How to Do My Own Taxes
Filing your own taxes may seem difficult. But with a little bit of practice, you’ll find that it’s something just about anyone can accomplish, assuming your tax situation isn’t overly complicated.
In fact, according to File, over 71.5 million taxpayers prepared and e-filed their own federal tax returns during the 2019 tax year.
If you’re thinking about doing your own taxes, you’ve come to the right place. This guide provides an overview of why it makes sense to do your own taxes and some tips to help you get started.
The Benefits of Doing Your Own Taxes
There are many reasons why it pays to do your own taxes. Here are a few of them.
Take Responsibility for Your Finances
It’s easy to go through the motions with taxes. If you’re like most workers, taxes are automatically taken out of your paycheck. Once you get your tax forms for last year’s taxes, you drop them off with a tax advisor, who does tax prep on your behalf during tax season.
Then whenever you get your tax refund, you send it straight to your checking account.
Truth be told, that’s the lazy way to do taxes, and it rarely pays off. Filing your own taxes may seem boring. But you’ll learn more about how the tax code works, and you’ll discover strategies to improve your personal finance situation.
As a taxpayer, you may not think twice about paying someone hundreds of dollars to do your taxes. But if you learn how to file them on your own, you could keep that money instead of giving it away to a tax professional. And if you owe money to the IRS, you can use that money to pay your bill.
Keep in mind that you don’t necessarily have to fill out paper forms when you send your federal return to the IRS. If your tax situation warrants it, you can use a tax software program like TurboTax and the IRS’ e-filing system to complete tax payments electronically.
File Taxes On Your Time
Tax professionals are famous for being notoriously busy during the first and second quarter of the year when returns are due. If you decide to file your own taxes, you won’t have to wait for anyone else. Instead, you can file as soon as all your paperwork is in order. This means your taxes can be completed faster.
As an added bonus, doing your taxes earlier in the year maximizes the time value of money principle, which states that money is worth more today than its equal sum in the future. If you are expecting a return, you’ll get paid faster and have more time to invest your funds and collect interest or pay down debt (e.g., credit card debt and student loans).
How to Do Your Own Taxes
Now that you have a better idea of some of the reasons why so many people do their own taxes, let’s take a look at how, specifically, you can take care of your own taxes next tax season.
- Round up Your Tax Documents
- Check Your Deduction Eligibility
- Determine Your Filing Status
- Pick Your Deduction Type
- Decide How You Want to File
1. Round up Your Tax Documents
To do taxes, collect all your tax documents, including your W-2s, 1099s, investment income statements, bank statements, mortgage interest statements, proof of healthcare form, receipts, and any other documents you may need.
Most forms detailing income and investment interest should be mailed to you by January 31. However, you have until April 15 to file your taxes. If you’re missing any forms by the end of January, contact your employers, bank, or brokerage and send a reminder.
2. Check Your Deduction Eligibility
Tax credits and deductions reduce taxable income, putting more money back in your pocket. The more tax deductions you are eligible for, the less you have to pay in federal and state taxes.
Spend some time reviewing the IRS website and determine which credits you may be eligible for. In addition to the standard deduction, here are some other common deductions:
- Freelance expenses
- Education costs
- Medical expenses
- Student loan interest
- Charitable donations
- Home office
If you’re not being claimed as a dependent, and you’re not a student, and your income is below a certain threshold ($32,500 in 2020), you should also look into the saver’s credit. This credit rewards taxpayers who contribute to a retirement plan.
3. Determine Your Filing Status
There are several ways to file as a taxpayer, depending on your personal situation.
Even if you’re in a committed relationship, you file as a single taxpayer as long as you’re not married, divorced, or separated when the tax year starts.
Head of Household
To qualify as head of household, you must have paid for more than half of the household’s expenses. You must also be unmarried, and support someone who is a qualified dependent or child.
Married Filing Jointly
To qualify for this status, a couple must be married and both parties must agree to file as one party.
Married Filing Separately
In some cases, it’s more strategic to file separately from your spouse. If you’re married, compare your projected tax bills before filing and determine which option saves you more money.
You can file jointly along with your deceased spouse if the spouse dies and you don’t remarry that same tax year. You can remain eligible for this filing status for up to two years afterward.
4. Pick Your Deduction Type
The next step is to decide whether you want to claim the standard deduction or go through the process of itemizing your deductions.
The standard deduction for the 2020 tax year is $12,400 if you’re a single (unmarried) filer and $28,400 if you’re filing jointly with your spouse. The rule of thumb is to itemize your deductions if you are eligible to write off more than those amounts in taxes.
5. Decide How You Want to File
Once everything is in order, the last step is to sit down, roll up your sleeves, and file your taxes.
The first thing to determine is whether you want to file electronically using the internet or the old-fashioned way by mailing paperwork to the IRS.
If you’re filing your own taxes without the help of a certified tax professional, you may want to use tax preparation software.
Here are the two most popular tax programs.
TurboTax is powered by Intuit, the same company that owns the popular QuickBooks accounting software. According to the company, more than 13 million taxpayers filed for free using TurboTax in 2020.
You can file your taxes on your own using TurboTax, or the company will provide assistance if you need it.
Read our full TurboTax Review.
2. H&R Block
H&R Block is another leading tax provider, offering in-office support along with virtual tax filing. The company offers free and deluxe online filing options.
