Tax season is underway, and millions of us are hoping for a refund — or at the very least, to minimize what we owe. Whether you plan on filing taxes early or procrastinating until the last minute, knowing a few basics can help put more money in your pocket.
The following are 31 things you need to know before filing your taxes.
1. Find Out If You Need to File
If you need help determining whether you're required to file a federal income tax return this year, use the IRS's online Interactive Tax Assistant. You need to answer a few basic questions about your filing status, gross income and whether you had federal income tax withheld. The first question asks you which tax year you're asking about. Make sure you select 2016.
2. Gather Social Security Numbers
To prepare any tax return, you will need your Social Security number, the nine-digit piece of information that follows you throughout life.
"Make sure you have the Social Security numbers for yourself, spouse and all dependents," said Kay Bell, tax journalist at the blog Don't Mess With Taxes. She added that to claim some credits — such as the Child and Dependent Care Credit — you'll need to provide a Social Security number or other ID number.
3. Determine Your Filing Status
Your filing status is based on what your marital status was on Dec. 31, 2016, and it applies to all of the 2016 tax year. There are five possibilities:
- Married filing jointly
- Married filing separately
- Head of household
- Qualifying widow(er) with dependent child
The laws of the state where you lived on Dec. 31, 2016, determine whether you were married or legally separated. If you legitimately fit into more than one category, pick the one that requires you to pay the least amount of taxes.
4. Review Your 2015 Returns
Pull out your federal and state tax returns from the previous year. The information will help you start your 2016 tax return because some of your entries will be the same. Other entries will prompt you for missing information or forms you need to collect.
Also, you might need to make changes if you had important life events in 2016, such as getting married or divorced, having a child, going to school, or changing jobs.
5. Gather Your Documents
For income information, you'll need the forms you received from employers and banks, which might include some of the following:
- Form W-2 (wages)
- 1099-INT (interest)
- 1099-DIV (dividends)
- 1099-B (investment sales)
- Combined 1099 (brokerage combined tax statement)
- 1099-MISC (independent contractor work, royalties)
- 1099-R (retirement distributions)
- K-1 (MLP, partnership or S-Corp share of income)
- SSA-1099 (Social Security benefits)
- 1099-G (unemployment benefits and state tax refunds)
- W-2G (gambling winnings)
- 1099-C (forgiven debt)
Next, if you had any adjustments to income, you might need any of the following forms:
- 1098-E (student loan interest)
- 5498 (IRA contributions)
- 5498-SA (HSA/MSA contributions)
- 1098-T (tuition)
Finally, if you itemize your deductions or receive tax credits, you might need forms such as:
- 1098 (mortgage interest)
- 1099-LTC (long-term care benefits)
- 1099-SA (HSA/MSA distribution)
- 1095-A (insurance marketplace statement)
- 1095-B (health coverage)
- 1095-C (employer-provided insurance coverage)
You'll also need any personal receipts for expenses such as charitable contributions, unreimbursed employer business expenses, medical expenses and moving expenses.
6. Know Which Deduction to Take
If you're not sure whether to itemize your deductions, there's a relatively simple way to determine the best choice for your situation. "If you have enough itemized deductions to exceed the standard deduction, itemize. If you don't, take the standard deduction," said accountant Eric J. Nisall, founder of AccountLancer, which offers accounting help for freelancers. "If you're not sure, put everything in and let your tax program of choice tell you what to do."
If you don't itemize, you're in the majority. Less than one-third of filers itemize their deductions, according to IRS statistics.
7. Deduct Your Medical Expenses
If you itemize deductions, you might be able to deduct specific medical expenses for the costs of diagnosis, cure, mitigation, treatment and disease prevention. These costs include payments you made in 2016 for medical services provided by physicians, surgeons, dentists and other medical practitioners. They also include spending on equipment, supplies and diagnostic devices. In addition, you might be able to deduct:
- Health insurance premiums for coverage not provided by an employer
- Travel costs
- Long-term care insurance premiums and long-term care services
However, there is a threshold you must meet before you can deduct such expenses. For 2016, you can deduct on Schedule A (Form 1040) only the dollar amount that is more than 10 percent of your adjusted gross income. If you or your spouse were 65 or older during the 2016 tax year, the threshold is 7.5 percent of your adjusted gross income.
8. Deduct Travel for Medical Treatment
If you drove in 2016 to get to a hospital, doctor's office or dentist's office for the purpose of medical treatment, the cost of getting to and from the facility or office is deductible at 19 cents per mile. You can also deduct the costs of tolls and parking.
Include the total transportation costs in your medical expense deductions. You can only claim these costs if you itemize deductions and meet the minimum threshold for total medical expenses. Keep good records of this type of travel to differentiate it from the driving you do for work, errands or leisure.
9. Deduct Your Mortgage Interest
If you paid interest on a mortgage, the amount of interest might be deductible if you itemize deductions. You might also be able to deduct interest on a second mortgage, a home equity line of credit, a home equity loan or a vacation home. Make sure you get Form 1098, a mortgage interest statement, from your lender if you paid $600 or more in mortgage interest.
