Gearing Up for Tax Season: An Individual’s Guide
Most people look forward to ringing in the new year. It’s a time to create new goals, better yourself, and make new memories. However, a new year also marks the kickoff of tax season, which most people aren’t celebrating. Tax season can be a burden for many, especially if you are confused about recent changes and the information needed to file your returns. That’s why we created a comprehensive guide to walk you through everything you need to know to file your returns correctly, timely, and accurately.
2021 Filing Season Changes
First, let’s go through recent regulation changes that affect your tax returns. The federal and state governments constantly change tax rules and regulations based on political agendas, economic factors, and public opinion. Each year there are changes that impact your individual tax return. Let’s go into the major changes for the 2021 filing season:
Each year the standard deduction and tax brackets are adjusted to account for inflation. For the 2021 filing season, the standard deduction for single taxpayers sits at $12,550, $18,800 for head of household, and $25,100 for married filing joint taxpayers. Another critical tax item that inflation impacts are the tax brackets. These did not change significantly, meaning no severe impact on your upcoming tax return.
Child Tax Credit
If you have children, you might already be aware of the temporary Advanced Child Tax Credit payments issued to households. The IRS sent out half of the Child Tax Credit in the form of monthly payments in an attempt to ease the financial burden in households with children. This was a great way for many to buy necessities, put food on the table, and pay bills, but it can lead to issues when your tax return is filed. To reconcile your advance payments to the tax return, you will need Letter 6475, which was set to be mailed by the end of January. Keep in mind that married filing joint taxpayers will receive a letter for each spouse, so be on the lookout for two letters if that applies to you. If you didn’t claim advance payments, no worries, you can take the full credit when you file your return.
Although it feels like forever ago, Americans were issued a third Economic Impact Payment during 2021. Each individual was eligible to receive up to $1,400 based on the last filed tax return. You should have seen this amount hit your bank account around March; however, you can claim it when you file your tax return if you never received the payment. Like the Child Tax Credit, the IRS will send out a letter detailing how much was sent to you. These were set to be mailed by January 31.
Dates to Abide By
Are you one of those people that likes to push everything off until the last possible minute? If so, pay close attention to this section as we will go through the latest dates you can file your tax return without incurring any penalties.
Individual returns are due by April 15th each year unless a six-month extension is filed. For the 2021 filing season, the deadline is April 18, 2022. The IRS officially started accepting returns as of January 24, 2022, so be sure to get your information over to your tax preparer. However, if the April deadline is not attainable, you can have your tax preparer request an extension, giving you an extra six months to gather information. Remember that any estimated tax is still due by April 15th, meaning you might have to pay in some money before you file.
The dates businesses need to abide by are a little different than individuals. Business returns need to be filed by March 15th each year. The deadline is set earlier to give enough time for individuals to gather any information from the business to file their individual tax returns, such as a K-1. The March 15, 2022 date is for regular year-end businesses, meaning if you have a short year, dissolved your business, or a fiscal year-end, you may need to contact an accountant for more specific filing details.
Organizing Your Individual Documents
Now for the fun part. What exactly should you watch out for to file your individual return timely? It’s always a good idea to glimpse at last year’s filed return to get a general idea of the documents you need. However, if you build an established relationship with an accounting professional, they often send you a tax organizer to help you navigate pulling documents together. Let’s take a look at common forms, when you should expect to receive them and what they are used for:
- W-2 – This form is sent out by your employer by the end of January and gives detailed information on the money you made, taxes you paid, and benefits you received. It is one of the most common forms needed to file the Individual 1040.
- 1099-DIV – Issued by brokerage companies, this form will outline any dividend income you received during the year. Like W-2s, all 1099s will be issued by the end of January.
- 1099-INT – This form will only be issued if you have over $10 in interest per bank and will be sent by January 31.
- 1099-MISC – This form is used to report other income, such as rent collected.
- 1099-NEC – If you are an independent contractor or small business, you can expect to receive this form that shows the income paid to you over $600 by each company you worked for.
- 1099-R – Withdrawals from retirement accounts are issued on this form. You will receive a 1099-R from each account you withdraw money from.
- SSA-1099 – Social security payments are issued on the SSA-1099. This form also details any insurance payments made from your social security benefits.
- 1098 – Lenders send out this form to summarize the interest you paid on mortgages each year.
- Property Taxes – Your locality will send out a property tax bill that should be kept for your records. Usually, this can be issued before year-end.
- Child Care Costs – A form outlining daycare costs and the school or individual’s information should be requested each year as you are entitled to receive a credit for qualifying costs.
- Charitable Contributions – The IRS now allows up to $300 for single taxpayers, $600 for married filing joint, to be taken directly from adjusted gross income for cash contributions, so save your receipts.
- K-1 – This form is issued by pass-through businesses and outlines the income and deductions that will be reported on your tax return.
Organizing Your Small Business Documents
Getting your individual tax documents together can seem overwhelming, but if you have a small business, you might have to go through another whole set of steps. Small businesses set up as a single-member LLC and sole proprietorship are reported on the individual return on Schedule C. All income associated with the business will be assessed at your tax rate, while losses can offset other income. Here is the typical process that your small business should go through to ensure your business is reporting accurate information on the tax return:
- Reconcile Balance Sheet through 12/31 – Reconciling your balance sheet includes completing all bank reconciliations and ensuring the numbers on the balance sheet are correct and adjusted for old and outstanding items. If you don’t have time to reconcile everything regularly, you should employ the help of an accounting professional to keep your books in tip-top shape throughout the year.
- Prepare Financial Statements as of 12/31 – Once all of your balance sheet accounts are reconciled, you can prepare your financial statements. Typical financial statements for small businesses only include the balance sheet and income statement. For other useful financials, contact an accountant. You want to be sure you keep proof for all transactions, such as receipts.
- Issue 1099s & W-2s – If you are able to get your financials knocked out before January 31, you can issue 1099s and W-2s next; however, if your financials are still open, focus your attention on the issuance of these forms to abide by the strict deadline. A 1099-NEC will need to be issued to each independent contractor that you paid over $600. You should get a W-9 from each contractor before they begin work to assist with the filing. Additionally, W-2s to your employees need to be issued as well. If you have a payroll processer, they will generally handle this. It’s a good idea to understand who needs to issue these forms before year-end to minimize any hiccups.
- Report Income – After all the backend work is completed, it’s time to report your income or loss on the individual tax return. Your tax preparer can help you properly report your income and take any extra deductions and credits available to you. Common deductions taken by small businesses include the Qualified Business Income Deduction and the Home Office Deduction, both of which can reduce your tax burden.
Are you feeling overwhelmed yet? Don’t sweat it if that’s the case. Many individuals struggle to get a grasp on their taxes. If everyone understood IRS rules and regulations, accountants would be out of a job. Whether you’re reporting your new business for the first time or trying to navigate recent changes, Star Taxes and Books can be your go-to guide. The last thing you want is to add a tax letter to your piling list of tasks. Avoid the hassle altogether and let Star Taxes and Books walk you through the entire process of filing your tax return, from information gathering to filing the final return.