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4 Things You Need to Know Before Filing Your Taxes

Last Updated
March 11, 2022

Tips to Simplify the Filing Process

Welcome to tax season – everyone’s favorite time of year! Well, perhaps not, but filing your taxes can be a little less painful if you are prepared. Following are four things you should know as you get ready to file your taxes.

#1 – Filing status matters.

Your filing status lets the IRS know what tax brackets your income is subject to and, ultimately, how much you either owe or are owed. Your status can determine what deductions and credits you’re eligible to take and how to fill out the required forms. If your filing status is incorrect, you’re much more likely to be audited. There are five main filing statuses:

  • Head of household – Unmarried people who pay at least half the cost of others’ housing and support
  • Married filing jointly – Most married couples
  • Married filing separately – Primarily high-income earners and people whose spouse may have tax liability issues
  • Qualified widow/widower – People who recently lost a spouse and are supporting children at home
  • Single – Unmarried filers who don’t qualify for another status

#2 – IRS Free File can save you time and money.

The IRS provides free electronic filing that can save you money over paying a professional if your tax situation is straightforward, and e-filing can get you a return faster than filing via mail. However, there are a few situations that will require you to complete a paper return, including the following:

  • Your e-return is rejected
  • You need to file an amended return
  • You are applying for injured spouse relief in an effort to recoup certain types of debt taken on by your spouse
  • You missed the e-filing deadline

#3 – Your AGI is key.

When preparing to file, be sure to keep an eye on your adjusted gross income (AGI), as this number is key in determining what tax breaks and IRA contributions you may be eligible for. The IRS defines AGI as “gross income minus adjustments to income.” To determine your AGI, you must take into consideration all sources of income, including:

  • W-2 and 1099 wages
  • Self-employment income
  • Alimony payments (for divorces prior to 2019)
  • Capital gains
  • Interest and dividends
  • Rental income
  • Any other taxable income

From that number, the IRS will subtract any eligible deductions, credits and exemptions to determine your taxable income. While these deductions may change from year to year, they typically include expenses such as IRA contributions, HSA contributions, alimony payments to an ex-spouse (for divorces prior to 2019), and up to half of self-employment taxes. Depending on your filing status (see #1 above), you may be subject to an AGI limit for certain tax credits and deductions that typically applies to higher income earners.

#4 – Extensions are only for paperwork.

The IRS may forgive you for filing your paperwork late, but Uncle Sam is not as understanding when it comes to late payments. If you need to request a filing extension, you can do so using Form 4868. Failure to file for 4868 by the tax filing deadline may result in a late filing penalty of 5% of the amount you owe each month, up to a maximum of 25%. Even if you file Form 4868, you’ll still need to estimate and pay any taxes due by the standard filing deadline. Be careful not to underestimate this amount, as the IRS will charge you interest on any unpaid balance. Also, if you don’t pay at least 90% of what you owe, you may be subject to a late payment penalty of 0.5% of the amount owed each month, up to a maximum of 25%. If you have questions about filing your taxes, Creative Planning is here for you. Our teams of credentialed, educated, experienced and action-oriented advisors are dedicated to helping you achieve your financial goals.

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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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