Real Estate / Taxes

What You Should Do Now to Prepare for Tax Season 2020

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As of December 27, 2019, the IRS had received a whopping 155,798,000 tax returns during the year. A bit over 138 million of those were filed electronically, with almost 60 million electronic tax returns filed by individuals handling their own taxes. Whether you intend to be a self-preparer in 2021 or not, it’s a good idea to prepare for tax season sooner rather than later.

If you want to know how to prepare for tax season early, here are some steps you can take as early as November or December of the previous year:

  1. Gather important tax documents.
  2. Gather information about dependents.
  3. Double-check personal information with your employer.
  4. Plan ahead if you might owe taxes.
  5. Renew your ITIN if necessary.
  6. Start prepping your tax return.
  7. Do research on professional tax preparers.
  8. Finalize contributions for the year.
  9. Stay up-to-date on news from the IRS.

That’s a hefty list, but don’t worry. You can find more details about each of these ways to prepare for tax season 2020 below.

1. Gather Important Documents

You probably know that taxes require a great deal of paperwork. Get organized by starting to gather those documents. You might create a folder or basket where you can store documents until you’re ready to use them. Because many tax documents, including W2s and 1099s, might come electronically, create a digital folder where you can store those documents as well.

Common documents you might need to file your taxes include but aren’t limited to:

  • W2s from employers
  • 1099s from anyone who paid you miscellaneous, contract or other relevant funds
  • Documents showing medical, educational, child care or other expenses, especially if you’re itemizing
  • Statements regarding investments or mortgage interest payments
  • Receipts showing charitable donations
  • Receipts related to deductible expenses

2. Gather Information About Dependents

You’ll need the names and Social Security numbers of relevant dependents to include on your tax returns. If someone else can or might claim one of your dependents on their return, you need to know that. For example, if you’re divorced, it might be a good idea to work out which parent will claim a child or children for the 2020 tax year. You both can’t claim the same child for the same tax year.

3. Double-Check Personal Info With Your Employer

Filing your tax return as soon as possible after the IRS starts processing returns can be a way to get a refund sooner. But you’re often at the mercy of employers and others. Employers must send W2s by the last day of January each year.

Whether your employer sends your W2 early or waits until the last day, you could receive it even later than you would have if your employer doesn’t have the right address. To avoid this issue, check with HR to ensure all of your information is up-to-date.

This is actually a good exercise to practice with other businesses in December. Whether it’s a bank, your IRA provider or your child’s school, if someone is likely to send you tax documents, make sure they have your correct address.

4. Plan Ahead to Pay Taxes

According to the IRS, around $121 billion in taxes were delinquent for fiscal year 2019. One of the best ways to keep yourself out of the delinquent bucket when it comes to taxes is to plan ahead if you think you might owe. Here are a few tips for doing so:

  • Start a savings account to pay for your taxes. If you put money away starting as early as December, you can break a tax debt into smaller chunks and have enough to cover it by the April deadline.
  • Consider maximizing contributions and charitable donations to reduce your taxable income. This might lower the total amount you owe.
  • Estimate how much you might owe. Divide it by the number of weeks until the first week of April. Create a new personal budget that sets that amount aside if you can.
  • Consider consulting with a professional tax attorney or accountant to find out if you can reduce your tax burden in any other ways.

Note that you can file an extension for your return. That means you’ll have until October 15 to file your return. However, that extension doesn’t apply to your tax payment. If you wait until later to pay your taxes, you might still owe penalties and interest.

The IRS allows taxpayers to set up payment plans in some cases. If you’re current on all back taxes or have filed all required returns, you might be able to set up an installment agreement.

5. Renew Your ITIN

If you have an Individual Tax Identification Number (ITIN) used to file returns, you might need to renew it. According to the IRS, ITINs with 88 as the middle number expire December 31, 2020, and must be renewed.

Your ITIN is also set to expire at the end of the year if you haven’t used it on returns since 2016. The IRS further notes that ITINs with middle digits of 90 to 92 or 94 to 99 that were issued before 2013 and never renewed will also expire. If any of these situations apply to you, you’ll need to renew your ITIN.

6. Start Preparing Your Return

Want to get a serious head start and reduce the potential headache and stress of tax season? You can begin preparing your return today. If you use tax preparation software, you can enter as much information as you have right now. As you get information, you can quickly add it into the software. By the time you receive your last W2, you’ll have your taxes done.

While you’re getting ahead of the game, make sure you’re ready to receive a direct deposit of your refund when the time comes. You’ll need a valid bank account to do so.

7. Research Professional Tax Preparers

Don’t feel like you can handle the job on your own? That’s fine too. Consider using this extra time to research potential professionals or tax services that can help you file your taxes. If you choose a tax professional, make sure they have a valid Preparer Tax Identification Number, which indicates they’re authorized to file federal tax returns on behalf of others.

8. Finalize Contributions for the Year

December is a great time to finalize contributions to retirement plans for the year. You can deposit as much as $6,000 into your IRA for 2020. If you’re older than 50, that amount is $7,000 to allow for catch-up contributions. Those contributions can be tax deductible depending on your situation.

Other contributions you might want to look at include:

9. Keep Up with IRS Announcements, Particularly About COVID-19

It’s unclear how COVID-19 may impact tax filing, refunds and payment deadlines in 2021. Make sure you stay up-to-date with the IRS’s news releases in this matter.

While you’re taking some time to prepare for the next tax season early, you might also want to give your financials a close look. If you’re not already keeping close tabs on your credit, now is as good a time as any to pull your reports to check them for accuracy. You can also sign up for a service such as ExtraCredit, which makes it easy to monitor your credit score and access numerous features to build, protect or use your credit.

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