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What Basic Documents Do I Need to Do My Taxes?

If you have several avenues of income or lots of opportunities for deductions, gathering the right tax forms and documents can seem overwhelming. Here are the basics to help guide you.

Key takeaways

  • Documents and records you’ll need for your taxes:
  • Income tax forms (W-2, 1099s, etc.)
  • Investment income and retirement information
  • Tax forms for deductions (donations, medical payments, real estate, etc.)
  • Stimulus payment information

It’s always important to keep taxes in mind throughout the year to avoid leaving all the work to the last minute. And whether you are a regular W-2 employee or a business owner will significantly impact the information you need, the tax forms you will receive, and the tax planning strategy you implement.

No matter the situation, start gathering your documents and records early. Let’s walk through the paperwork and information you may need to complete your tax return.

Personal information

First, you’ll need all the essentials about yourself and your spouse, if applicable, to complete your taxes:

  • Name and spouse’s full name
  • Social security number or tax ID number
  • Spouse’s social security number
  • Date of birth and spouse’s date of birth
  • Bank account information if using the direct deposit method for your refund

If you have dependents, you’ll also need to gather their personal information and childcare records for your taxes, including their date of birth and social security number.

You also may need to provide an identity protection PIN issued by the IRS, if applicable, for you, your spouse, or a dependent. This number is used to protect your social security number from being used by someone else to file a tax return in your name. The IRS recently announced that all taxpayers are now eligible to get an identity protection PIN.

Forms and sources of income

Now, let’s take a look at the most common forms needed for income reporting. By the time you are completing your taxes, you should have received these forms from your employer or anyone who paid you throughout the year:

  • Form W-2: for regular employees
  • Form 1099-MISC: some self-employed individuals may receive this form from clients
  • Form 1099-NEC: most independent contractors will now receive this form from clients
  • Form 1099-G: reports government payments, including unemployment 
  • Form 1095-A: reports health insurance marketplace statements

To summarize: if you are a regular employee, you will receive Form W-2; independent contractors will receive either Form 1099-NEC or Form 1099-MISC; and the unemployed will receive Form 1099-G. 

That said, some contractors paid through third-party payment processors, such as PayPal, won’t receive a form if the annual amount is less than $20,000 and 200 transactions. If this is the case, you’ll need to self-report this income. If pay exceeds the threshold, the payment processor or freelance site should send a Form 1099-K.

Make sure you have a method for tracking income throughout the year so you can confirm that you’ve received all applicable forms from your employer(s) and/or clients.

If you are a small business owner or an independent contractor, you probably have to pay estimated quarterly taxes throughout the year. You will need Form 1040-ES with your tax return, which is a record of the payments you made. 

Other types of income you may need to report include prizes or awards, income from a trust, hobby income, or gambling income. Even if you do not receive a tax form for these payments, you still need to report them on your tax return.

Investment and retirement income

If you have any investment accounts, including retirement plans, you will also need the applicable forms from your financial institutions before doing taxes. These include:

  • Form 1099-INT: where interest income is reported
  • Form 1099-R: income from a pension, IRA, or annuity
  • Form 1099-OID: used if the original issue discount (OID) in gross income is at least $10
  • Form 1099-DIV: dividend income
  • Form 1099-B: for proceeds from broker and barter exchange income
  • Form 1099-S: reports income from real estate sales or exchanges and some royalty payments
  • Forms 1099-SA: reimbursements from Health Savings Accounts 
  • Form 1099-LTC: long-term care reimbursements

Today’s institutions may have enrolled you in a paperless program. So, instead of receiving a physical copy of your investment tax form in the mail, you may be able to find it in your online portal for easier access. If this is an option, it can help speed up the preparation process. 

Documents for deductions

Depending on your situation, you may need certain statements or receipts to claim deductions on your return. For example, if you made significant charitable donations, make sure you have those records to report that information accurately. Charitable donations may be cash or non-cash donations.

Other records you may need for deductions include the following:

  • Medical expenses
    • Doctor/hospital visit payments 
    • Insurance
  • Childcare expenses
    • Payments to daycare centers or other childcare providers
  • Homeownership documents, including:
    • Property tax records
    • Form 1098 or other mortgage interest documents
    • Records for energy-efficiency home improvements
  • Educational expenses, reported on Form 1098-T or 1098-E
    • Scholarships or fellowships received
    • Other qualified educational expenses
  • Educator (K-12) expenses
    • Supplies for the classroom
  • Tax payments
    • State and local tax paid aside from wage withholding
    • Vehicle sales tax
  • Retirement contributions on Form 5498, 5498-QA, or 5498-ESA
  • Disaster payments for federally declared disaster

These deductions can make a big impact on your tax burden, so always be thorough in record-keeping to ensure everything is reported. 

