1. Determine Your Filing Status
When you prepare to file taxes, one of the first steps is determining your filing status – in other words – how your tax information will be categorized and evaluated. You can choose from five filing statuses, depending on which is accurate for you:- Single: You are not married and are filing only for yourself.
- Married filing jointly: You and your spouse have decided to file as a unit.
- Married filing separately: You and your spouse have decided to each file your own taxes.
- Head of household: You are not considered married by the IRS, pay more than half of your household’s expenses and have a qualifying dependent.
- Qualifying widow(er) with a dependent child: Your spouse passed away during the tax year, you did not remarry during the tax year, you have a qualifying dependent who lived in your home and you paid more than half the of your household’s expenses.
2. Choose the Right Type of Deduction
Once you’ve determined your filing status, it will be time to consider which type of tax deduction – standard or itemized – benefits you. In many cases, the standard deduction is a good choice. If you aren’t eligible for specific tax deductions, this option subtracts a specific amount from your Adjusted Gross Income (AGI). The amount deducted is based on your filing status:Filing Status | Standard Deduction (2021) |
Single | $12,550 |
Married (filing jointly) | $25,100 |
Married (filing separately) | $12,550 |
Head of household | $18,800 |
Qualifying widow(er) | $25,100 |
- Paid significant out-of-cost medical expenses during the tax year
- Paid high-dollar insurance or tax costs on your home
- Contributed a significant amount to qualifying charities
- Had major out-of-pocket casualty or theft expenses
- Lost a significant amount of money gambling
- Qualify for other major deductions not listed above
3. Check Your Income Tax Withholding
When you started working for your current company, you likely set up certain tax information with them, including withholding. Withholding is the amount your employer takes out of each paycheck for tax purposes, and it can help offset the amount you owe the following tax year. You can find out how much is withheld from each paycheck by checking a recent pay stub. Unlike certain company offerings, like benefits, that require a qualifying event to change, you can update your withholding amount anytime. Use the IRS’s Tax Withholding Estimator for an idea of how much you should withhold to avoid paying a large lump sum during tax season, then submit a form W-4 to your employer to formally change your amount. It’s a good idea to check on this total anytime you have major lifestyle or income changes, before tax season or if the tax law changes. If you’re self-employed, it’s up to you to withhold money from your own earnings. Try out the withholding calculator linked above to see how much you may want to set aside for taxes. For information about your specific circumstance, speak with a tax advisor.4. Contribute to Tax-Advantaged Accounts (Retirement/HSA)
Certain tax-advantaged accounts for retirement, health savings and education may offer special deductions that reduce your AGI. Research which of your accounts may offer tax-deductible savings, then consider contributing as much as you can reasonably afford to lower your taxable income and maximize your return.5. Research Other Deductions That May Apply to You
In some cases, you may be eligible for tax credits and deductions outside of the ones listed above. Explore the IRS’s list of available credits and deductions to determine whether any may apply to you.6. Gather Your Financial Documents
Once you’ve determined your filing status, prepared your withholding amount and maximized your potential deductions, you’re almost ready to file your taxes. Begin organizing financial documents like your W2 forms, retirement information and investment details, and store them securely until it’s time to file. Nerdwallet offers a detailed Tax Prep Checklist to help you organize your paperwork ahead of time. It’s important to take some time in the months leading up to tax season to prepare your finances. By thinking ahead, you can make smart money moves that push you toward your financial goals.
Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as financial, legal or tax advice. An attorney, financial advisor, and/or tax advisor should be consulted for advice based on your circumstances.
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