10. Look for New Mortgage Documents
In recent years, changes to mortgage financing disclosure laws also altered the type of document you need when filing taxes.
Within 30 days after closing a refinance or home purchase, you will get a final closing statement, where any last-minute changes in costs — such as recording or prepaid finance charges — are disclosed. This is the form to use for filing purposes, said Casey Fleming, author of "The Loan Guide: How to Get the Best Possible Mortgage" and founder of LoanGuide.com.
11. Properly Deduct Charitable Donations
If you want to claim a deduction for charitable contributions, you must itemize your deductions, said Nisall. "Any single cash donation over $250 or non-cash donation in excess of $500 should have a receipt in your records — and it would be ideal to have a receipt for any donation," he added.
However, not all donations are deductible. For example, you can't deduct the entire amount of your donation if you received a benefit like a fancy dinner at a fundraiser. You have to subtract the fair market value of the meal from the amount of your donation.
12. Know How to Handle Political Donations
Perhaps you wanted to help your favorite candidate reach the White House this year by giving money to the campaign. However, such a donation doesn't count as a charitable contribution. The same rule applies to political parties or groups — you can't deduct the amount of your donation.
13. Check Your Volunteer Driving Expenses
If you volunteered with a charitable organization, you can't deduct the value of your time. However, you might be able to deduct the cost of driving if you itemize deductions. Miles you travel on behalf of charity are deductible at 14 cents per mile, and you can deduct tolls and parking costs. Make sure you keep good records of your mileage for this travel to differentiate it from your personal or work travel.
14. Gather Health Insurance Tax Documents
You might receive a Form 1095-A, Form 1095-B or Form 1095-C for the medical care coverage that you had or that was offered to you. This is yet another important document to keep track of for tax-filing purposes.
"You and each member of your family must have qualifying health insurance coverage for each month of the year, or qualify for an exemption from the coverage requirement — or make an individual shared responsibility payment when you file," said Bell. "Filers who get coverage from the marketplace will need the Affordable Care Act 1095 forms to make sure they file properly. If you have coverage through your workplace, you'll simply check a box on the return."
15. Find Out If You Qualify for EITC
If you worked in 2016 but had low to moderate income, you might qualify for the Earned Income Tax Credit. You don't need to itemize your deductions to receive this tax break because a tax credit reduces the amount of tax you have to pay. You might even get a refund. The requirements are strict, so the IRS provides an online EITC Assistant to help you figure out if you qualify for this benefit.
16. Report Your Unemployment Income
If you weren't employed in 2016, you might think that you don't owe any income taxes. However, if you received unemployment compensation, you have to declare it and pay any taxes you owe. So, don't ignore that 1099-G you got. "The Internal Revenue Service got a copy, too," said Bell.
17. Check Your Job Search Expenses
Did you look for a new job in your current profession in 2016? "You should be aware of the income tax deduction that may be available with respect to job search costs," said Rosen. "Qualifying expenses are deductible even if they do not result in a new job being offered or accepted." However, you cannot deduct expenses if you search for a job in a new profession.
18. Calculate Business Auto Expenses
If you used your car for business purposes, the costs might be deductible. You have two choices for deducting expenses. The first method is to use the standard mileage rate of 54 cents per mile for 2016, plus business tolls and parking. Or, you can use the actual expenses method, in which you deduct the costs to operate the car when using it for business. Such expenses might include:
- Registration fees
- Depreciation or lease payments
Make sure to keep meticulous records of business travel. Don't claim mileage or expenses for personal trips you made, or for driving to work for an employer.
19. See If You Qualify for an Adoption Credit
If you adopted a child in 2016, you might be eligible for a tax credit for your qualified adoption expenses. There are strict requirements for eligible expenses. For example, you are not eligible for the credit if you adopted your spouse's child.
The maximum amount of the credit for 2016 is $13,460 per child. Another benefit of the adoption credit is that if your employer provided you with any financial assistance, the amount is excluded from your taxable income.
20. Don’t Forget Lottery and Contest Winnings
If you won a big jackpot, Uncle Sam took a big cut before you got your hands on it. If you won contests or prizes, the company might report your winnings to the IRS. Even if it didn't, you're required to report it as income.
21. Report Your Gambling Wins and Losses
If you struck it rich in Las Vegas last year, you might have to report it on your tax return because your gambling winnings might be taxable income. If you weren't so lucky, your gambling losses might be deductible if you itemize deductions instead of taking the standard deduction. Gambling transactions include betting on games and contests such as poker, horse racing and even bingo.
However, you can't take the amount of your gambling winnings, subtract your losses and claim the net amount as your gambling winnings. You have to report the entire amount of your winnings as income. Your losses are reported as an itemized deduction, up to the amount of your winnings. The IRS requires you to keep accurate records of your winnings and losses.
Also Read: 50 Tax Write-Offs for 2017
22. Properly Deduct for Uniforms
You might be able to deduct the costs of purchase and upkeep of certain uniforms if your employer specifically requires you to don clothing items that aren't suitable for wearing as your regular clothing.
