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Watch as Jessica Willis, CFP and CPWA, guides you through #lifehacks to get you organized for your annual tax prep
Note: This video was originally recorded in 2020.
Disclaimer: The information provided is not intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. Individuals are encouraged to seek specific advice from their personal tax or legal counsel.
Didn’t have a chance to watch our live webinar with Jessica Willis, Certified Financial Planner®, Certified Private Wealth Advisor® and founder of Pocketnest? No worries! Catch the video, anyway! Watch as Jessica guides you through best practices and #lifehacks to get your tax prep work done on time—no sweat, blood or tears necessary.
Doesn’t Uncle Sam know we have TONS on our to-do lists already?! Taxes might be due soon, but that’s no cause for concern. You got this. We can help. We’ve devised a short list of the top 10 things you need to know while preparing your tax return.
Know your dates
Taxes are typical due on April 15th of each year, but can extend a day or two based on weekends. That means, they must be signed, sealed and post-marked by the US postal service on that date.
Know your lingo
Income: your total earnings from wages, investment and other sources. YES, all your earnings.
Tax Deductions: subtractions to your income the IRS allows you to take to reduce the amount of income you have to be taxed on. (Typically, think of things like donations you’ve made to charity, business expenses, mortgage points, and property taxes.)
The tax formula: something you’ll want to skim over.
Choose your strategy
Either hire a CPA or use these affordable online tools.
For simple returns (e.g., your W2 from your one job, if you’re renting and don’t own a home, etc.), and a DIY attitude, we recommend you consider the DIY approach with one of these affordable online tools. If you have a more complicated return—you have significant investments outside of your 401(k) such as owning and/or selling real estate, excessive and various forms of debt, stock options through work...you get the picture—or like more handholding, it’s probably best to consider a CPA or professional tax preparation help.
Bring on the experts—if you decide it’s worth it, which oftentimes, it is
Before officially hiring a professional, have them review everything and provide an estimate. And ask lots of questions. For example, if you have stock options or anything complex, be sure they’ve handled cases similar to yours. Throw in a challenging question, too, to ensure they actually know what they say they know. (Hey, you can never be too certain, right?!) You want to be sure you’re comfortable with their quote and their ability to serve your needs.
#ProTip: If you’re hiring a professional, you can keep costs down by doing a lot of the heavy lifting beforehand. A half-day of your time may be more cost-efficient than paying a CPA or tax preparer for a half-day of her time.
Get organized
Whether you’re hiring a CPA, tax preparer, or doing your own return using a DIY tool, organization will make your life way easier. And cheaper, if you’re paying a CPA. Organization will help you understand the process, while learning more about your personal finances along the way—bonus!
While most of these tax forms are automatically generated from your tax docs or within your tax prep software, it’s still good to know the deets. Below are some key schedules you’ll want to get cozy with. (Reminder, whether preparing your own return or assembling the info for a professional, the better organized you are beforehand, the less time you’ll spend inputting this data and/or paying for unnecessary tax prep hours.)
Briefly, some key terms:
W2: Reports wages paid to you and taxes withheld from you
1099: Reports income received through sources outside of employment
1040 Schedule A: Reports the amount of your itemized deductions. In Schedule A, you choose to itemize your deductions instead of claiming a standard deduction. Deductions include medical expenses, mortgage interest and charitable contributions.
1040 Schedule B: Reports your income schedule, citing each source of interest and dividend payments you receive.
1040 Schedule C and C-EZ: Report self-employment income by listing your business earnings and deductions that land you at your net business profit or loss. Add this income to your income on Form 1040. Use Schedule C-EZ (shorter and “ez-ier”) if you have one business with simple accounting that meets IRS qualifications.
1040 Schedule D: Reports earnings on your capital assets sold. These only account for investments outside of your employer investment account, and typically are the gains and losses of when you sell your stocks. They can also include other property you’ve sold, like your home or car. Long-term transactions (like owning a home for more than a year) are typically taxed at lower rates than short-term transactions, which are taxed at your standard income rate.
1040 Schedule EIC: Reports your qualifications for claiming the earned income tax credit for qualifying children or if your income falls below a certain level.
Schedule SE: Reports the amount of your self-employment tax to pay for social security. If you are self-employed, you are responsible for paying social security tax on your earnings, since your employer isn’t withholding it from your paycheck.
Review, Review, Review and then Hit Submit!
Give it the old once-over and send that puppy in! Pat yourself on the back, because you’re done!
Spend (invest?!) that Return Wisely
Your return check comes through and you’re swimming in the dough! Before you start throwing dollars like you’re a Kardashian, think about where that next dollar should go. Consider paying down expensive debt, building a cash reserve, throwing extra cash into your retirement or college savings fund, pay more on your mortgage—the options are endless! Just think it through and make a decision that feels right for you and your family.
What if you don't get cash back?
You’re not guaranteed cash back from Uncle Sam. In fact, the less cash you get back, the closer your estimates were of what you owed the government from your paycheck. Remember, that's a good thing because that means you kept money in your pocket earning interest (well, in a bank account) versus allowing Uncle Sam to earn that interest on your money.
What to do if you OWE money
Yeah, this one stings. It’s never fun to get another bill from Sammy. But by all means, pay what you owe and pay it on time so you don’t hit with interest and penalties. Next time around, review your W-2 forms and see if you need to change your withholding. That way, you’ll pay your taxes straight from your paychecks throughout the year, instead of owing the government a lump sum come tax time. And, certainly consider consulting a CPA or other tax professional, as they may find more deductions that never crossed your mind.
Deviate when it feels right
We totally get that each of you is a unique unicorn. You may have personal or non-financial reasons to deviate from this plan, and by all means, do what works for you.
Now, dust yourself off and pat yourself on the back. You did it!
It is important to understand that nothing in this content should be considered personalized investment, financial, tax or legal advice.
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