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Tax Time: What to Know Before Filing Taxes

Tax preparation

Tax season comes around every year, and every year people scramble to get their tax returns completed by the April 15 deadline. Although many things stay the same year after year, the Internal Revenue Service does make some changes to the tax code from time to time. Whether you’ve prepared your taxes in the past, are used to working with a tax pro, or are completing a return for the first time, here’s what you need to know before filing taxes:

Know Your Deduction Options

A deduction reduces the amount of taxable income you earn. While reducing your income sounds like a bad thing, when it comes to taxes— it’s really for the best. Typically, there are three types of deductions for people filing Form 1040:

  1. You can claim the standard deduction. According to the IRS, the standard deduction is $6,300 for singles and married couples who file separately for the 2015 tax year. It’s $12,600 for married couples who file together.
  2. Depending on your circumstances, you can choose to itemize your deductions, instead of taking the standard deduction. Deductions you can itemize include mortgage interest payments, property taxes, state taxes, and medical expenses above a certain amount. It only makes sense to fill out the extra paperwork and itemize your deductions if they will be worth more than the standard deduction you can claim.
  3. There are also several “above the line” deductions that you can claim on your tax form. You don’t need to fill out special paperwork to claim these, and you can take them along with your standard deduction. Above the line deductions include in any interest you’ve paid on student loans, contributions to your IRA, and health insurance premiums if you’re self-employed.

Know Your Income

Income is one part of the tax return process that confuses people. Here’s what to know before filing taxes as far as your income goes: Report every cent you earned, even if it was just $100 cash for a small job you completed for a local small business. Your income includes the wages reported on your W-2, any interest you earned in a bank account, and even the value of property you received in exchange for your services. If you aren’t sure where to report your income or how much you earned during the past year, it’s a good idea to speak with a tax professional.

Know Any Changes

Although the basic tax rules stay the same from year to year, the IRS also makes some changes annually. For example, now that every person is required to have health insurance, there is a tax penalty for not having a policy. In 2015, the penalty went up to 2% of household income, or $325 per person per year, whichever is higher. Limits on the amount you can contribute to your 401k plan, your IRAs, and your flexible spending accounts also tend to increase year after year.

Know the Deadlines

The due date for tax returns is April 15 (except when April 15 falls on a Friday or a weekend). In 2016, the tax deadline is actually April 18. If you’re a U.S. citizen living abroad, you have until June 15 to file. You also have the option to file for an extension by April 18, which will give you until October 15 to submit your return. Although you have an extra six months to submit your returns, you’ll still want to pay any tax due by the original April deadline to avoid penalties and interest.

The team at CESI is committed to helping you make wise financial decisions and to helping you understand how to get out, and stay out of debt. For a free debt analysis, contact us and find out how we can help.

 

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