As tax season nears, you may ask what the alternatives available for filing a tax return are. You have three options to file your tax: filing your taxes, filing using online tax software, or filing by hiring a professional. You must have certain information readily available when filing taxes, no matter which method you select. This article will see how to file your taxes, which options are available, and which tax filing methods are best. But before you start to look for ways to file your taxes, you must know:
Do you even have to file taxes this year?
Your income, tax filing status, age, and other criteria will determine whether you must submit a tax return this year. It also depends on whether or not you can be claimed as a tax dependent by someone else.
Even if you aren’t required to file taxes, you should consider doing so anyway: If you qualify for certain tax credits or have already paid some federal income tax, the IRS might owe you a refund that you can only get by filing a return.
In the early months of the following year, “tax season” for the previous tax year begins. For example, the Internal Revenue Service (IRS) will begin receiving and processing returns for the 2021 tax year on January 24, 2022. Also, due to some public holidays in certain states/districts, the deadline for filing taxes is April 19, 2022.
Choose How to File Your Taxes
You can file your taxes in several ways. Hiring the service of a tax professional, using online tax software, or filling out the forms yourself are the three primary options for tax preparation. Take a closer look at these methods below:
1. Filing taxes online with tax software
You already know how to prepare and file taxes online if you’ve used tax software in the past. Many big tax software companies also provide access to human tax preparers.
For example, some companies provide software or support packages that include on-demand, on-screen, or online access to human tax specialists who can answer questions, evaluate your return, and even file your taxes.
Several tax-preparation companies, including big brands, offer free online tax preparation software under the IRS Free File program. You must have an adjusted gross income of $73,000 or less to be eligible.
2. Hire and work with a tax preparer
With a complicated federal tax code that is more than 74,000 pages long, it’s no surprise that more than half of all taxpayers in the United States need a professional to assist them.
If you choose this method, make sure the tax preparer has a Preparer Tax Identification Number (PTIN) from the IRS, and also ensure you ask about the fees upfront. Please note that the IRS requires your tax return to be filed electronically if your tax preparer submits 10 or more returns in a year.
If you do not wish to meet in person with the tax preparer, in that case, there is another way of filing taxes. You can share documents electronically with a tax preparer via a secure channel. Typically, the preparer will send you a link to the portal, where you will create a password and then submit photos or PDFs of your tax documents.
3. Filing taxes on your own
You can file taxes on your own by downloading and printing the forms from the IRS website, then mailing them with a check if you owe taxes.
Another option is filling out the forms online and submitting the return with a credit card payment. Using the Forms, Instructions, and Publications Search engine, you can find all the federal tax forms. In addition, state income tax forms are usually available on your state’s official website.
There is no cost or fee associated with submitting your taxes. Filing taxes on your own helps you understand and know your financial situation since it compels you to monitor and keep track of your transactions, earnings, and spending.
The majority of people who file taxes on their own have a simple tax status, an unaltered tax situation, or a genuine interest in the topic. If you have the necessary forms on hand, it can take only a few minutes.
If you file a paper return, it can take six to eight weeks to obtain your refund, however, you must submit it by mail in the below cases:
You’re married and live in a community property state but filing a separate return.
Whether you hire a tax preparer or prefer filing taxes on your own, you’ll need to gather tax filing information.
The purpose is to collect proof of income, expenses that may be tax-deductible or qualify you for a tax credit, and documentation of taxes paid during the year.
Social Security numbers for yourself, your spouse, and any dependents, if applicable.
W-2 form, showing how much you earned in the past year and how much taxes you have already paid. (If you worked multiple jobs, you may have received multiple W-2 forms).
1099 forms, record money given or paid by someone other than your employer. That is non-employment income such as dividend income, interest income, etc.
Contributions to a retirement account
Mortgage interest and property taxes
Donations to charity
Local and state taxes you paid
Expenses related to education
Medical bills that have not been reimbursed
Federal and state tax returns from the previous year
Collect Income Data
Getting your tax forms together for you and your spouse is a great start, however, keep in mind that you may have income that isn’t listed on your W-2. Remember to include any income you received over the year, such as:
Money earned through investments
Rental properties
Home businesses
Winnings from the lottery or a casino
Itemized Deductions and Credits
The total amount of taxable income is reduced due to tax deductions. Hence, keeping track of everything you can deduct is necessary. The following are some common deductions:
Child care costs
Education costs
Interest payments on a mortgage
Donations to charity
Most deductions necessitate receipts and other documents, so double-check with your tax expert to ensure you have all you need.
Track of Taxes Paid
Most businesses deduct federal, state, and additional taxes from each employee’s pay. On your W-2 form, these deductions will be detailed. You’ll have to keep your tax records if you’re a contract employee or operate a business.