Stimulus payment information

For tax years 2020 and 2021, you will need information about the economic impact payments (EIPs), or stimulus payments, if you qualified for them. IRS Notice 1444 shows the amounts you were paid, but keep records of when you received it and how much you were given each time.

If you did not receive the amounts you are owed, you can claim the Recovery Rebate Credit for the 2020 tax return to claim the rest of a stimulus payment.

Work with a tax professional for your tax-related questions

Depending on your work, income, and investments, your tax return may get complicated fast. To make sure you have all the documents you need—and that everything is claimed that you’re eligible for—work with a tax professional who knows how to take care of it all. 

The team at Provident CPA and Business Advisors is ready to help. We can help you minimize your tax burden as a business owner or individual taxpayer. Work with our team to create the right tax plan. Contact us today to learn more about our services.

Sidestep These Errors to Keep More of Your Tax Dollars

Paper filing. Sloppy record keeping. Missing out on deductions. All these and more could mean you’re throwing money away. Here’s how to make your tax return as financially efficient as possible.

There are many ways for a tax return to be filed incorrectly. The IRS offers a list of the 9 most common errors which result in processing delays and hamper the chances of a quick refund. Those 9 can be classed as simple oversights; ones that are easy to overcome with some focus. This blog includes other potentially costly errors which take a little more thought to avoid.

Paper filing could be costing more than necessary

Tax filing is traditionally a chore. Today, going online to complete your returns digitally is not only a timesaver, it will also save you money.

More and more people are making this their go-to filing method. IRS figures show that 127,939,000 tax returns were e-filed for Tax Year 2018. Online filing may sidestep fees associated with having someone file your taxes for you and the cost of postage/a trip to the post office if you’ve been filing paper taxes yourself. It’s also a statistically safer option—costly tax form errors are around 21 percent more likely on paper compared to less than 1 percent on digital.

The IRS offers the Free File/Fillable Form program which allows taxpayers to prepare and file their federal individual income tax return for free using specially-created tax software. The Free File option applies to individuals whose personal income was under $66,000 for the tax year, while the Fillable Forms option is for those who made more than $66,000.

Using either of these systems could cut your expenses compared to paperwork. E-filing combined with Direct Deposit can make it easier and faster to claim and track any tax refunds. The Free File option also allows up to a six-month extension if taxpayers feel they won’t have their forms submitted in time.

That said, having a professional who knows the ins and outs of tax code will likely save you a lot more money than filing taxes on your own, however you do it.

Don’t forget to keep accurate financial records

Some commonsense steps in this area could save a lot of money later. Entrepreneurs risk steep misfiling fees and time-consuming audits if they don’t keep bank statements, invoices, payroll records, and receipts which will support any claims about income, expenses, credits, or deductions.

These records must be made easily available to the IRS and should be kept for at least three years (four in the case of employment records) after filing or payment, whichever is later. The IRS may audit you many years after a misfiling. In certain tax situations, they may have an indefinite period to call businesses and individuals to account.

Keep financial records and receipts in a digital format whenever possible This makes them harder to lose and easier to back up against damage. Watch this short IRS informational video for more information on proper record keeping.

Professionals could be entitled to deductions they’re not claiming

Have you been reluctant to claim a tax deduction for business expenses because you feared you’d be turned down or worse, audited?

This could mean you’re losing out on legitimate deductions which should be straightforward to claim if you’re keeping detailed financial records. Deductible business expenses can be anything the IRS deems ordinary (one commonly accepted in your line of work) and necessary (appropriate and helpful for your business).

Professionals who use a part of their home for business can claim a deduction, as can anyone using their vehicle for business travel as well as personal purposes. Publication 463 offers more information on how to make this deduction safely, as well as other expenses such as business meals.

Other types of deductible business expenses are:

  • Federal, state, local, and foreign taxes directly attributable to your trade or business
  • Employees’ pay
  • Rent paid for the use of property you don’t own.
  • Interest charged for the use of money you borrowed for business activities
  • The ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession

Don’t neglect the proper security steps

More taxpayers filing online also makes more businesses and individuals vulnerable to cybercriminals. It’s true that digital recordkeeping is more effective against thieves than a filing cabinet full of receipts, but failure to safeguard digital data can see it stolen or corrupted—which could mean trouble with the IRS and losing out on refunds.

The information businesses retain and send to the IRS contains the sensitive data of themselves and their employees including social security numbers, home addresses, and bank details. Data thieves can use this data to commit tax-related identity theft and even steal refunds which rightfully belong to their victims.

There are several steps to take which help minimize digital tax risks. Installing personal firewalls and antimalware software can block cybercriminals, as can staying current with any updates or patches in your operating system.