In addition, the IRS also provides online services for taxpayers. If your adjusted gross income is less than $66,000, you can use their Free File system, which will walk you through the filing process and provide assistance for determining deductions.
If you make more than $66,000, you can still use their electronic forms. However, they won’t provide comprehensive support.
Read our full H&R Block Review.
Tips to Make Taxes Easier
Filing taxes is a pretty straightforward process as long as you stay organized. It doesn’t have to be the nightmare that people often make it out to be (unless, of course, you have a particularly complicated tax situation).
Don’t Dread the IRS
The Internal Revenue Service (IRS) remains one of the most feared government agencies. However, contrary to popular belief, the IRS is on your side as a taxpayer. The mission of the IRS is to protect American taxpayers by helping them meet their financial responsibilities and provide fair tax enforcement.
The IRS works to combat tax evasion so that all Americans are held to the same tax standards.
If you get a letter from the IRS letting you know that you slipped up, or if you wind up owing back taxes, be polite, and work with the agency to resolve the issue.
Prepare in Advance
If you receive all of your paperwork at the end of January, do your preparation work as soon as possible. Don’t wait until two days before the federal tax deadline to realize that you’re missing a tax form or you could wind up having to file for an extension and submitting your information late.
This drags out the process, increasing stress, and delaying a potential refund. Generally speaking, it’s better to get your taxes done as quickly as possible.
Don’t Forget About Your Local and State Taxes
In addition to filing your federal taxes, you’ll also have to file state and — depending on where you live — potentially local taxes, too.
Even if you’re moving to a state that doesn’t collect income taxes, you may still owe taxes to the place you moved from. If you moved from one state to another state during a tax year, you will need to file a part-year resident state tax return for both states. If you lived in multiple states over the course of a year, file part-year forms for each state you resided in.
Frequently Asked Questions
Do self-employed people pay a lot of taxes?
If you’re self-employed, you can expect to face a self-employment tax rate of 15.3%. Of this rate, 12.4% is made of Social Security and 2.9% goes to Medicare.
It seems like a lot to pay in taxes, but you can lower them by increasing your business-related expenses, which will reduce your net income and your overall tax obligation.
Check out the IRS Self-Employed Individuals Tax Center for further reading.
Is filing your own taxes difficult?
Filing your own taxes may be tricky at first if you have never done it or your taxes are complicated. However, what’s even harder is going through life not knowing how your taxes are assembled.
Doing your own taxes can be an excellent learning experience that can change the way you think about managing money.
Is it better to use a tax professional?
There is nothing wrong with using a tax preparer. You’re just going to pay more for services that you could easily figure out on your own. Tax advisors make a bundle every year catering to people who simply don’t want to be bothered taking care of their paperwork. And if you can afford it and genuinely don’t care about working through your taxes, then go for it.
There are also plenty of places to find free or affordable tax advice. For example, if you make $57,000 or less, have disabilities, or speak limited English, consider using the IRS’s Volunteer Income Tax Assistance (VITA) program. There’s also no shame in asking questions from a CPA or trusted source when they arise.
Will amending taxes trigger an audit?
In most cases, amending your taxes is not going to trigger an audit unless you made an egregious error. It’s far worse to avoid amending your taxes because you don’t want to trigger an audit. So, if you discover a mistake, go through the process of amending your return to be sure you are covered. The IRS typically has three years to audit a taxpayer. But they could add extra years if it’s deemed necessary.
Never lie to the IRS or omit information and keep careful records to protect yourself in the event you do get audited. And if you are a small business owner or self-employed, it’s a good idea to incorporate or form an LLC to protect yourself.
Do you have to report your stimulus check?
Americans do not have to pay taxes on their stimulus checks for the 2020 or 2021 tax year, which were mailed out in response to the coronavirus pandemic. Stimulus checks are regarded as tax credits under the CARES act. As a result, they are not considered gross income or taxable income.
Do you have to report cryptocurrency in the United States?
According to the IRS, virtual currency is treated as property, and so general tax principles applicable to property transactions apply to all transactions that use virtual currency. The sale or exchange of virtual currencies, the use of them to pay for services or goods, or holding them as an investment has tax consequences.
In short, if you have mined bitcoin, used it to buy goods, traded or sold cryptocurrencies, or received bitcoin as payment, you need to report gains and losses to the IRS using a Schedule D (1040) form.
The Bottom Line
At the end of the day, only you can determine whether it makes sense to file on your own or consult with a personal tax advisor. Take a hard look at your financial situation and consider whether you can get by without the help of a tax expert.
You don’t need to be a CPA or a tax pro to do your own taxes. You just need to know the rules, set aside the time to do it, and stay organized.
It may seem like a trivial or boring activity. But going through the process of doing your taxes can be one of the most rewarding personal finance decisions you make in life. It teaches you a great deal about how taxes work, and you can potentially save money in the process. What’s not to like?
Of course, there is nothing wrong with using a certified tax representative, either. Going this route can potentially uncover tax advantages that you had not previously considered. Just make sure that they charge a reasonable rate and know what they are doing. Look for a professional with a demonstrated history of helping clients save clients money.
Regardless of which approach you take with your taxes, one thing remains true: Do your taxes thoroughly, accurately, and on time each year, Otherwise, you might wind up in an ugly situation that was easily avoidable.