W2’s, Deductions, and Itemizing – Oh my!
Tax season can be stressful, but with a little preparation, you can conquer this annual challenge.
What Documents Do You Need?
The first step to a smooth tax season is to gather all your financial paperwork. Here’s what you’ll need:
Personal Information: Social Security numbers for yourself, any dependents, and your spouse (if applicable).
Income: W-2 forms from your jobs, 1099 forms for freelance or contract work, and any other income sources like unemployment or interest income.
Last Year’s Return: Having this on hand can help you spot any changes and ensure accuracy.
Deductions: While credits directly reduce your tax bill, deductions lower your taxable income, which can also result in tax savings.
The following can be used whether you take the standard deduction OR itemized deduction (read on below for more information on the difference):
Student loan interest: You can deduct up to $2,500 in interest paid on qualified student loans.
Alimony payments
Traditional IRA contributions (up to $7,000 in 2024)
HSA Contributions (up to $4,150 for individuals, and $8300 for families in 2024)
Teacher expenses (up to $300)
Business expenses: such as the business use of your car or home.
& more
The following can be deducted only if you plan to itemize:
Charitable contributions: Donations to qualified charities.
Income, sales, real estate, and personal property taxes
Mortgage interest: the portion of your mortgage payment each year that goes towards the interest on the loan only.
Medical & dental expenses: If they exceed 7.5% of your adjusted gross income.
& more
What else should you keep in mind?
Credits: Keep track of expenses like student loan interest, tuition payments, and charitable donations. You might also qualify for credits like:
Earned Income Tax Credit (EITC): This refundable credit is for low-to-moderate-income working people.
Child Tax Credit: If you have qualifying children.
American Opportunity Tax Credit: For qualified higher education expenses.
Lifetime Learning Credit: For qualified higher education expenses.
Child and Dependent Care Credit: If you paid for childcare expenses.
Saver’s Credit: A tax credit for low-to-moderate-income taxpayers who contribute to retirement accounts.
Residential Energy Credit: Install solar, wind, geothermal, fuel cells, or battery storage and you may qualify for a home energy tax credit. (Note: this credit is non-refundable, but can be carried over to the next tax year)
Don’t forget to check state-specific credits and deductions. Many states offer additional tax breaks to residents.
Rebates: typically one-time payments issued by the government to taxpayers
Energy Efficient Home Improvement Credit:
Look for specific state rebates
Organize Your Finances
Create a system to keep your financial documents in order throughout the year. Whether you prefer a digital folder or a physical filing cabinet, staying organized will save you time and headaches when tax season rolls around.
Standard Deduction vs Itemized
Generally, you’ll choose the option that gives you the bigger tax break.
Opt for the standard deduction if:
Your itemized deductions are less than the standard deduction amount for your filing status.
You don’t have many deductible expenses.
Consider itemizing if:
You have significant deductible expenses like mortgage interest, income/sales/real estate/property taxes, or medical costs.
You’ve experienced a major life event, such as a home purchase or a significant medical issue.
Understanding Your Filing Status
Your filing status determines your tax bracket, standard deduction, and eligibility for certain credits and deductions.
Single
Unmarried: You are not married or legally separated.
No dependents: You do not qualify as a head of household.
Head of Household
Unmarried or legally separated: You are not married and living with a spouse.
Dependent: You provide more than half the support for a qualifying person (like a child or dependent relative) who lives with you for more than half the year.
Separate household: You maintain a separate home for yourself and your dependent.
Married Filing Jointly
Married: You are legally married to your spouse at the end of the tax year.
Combined income: Both spouses’ income and deductions are combined on one tax return.
Mutual responsibility: Both spouses are responsible for the entire tax liability.
Married Filing Separately
Married: You are legally married to your spouse at the end of the tax year.
Separate returns: Each spouse files their own tax return, reporting their own income, deductions, and credits.
Limited benefits: Some tax benefits available to married couples filing jointly may not be available when filing separately.
Student Loans: depending on your student loan repayment plans, it may be in your best interest to file separately even if you are married.
Choosing the right filing status is crucial for determining your tax liability. It’s important to accurately assess your situation to ensure you’re filing correctly.
Consider Tax Software or a Professional
There are plenty of (free) tax software options available that can guide you through the filing process. If your finances are complex or you’re unsure about certain deductions, consulting a tax professional might be a good idea.
We know it’s tempting to put off taxes until the last minute but avoid this temptation! Filing on time can prevent penalties and interest charges. Plus, early filing often means a quicker refund.
Remember: Tax laws can change, so it’s always a good idea to stay informed.