OVERVIEW
A tax return is a document you must file with the government showing how much income you earned in a particular year.
Income documentation
The first piece of information you’ll need to start preparing your tax return is the total amount of income you earned during the year. Any employer that pays your salary must send you a W-2 form each year that reports your annual income and how much tax was withheld. Independent contractors typically receive income reports on Form 1099-NEC (1099-MISC in years prior to 2020). If you are a sole proprietor, then you are responsible for gathering all of the information pertaining to the profit or loss of your business to report on your Schedule C attachment.
Prior tax payments
If you have taxes withheld from your employment earnings during the year, you can enter them at the end of your tax return to reduce the amount of tax you still owe. Contractors or workers who receive 1099 income do not have taxes withheld and must pay estimated taxes, which should also be entered on the tax return. Although a 1099 will not reflect any tax withholding, your W-2 will report the total amount of tax you paid during the year.
Reporting deductions and credits
Various tax credits are available that directly reduce the amount of tax you're responsible for paying. Some frequently claimed tax credits include the child tax credit, residential energy credits and the earned income credit. Each has its own eligibility criteria you must satisfy.
Tax deductions, on the other hand, only lower the amount of your taxable income and do not provide a dollar-for-dollar reduction of taxes owed like the credits do. Still, all taxpayers qualify for certain deductions, such as the standard deduction. In order to claim any deduction or credit, you will need some basic information, such as your filing status, the number of dependents you have and a list of your deductible expenses. You may need other documentation to support your deductions and credits as well, such as receipts for charitable donations you made during the year.
Interest and dividend income
If you receive any investment income, you will typically receive a Form 1099 showing the type and amount of income paid to you. Interest income from investments typically includes interest from savings accounts and the dividends you receive on stocks you own. These are reported to you on Form 1099-INT and 1099-DIV. Regardless of the type of investments you have, if you earn income, you must keep a record of it and report it to the IRS.
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