Multi-factor authentication or encryption should be used to safeguard any place data is stored. At the very least, taxpayers should make all passwords related to sensitive data both unique and difficult to guess—and routinely change them.

The IRS recommends learning to recognize and avoid phishing emails, threatening calls, and texts from thieves posing as legitimate organizations such as your bank, credit card company, and even the IRS itself. Do not click on links or download attachments from unknown or suspicious emails. Professionals can learn more to keep their taxes safe here and by reviewing these further IRS guidelines.

These are just a few of the pitfalls which can cause you a headache at tax time. Provident CPA & Business Advisors are here to give our clients the complete picture on how to maximize tax efficiency and minimize risk.

Provident CPA & Business Advisors offer a wide range of services in tax, accounting, and beyond. Our core focus is to help professionals achieve financial freedom and build a better business. Get in touch today to start strengthening your finances.

How Understanding Tax Rules Can Maximize Profits from a Business Sale

A record number of American business owners are selling up. It pays to know what this means for your next tax return if you’re ready to close a deal.

More people than ever are looking to become their own boss in 2019, so if you’re ready to sell your business, you may find no shortage of takers. New sales records were set in 2016–2017 and these were again broken in 2018. But achieving a truly successful sale means navigating the best ways to avoid taking a hit on taxes. Here are some key things to consider before closing a deal.

The money from your business sale is subject to income tax

This is the first thing to consider in order to minimize losses to the IRS. Selling your business doesn’t mean it’s no longer a source of income because it will make you money when it changes hands.

The type of business being sold—LLC, sole proprietorship, S Corp, or partnership, etc.—affects how much tax you pay, as does selling your business as assets or as stock certificates. In any case, business owners must declare the full amount gained from the sale on their next income tax return.

Consider closing the sale through installments or deferred payments

Business owners may be reluctant to accept anything less than the entire purchase price at closing. This is understandable and removes the risk that a buyer might default on installments, but it isn’t always possible, as many deals mandate a structured, incremental buyout. It’s also not necessarily the best tax move. Accepting all sales proceeds in a single year will land you in a higher tax bracket.

Agreeing to installments over several years can lower the tax liability of your business sale since you pay much of the tax over time as you get the payments. In such a competitive buyer’s market, offering installments could also make your business more attractive to buyers who won’t have to pay everything at once.

Installments also mean you remain part of the operation until closure. This keeps the original owner around to offer advice and ensure things are being run properly, which minimizes performance risk and lowers the likelihood of the buyer defaulting on installments.

Where you live could be a tax advantage (or a liability)

Your state of residency is a benefit or a burden when selling your business because state and local income tax can be applied on top of federal taxes.

Stock sales are generally more favorable than asset sales in this scenario. If your business makes an asset sale it will typically owe taxes in the state or states where it has assets, sales, or payroll, or has gained income in the past. Stocks, on the other hand, are usually taxed in the state of residence.

This means that a business owner living in the “right” state (and choosing an all-stock sale) could avoid a significant tax bite. Of all states, only nine are exempt from income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Business owners making an all-stock sale while living in any of those could avoid tax entirely, even if the company does business in another state. In addition, stocks are generally immune from the transfer, sales, and use taxes.

Your sale could qualify as totally tax-free

When one C or S corporation buys another, it’s possible to set the deal up as a capital gains tax-free merger. One way to do so is through a stock exchange or “corporate reorganization.”

The “buyer” and the “seller,” in this instance, can swap stocks in their respective companies until the buyer is in full possession of the other’s business. This can avoid income tax completely since a stocks-for-stocks exchange classifies as non-cash assets.

Sellers must receive a certain percent of the buyer’s stock (typically between 40 and 100 percent) for this kind of deal to go through. Two important notes here:

  • Even if sellers get off tax-free on a stock exchange, they’ll still be taxed later if they choose to sell the shares.
  • Federal law prohibits selling shares gained in this manner for a set period if the seller wants to hold on to that tax-free status.

For taxes filed in 2020, many taxpayers will pay 15 percent long-term capital gains tax if they’ve been holding new shares for over a year and decide to sell. The standard income tax rate will apply if they choose to sell new shares they’ve held for a shorter time.

The corporate reorganization process is complex and laid out in Section 368 (a) of the Internal Revenue Code. If your business wishes to go this route, it’s vital to speak to a qualified CPA who can guide you safely through it.

Each of the above suggestions are potential tax implications; everything has its own element of risk and there are frequently exceptions to rules. Connect with Provident CPAs to get the full picture on which sales solution will save your business the most come tax time.

Provident CPA and Business Advisors offer a wide range of services in taxes, accounting, and beyond. Our core focus is to help professionals achieve financial freedom and build a better business. Get in touch today to start strengthening your finances.