Let’s admit it: no one likes tax season. Many of us likely inherited habits from our parents: paying fees to the family accountant, or struggling through DIY taxes without a clue as to how much money is being left on the table.
Today, low-fee and free tax software has made it possible to get through tax season relatively stress-free, without paying hundreds to an accountant.
It’s time to bust the myth that tax season has to be stressful – here’s how to DIY your taxes without losing your mind.
First, let’s talk about your options for filing a tax return:
Doing it yourself using online tax prep software. This increasingly popular method can save you both time and money. There are three leading software programs for filing your taxes: H&R Block, TaxAct, and TurboTax. Prices vary for each service, but they’re relatively affordable, ranging from about $30 to $60 for each separate filing of a federal or state return. They all let you import your W-2 from thousands of employers, and you can choose to have the programs guide you through questions or skip sections that don’t apply. The mobile versions of H&R Block and TurboTax let you prepare the Form 1040 (more on that below) as well as the “short forms” (1040-A and 1040-EZ) on their apps. TaxAct’s mobile version only handles short forms.
Going to a tax professional. If the thought of filing your taxes (even with the help of online software) makes you want to run and hide, there’s nothing wrong with handing the process over to a professional. There are even cases when going to a tax professional is the better choice, if you have a complicated tax situation or plan to itemize deductions. A helpful benchmark to consider is your income. You should hire a tax professional if you make more than $200,000 a year, since your chances of being audited by the IRS increase as your earnings-potential grows.
Doing it yourself, using printed tax forms. This is the method that first made people fear tax season. Although perhaps a fun challenge for the financial nerds among us, this method can actually be risky, as you may have to spend more money on re-filing your taxes if you make a mistake.
The different tax forms
If you do decide that DIY taxes are right for you, it’s important to choose the right tax form to file for your situation. This will help you get your taxes done faster without missing deductions.
Here’s a quick rundown of the three tax forms you can choose - 1040, 1040A and 1040EZ - and how to pick the right form for you.
This is the simplest tax form available, and if you qualify for it, we recommend using it.
The criteria for using the 1040EZ include:
- Your filing status is single or married filing jointly
- You’re claiming no dependents
- You aren’t claiming any adjustments to your income
- You aren’t claiming any credits other than the earned income credit
- Your taxable income is below $100,000
For a complete list of requirements to file a Form 1040EZ, consult this list from the Internal Revenue Service.
One recent change also disqualifies people from using the 1040EZ if they bought health insurance through a federal or state exchange via the Affordable Care Act, since these consumers have an option to receive advance payment of the premium tax credit that helps cover some of the insurance costs.
The 1040EZ can save you time, but it can also limit your chances to save on your tax bill.
If your taxable income is below $100,000, but your income or family structure is a little more complex, this form might be the one to use. Individuals using Form 1040A can use any of the five available status filing options, including head of household. It’s also for people who want to claim any of several tax credits, such as child, additional child, education, dependent care, elderly or disabled, and retirement savings credits that are not available with the 1040EZ.
The 1040A also lets you make adjustments to your gross income that can lower your taxable income, and thus your tax bill. Adjustments allowed on Form 1040A include expenses for education, certain IRA contributions, student loan interest, and some college tuition fees. Plus, you can claim capital gain distributions.
However, you cannot itemize deductions with Form 1040A. If you want to itemize, you have to take the last step up the tax form complexity ladder.
Taxpayers should use this form if earnings (or combined earnings, for joint filers) are above $100,000, to itemize deductions, to report self-employment income, or income received from the sale of a property.
Taking advantage of the tax credits and deduction opportunities with Form 1040 requires additional paperwork and forms to file, but the task is now much easier with the advent of tax-preparation software mentioned above that guide you through a step-by-step process.
Keep in mind that as your finances change, the tax form you use may need to change with it.
Tax season can be scary, but with the right tools and preparation, you can sail through without losing your mind. Choose the method that is right for you and your finances, and know your forms to make tax season a breeze.
And while you’re finishing up your annual tax filing, it’s also a good reminder to check on your credit score to make sure you’re on top of your credit health. Get your free TransUnion VantageScore 3.0 by signing up through MoneyLion today.