For those filing a tax return for the first time, the key to creating a successful tax plan is gathering as much information as possible, including all relevant personal tax documents and the resources to put the return together mistake-free.
Gather all tax filing information
For those who generated taxable income from employment or investments, necessary documents should be available through mailings or online. That includes a W-2 from your employer and 1099 forms issued by any entity where you earned money. Other necessary information will include state and local taxes paid, retirement contributions and charitable donations. For those with student loans, there is loan interest that might be deductible. In addition, those who own a home will need information on mortgage interest and property taxes paid. Wait until all necessary documents and information are in hand to start the process of completing the return.
Resources available
Once all information is gathered, there is a decision to make: Is the return complex enough to require an accountant? For those going the self-filing route, there are resources available. The IRS website provides detailed instructions and forms for filing. The option to file online through the IRS’s FreeFile program might also be an option for those with Adjusted Gross Income less than $72,000 for the 2020 tax year. There are two ways to file, either through free online tax preparation or filing options on IRS partner sites, or, if you know how to prepare a tax return, you can opt for completing the fillable electronic tax forms.
Retirement planning
First-time filers will also have the opportunity to fund an IRA (Individual Retirement Account), even if they have participated in a company retirement plan. Assuming funds are available to contribute, the next decision is Traditional IRA or Roth IRA. A Traditional IRA provides a tax benefit now while the Roth allows tax-free distributions in the future. The maximum amount is $6,000 per individual (with an additional $1,000 allowed as a catch-up for those over 50) and the contribution should be made by the tax filing deadline.
Filing the return
When all documents are in hand and all resources reviewed, it’s time to file. It’s very important to avoid mistakes by taking the time needed to complete the return and review it. Do not wait until the last minute to file. If there are enough deductions to itemize, make sure all the required documentation is in hand to prove the expenses were paid, or the IRS may be disallow them through audit. Most importantly, make sure to pay taxes owed, on time, to avoid any penalties. The IRS accepts multiple options to pay taxes, including electronic payments, wire transfers, debit and credit cards, and checks.
Tax considerations going forward
By actively participating in tax filing, you will gain an increased understanding of the process and ways to minimize income tax expense. The goal is to gather proof of income, expenses that might be tax-deductible or qualify for a tax credit, and evidence of taxes you already paid throughout the year. If the return qualifies you for a large refund, consider a lower Federal tax-withholding rate. Investigating and using a tax-deductible retirement plan at work can lead to a lower tax bill and increased retirement savings.
A CFP® professional can be instrumental in helping forecast yearly income tax, while also taking budgetary and retirement concerns into account. To find your CFP® professional, visit www.letsmakeaplan.org today.
Get started on securing your financial future today
Find a CFP® professional