, a CPA in Beverly Hills, California, says some clients hand him a folder labeled, “Things for Harlan.”
“People who are organized make my life easy, which means that I won’t have to charge them as much money. People that require me to chase things down make things more complicated,” Levinson says.
Some accounting firms, like SobelCo in New Jersey, charge a set fee to prepare a 1040, but that charge could increase the following year if the accountant was delayed by the client, according to Mary K. Ford, tax director at SobelCo. “If they’re very efficient with their information, it definitely cuts down on their tax preparation fees,” says Ford, “but if they’re very disorganized, their fees are going to go up every year, because it takes more time to prepare their return.”
Getting organized can be straightforward. As tax documents arrive, put them in a folder — a physical folder for paper statements and a digital folder for documents arriving by email or that you need to download online. Many accounting firms will give clients a checklist of documents to compile.
If in doubt, put the document in the folder. “It’s probably better to put too many things in that folder than too few things in that folder,” says Levinson.
2. Don’t ignore your mail
In a digital world of paying bills online and taming overflowing email inboxes, envelopes in the mailbox may get put in a pile to sort later. January and February is a bad time to do that.
Here are some of the tax documents that will begin arriving in January and February:
- W-2 shows employment income if you are still working
- 1099-NEC stands for non-employee compensation paid to independent contractors
- 1099-INT documents interest received from a financial institution
- 1099-B reports gains and losses from stocks, bonds and other securities sold through a broker
- 1099-R shows distributions made from pensions, annuities, IRAs and other retirement plans
Some envelopes will be marked, “important tax return document enclosed,” but sometimes an important piece of paper could be included with a regular monthly statement, such as a mortgage statement.
To get a sense of what’s coming when, you can find clues in your mail. Brokerage firms often tuck a slip of paper into December quarterly statements showing a timeline of when the company will send 1099s and other tax documents.
“They need to open the mail, first of all, and check those extra slips of paper that are included with their statements because there’s probably some important tax information in it,” says Downey.
That jammed inbox will also contain emails from financial institutions, letting you know tax forms are available to download from their websites.
3. Know your standard deduction
If you are confident you will take the standard deduction, which is $12,550 for single filers and $25,100 for joint filers this year, that will reduce some of your paperwork. (If you are 65 or older, the standard deduction is $1,350 higher per person for married couples filing jointly; so if you and your spouse are both 65 or older, the standard deduction is $2,700 more. If your filing status is single and you’re 65 or older, you get an additional $1,700 for your standard deduction.) It doesn’t make sense to go through the time and effort to itemize if your itemized deductions are less than the standard deduction.
“The standard deduction was a huge game-changer as far as documentation and the amount of time and stress on people to pull things together,” says Downey. She says taxpayers can look at their return last year, consider what changed this year and make a rough calculation if they are anywhere close to exceeding the standard deduction — a difficult feat if they have no mortgage and don’t have high medical bills.
If you plan to itemize deductions, you will need to comb through your checkbook, credit card statements and receipts if you haven’t been tracking items like charitable contributions during the year. That takes time, but the effort may be worth it, particularly if you’ve taken out a mortgage or incurred large medical expenses. Also, states have different limitations on itemized deductions, so some expenses may be deductible on your state return even if you take the standard deduction on your federal filing, Ford notes.
For the 2021 tax year, you can deduct up to $300 (for single filers) and $600 (for joint filers) for cash charitable deductions, even if you take the standard deduction. As with last year’s taxes, you can only deduct medical expenses that are above 7.5 percent of your adjusted gross income.
4. Figure out your cost basis
If you sold stocks, bonds or other securities in 2021, you will need to know the cost basis, or what you paid, to calculate any gain or loss on the sale. Before 2011, brokers were not required to report cost basis to the IRS so they may not have records of what you paid, requiring you to collect this information. If you don’t use a broker, you are responsible for figuring out your cost basis.
If you sold a home, you want to compute your purchase price and any improvements to determine if you need to report a capital gain. Up to $250,000 of the gain on a home sale can be excluded for single filers and up to $500,000 for those filing joint returns. Even if the home sale falls below those amounts, the sales transaction needs to be reported to the IRS, Ford notes. “People don’t always realize that,” she says.
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5. Track down missing documents
While many documents will be pushed to you automatically, others will require you to be proactive. “If you receive unemployment compensation, you typically have to go online to print that out. You will not receive that in the mail,” says Ford, noting many states require residents to go to a portal to print the 1099-G, which summarizes unemployment dollars received and certain other government compensation, such as state and local tax refunds. For charitable contributions of $250 or more, you need a written acknowledgment from the nonprofit. If the organization did not send the letter yet, or you’ve lost it, now is the time to contact the charity to request a copy.
If you got divorced in 2021, your preparer will want a copy of the divorce decree, Ford says. The decree can contain important information, such as which parent can claim any dependent children that year, she says.
6. Check your stimulus check
If you received a third Economic Impact Payment, or stimulus check, in 2021, you may need that information to determine if you can claim a larger amount. If you received no stimulus check, you may be able to claim the credit on your 2021 return. Here’s why. You may be owed more stimulus money if the government’s calculation was based on your 2020 tax return — or your 2019 tax return if your 2020 filing was not processed when determining your eligibility — and your situation changed in 2021. For example, your income may have been lower in 2021.
“If some people didn’t receive the amount that they were entitled to, they would get a credit for it,” says Downey. “You may have gotten a lower stimulus amount, when you’re entitled to more.”’’
If the taxpayer received a stimulus payment and doesn’t report the correct amount on the return, it could delay the processing of any refund or even require the filing of an amended return, Ford notes.
7. Know what to ignore
When using an accountant, you can skip giving the preparer monthly brokerage statements — only the consolidated 1099-B is needed. Likewise, the CPA does not need IRA statements, only the 1099-R if there were distributions, Ford says. For IRA or SEP contributions, the taxpayer does not need to give the CPA any documentation. “They just need to let us know that they’ve actually done it,” Ford says.
8. File early and beat the scammers
You might not be motivated to dive into tax prep, but scammers are already plotting their nasty tricks. “Be very diligent and careful because there are a lot of scams and fraud,” advises Downey. One illegal tactic is to file a fraudulent return, using your Social Security number, before you can submit your return. Filing early helps reduce this risk.
9. Take time to review your return
If you feel overwhelmed, consider hiring a tax preparer. “Don’t stress yourself out. If you feel like you can’t prepare the return on your own, then hire someone to do it. Take that headache off of you,” says Downey.
But even if you hire an accountant, you are responsible for everything on the return, so it’s crucial that you review everything carefully before it’s filed. “If they do that last minute, there’s not a lot of time,” says Ford. “So you’re better off doing it earlier. That way you can review it and ask questions as needed.”
Sharon Waters, a former CPA, has written for Wired.com and other publications.