Employees who might be able to claim a deduction for their uniform costs include:
- Delivery workers
- Health care workers
- Law enforcement officers
- Letter carriers
- Professional athletes
- Transportation workers (air, rail, bus, etc.)
Protective clothing or safety items might be deductible for people who work as:
- Cement workers
- Chemical workers
- Fishing boat crew members
- Oil field workers
- Pipe fitters
- Steam fitters
- Truck drivers
Special rules apply to military uniforms.
23. Know What Expenses You Can’t Deduct
If you itemize deductions, make sure the items you claim are actually deductible. Here's a list of some nondeductible expenses from the IRS:
- Adoption expenses (although you might be eligible for an adoption credit)
- Broker commissions
- Burial or funeral expenses, including the cost of a cemetery lot
- Club dues
- Fees and licenses, such as car licenses, marriage licenses and dog tags
- Fines and penalties, such as parking tickets
- Health spa expenses
- Hobby losses (although certain hobby expenses might be deductible)
- Home repairs, insurance and rent
- Home security systems
- Illegal bribes and kickbacks
- Losses from the sale of your home, furniture, personal car, etc.
- Lost or misplaced cash or property
- Lunches with co-workers
- Meals while working late
- Personal, living or family expenses
- Professional accreditation fees
- Professional reputation, expenses to improve
24. Remember Your State Income Taxes
In most states, you have to file a separate income tax return. However, if you live in one of these seven states, you don't have to:
- South Dakota
If you live in New Hampshire or Tennessee, you don't have to pay state income tax, but there is a tax on interest and dividends. States that do not collect income tax manage to find it elsewhere. For example, you often pay higher sales taxes.
25. Don’t Make Simple Mistakes
It's easy to use the wrong dollar amount on your return, whether you prepare the tax return yourself, use a human preparer or use an online service.
Nisall said you should double-check and triple-check your figures. "Making an input error can mean getting back too much and having to pay it back later — sometimes with interest and penalties," he said. Or, you might not get back what you deserve and can lose the money permanently if neither you nor the IRS catches and fixes the error, he added.
Take a deep breath and step back for a moment when you finish your returns. Look at the bottom-line numbers. "If anything looks off — either owing too much or receiving too large of a refund, or if you simply have no clue what you are doing — hire a qualified tax preparer," said Nisall.
26. Check Your Tax Preparer’s Work
If you use an accountant or other human tax preparer, remain vigilant. The IRS won't let you off the hook if the preparer makes mistakes or tries to claim excessive deductions for you.
"It is your tax return, and even though someone else prepared it, you are responsible," Rosen said. "Do not take a refund that you are not entitled to, or you can likely owe it back one day with interest plus penalties."
In addition, a tax preparer should sign his name on your return. "If your tax preparer will not sign their name, you should walk away," Rosen said. "That means they are hiding from something, and it is a sign you need to worry."
Rosen urges you to find a tax preparer with a good reputation. "You do not want to be audited because you had a questionable tax preparer," he said.
27. Don’t Fall for Tax Scams
Unscrupulous people might call you, pretending they are IRS employees and demanding that you pay taxes you owe. The IRS will never:
- Call to demand immediate payment
- Call about taxes owed without first having mailed you a bill
- Demand that you pay taxes without giving you the opportunity to question or appeal the amount the IRS says you owe
- Require you to use a specific payment method for your taxes, such as a prepaid debit card
- Ask for credit or debit card numbers over the phone
- Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying
If a caller makes any of these demands, do not give him any personal information. Instead, hang up the phone immediately.
28. Report All Your Income
Be honest when reporting your income. "Report every penny of income," said Nisall. "It doesn't matter that a tax form wasn't issued. If you earned money — either income from a bank account or working for cash on the side — it's all taxable income."
Don't overlook non-wage income, Bell said. "You might, or might not, get an official tax statement for this," she said. Regardless, it's taxable. This includes tips you receive as part of your job.
Don't Miss: Everything You Need to Know About Tax Brackets
29. File Electronically or Mail a Paper Return
It's your choice whether you want to file online or submit all the paper forms to the IRS. "Many clients tell me they do not want to file electronically, since they do not want their information going over the internet," said Rosen.
However, Rosen noted that IRS employees "touch" paper returns, so there is a security issue there as well. "In addition, you statistically get your refund much quicker filing electronically, plus you have less chance of an error rate," he said.
30. File Your Federal Tax Return for Free
Free tax filing is available to taxpayers who meet certain requirements. The IRS offers Free File to file your federal taxes without paying any fees. The version you can use depends on the amount of your adjusted gross income.
If it's below $64,000, you can use the available free filing software. If your adjusted gross income is higher, the IRS provides Free File forms that represent the electronic version of its paper forms.
31. Know the Deadline to File
Usually, your income tax return has to be postmarked on April 15. However, the due date for your 2016 return is April 18, 2017, because of the Emancipation Day holiday in the District of Columbia.