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Before preparing your tax returns, it is important to have a ready checklist of the documents required to complete the whole process. Once you have organized the information needed and ready to proceed, it will become straightforward for you to go through the whole process without any unnecessary stress. The Internal Revenue Service (IRS) wants to know and keep a record of persons filing tax returns and the number of people covered on it. For this reason, you should be ready with both personal details and income information.
Personal details are crucial for the Internal Revenue Service (IRS) to record your identity and know the number of your dependents (Hopkins, 2011). The details to provide in this category include your social security number, if you are married, provide the social security number for your spouse as well, and social security numbers for your dependents. The personal information also helps the IRS to keep your account safe and secure from access by identity thieves who may hack it to reap benefits out of it including acquiring hefty loans, claiming refunds, travelling abroad, or to buy a high insurance cover without your knowledge (Vasavada, 2010).
Filing federal tax returns for income information requires W-2 forms from all employers you worked for in the past tax year. Suppose you want to file a joint return; you should provide W-2 Forms both yours and for your spouse. Other documents include 1099 Forms if you or your spouse completed a contract work and earned an income of more than $600. Another important information is the investment income information such as dividend income, interest income, proceeds from the sale of stock or bonds, as well as income from foreign investments (Vasavada, 2010). Local or state tax refunds income from the previous year, rental property income, business income, social security benefits, and the miscellaneous income such as lottery and gambling winnings, jury duty, Form 1099-MSA from medical savings, and Form 1099-MISC for awards and prizes.
Deductions include work-related deductions such as deductible business expenses, business travel expenses, depreciation and amortization, bad debt, standard mileage rates, use of a car, business entertainment expenses, and home office (Hopkins, 2011). Education deductions include student loan interest, work-related educational expenses, tuition, and fees deduction, and teacher educational expenses. Health care deductions include health savings account and medical and dental expenses. Investment deductions include capital losses, individual retirement arrangements (IRA), and sale of the home. Itemized deductions include standard deduction, property tax, deductible taxes, interest expense, miscellaneous expenses, union expenses, charitable contributions, sales tax, home mortgage interest, gambling loss, and real estate taxes (Vasavada, 2010).
Credits include income and savings credits such as earned income tax credit, foreign tax credit, nonrefundable credit for previous year minimum tax, saver's credit, excess social security and RRTA tax withheld, credit to holders of tax credit bonds, and credit for tax on undistributed capital gain. Family and dependent credits include the child tax credit, adoption credit, earned income tax credit, credit for the elderly or disabled, and child and dependent care credit. Health care credits including health coverage tax credit and premium tax credit. Education credits include American opportunity tax credit and lifetime learning credit. Home credits include nonbusiness energy property credit, residential energy efficient property credit, and low-income housing credit (Spadaccini, 2011).
Personal income refers to money coming into your possession or paid to your bank account. Personal incomes occur in the form of salaries or wages for work done, loans or bursaries, income from inheritance, savings, gifts or pocket money, and interests on savings. There are three types of personal income namely; fixed, variable, and occasional income. Fixed income does not change with time; it includes salaries and wages (Hopkins, 2011). Variable incomes change with time; they include interests on savings or investment and commissions. On the other hand, occasional income comes occasionally; it includes income from inheritance, and gifts or pocket money (Vasavada, 2010).
Expenditure means the money spent. Money can be spent on the living expenses such as food, entertainment, and clothing; fees, payment of loans and taxes, insurance for house or car, utility accounts such as telephone, water, and electricity. Expenditures can be broadly categorized as fixed, variable and occasional expenses. Fixed expenses are constant spending such as house rents. Variable expenses change over time, for example, electricity bills. Occasional expenses are unexpected but necessary spending such as fees for repairing a car when it breaks down, examination fees to a doctor when you become sick, among other examples. However, some occasional expenses can be scheduled such as the annual car services (Hopkins, 2011).
The IRS website provides an incredible opportunity to enable you to stay current in the identification and application of appropriate tax codes and laws. A section of popular forms, instructions, and publications presents a vast amount of up-to-date forms and instructions, online publications, accessible versions for people with disabilities, and eBooks that are browser friendly. Therefore, the IRS website offers a rich source of information concerning the current tax codes and laws.
Hopkins, B. R., Gross, V. C., & Schenkelberg, T. J. (2011). Nonprofit law for colleges and universities: Significant questions and answers for officers, directors, and advisors. Hoboken, N.J: John Wiley & Sons.
Kass-Shraibman, F., & Sampath, V. S. (2011). Forensic accounting for dummies. Hoboken, NJ: Wiley.Raabe, W. A., & Raabe, W. A. (2012). Federal tax research. Mason, OH: South-Western Cengage Learning.
Spadaccini, M. (2011). Ultimate LLC Compliance Guide: Covering All 50 States. New York: Entrepreneur Press.
Vasavada, N. P. (2010). Taxation of U.S. investment partnerships and hedge funds: Accounting policies, tax allocations, and performance presentation. Hoboken, N.J: Wiley.
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