Significant Life Changes
Important life events might have an impact on your tax return. If you had a life event that the IRS recognized, you may be able to claim additional deductions, such as:
Divorced
Got married
Had a baby
Moved to a new state
Closing Thoughts
The federal tax code is constantly changing. Make sure you discuss how these changes may affect you each year with your tax expert. Proposed tax legislation may have an impact on those in higher tax bands. Make sure you understand these bills significantly if your family’s annual income surpasses $250,000.
With over 15 years of experience, AOTAX is the experienced team you need. AOTAX has managed the finances of a number of Indian IT professionals. We have aided in reducing tax burdens and simplifying tax preparation year-round. So, if you’re going to trust a pro, sign up for free with AOTAX today!
Whether you file your tax return using tax software or work with a professional, a tax prep checklist will help you organize and retrieve the documents and information you’ll need to complete your tax return. Therefore, this article helps you understand the necessary documents and papers you need to file your tax to avoid typical mistakes and errors, allowing you to keep as much of your own money as possible.
Checklist You Need to Follow If You Are Filing Your Taxes Yourself
Not every category of this checklist will apply to you. However, when you are ready to file your tax return, you’ll be surprised how much time you will save by organizing your information in advance.
Remember that if you are married and filing a joint return, you will need to include the following information for your spouse as well.
The following is a list of the tax documents and information you’ll require:
Personal information
The IRS and state taxation authorities use your personal information to determine who is filing a return, how to contact you, and where to deposit your tax refund. Your personal information will include:
Your full legal name, as it displays on your Social Security card
Year of birth
Social Security number
Residential address
A copy of state and federal tax returns from the previous year
To receive your refund by direct deposit, you’ll need your bank account number and routing number.
Dependent information
You’ll need the following information to claim someone else as a dependent:
Names, dates of birth, and Social Security numbers of dependents (as they appear on their Social Security cards) (or tax ID numbers)
If the custodial parent of your dependent child is relinquishing their right to claim the child as a dependent, fill out Form 8332.
Sources of income
You may receive many different forms documenting your income. Among the most common are:
W-2s (Wage and Tax Statements) from your company (s)
Form 1099-G to report unemployment benefits and state or local tax refunds.
Forms 1099-INT and 1099-DIV, to report interest, stock sales, and dividends
Form 1099-B to report broker-handled transactions.
Forms 1099-R and SSA-1099 to report retirement plan distributions and Social Security benefits.
Form 1099-S to report income from your home or other property sales.
Form 1099-Q to report 529 plan or Coverdell ESA distributions
Form 1099-SA (HSA) to report distributions from a health savings account
Schedule K-1 for a pass-through corporation, trust, or estate income.
Alimony received (in the case you are separated or divorced, and the agreement is dated on/before December 31, 2018)
Record of any cryptocurrency transactions.
Other sources of income, such as gaming winnings, debt cancelation, jury duty pay, etc.
Self-employment and business records
If you are self-employed, you must disclose your income. However, you can also deduct business expenses from your gross income to reduce your taxable income.
The following are the documents and business records a self-employed person must maintain and need at the time of filing returns:
Forms 1099-NEC or 1099-K. To report income earned as an independent contractor
Records of business income and expenses.
Documentation for home office expenses, including the square footage of the home and the area used only for business.
Records for depreciating business equipment, including cost and date of installation.
Record of business-related miles traveled
Deductions
Deductions can help you reduce your taxable income and maximize your refund by lowering your tax liability. In general, you can either take the standard deduction (a fixed amount based on your filing status) or itemize your deductions.
If you itemize your deductions, you’ll need information on the following:
Expenses for medical care paid from pocket
Long-term care insurance premiums that have been paid
Any mortgage insurance premiums, mortgage interest, and charges you paid during the tax year are listed on Form 1098.
Taxes on property
State, local taxes, including sales tax.
Taxes paid with the registration of your vehicle
Charitable donations
Documentation of casualty losses (if you owned/lived in a property situated in a federally declared disaster area)
Even if you do not itemize, if you have the following deductions, referred to as adjustments to income, you can claim them.
Below are such adjustments to income:
Interest on student loans is reported on Form 1098-E.
Contributions to an HSA, IRA, SEP, or self-employed retirement plan should be recorded.
Alimony paid (for separation/divorce agreements dated on/before December 31, 2018)
Expenses for classroom supplies that teachers paid.
Premiums paid for self-employed health insurance
Tax credits
Tax credits reduce the amount of tax you owe on a dollar-for-dollar basis. To claim potentially essential tax credits, you’ll require the following documents:
Child care fees and the name, address, and tax identification number of the care provider are listed on Form 1098-T.
Costs of adoption and the Social Security number of the child you officially adopted in 2021
If you bought health insurance through the Health Insurance Marketplace, you’d need to fill out Form 1095-A.
Estimated tax payments
You may have to make estimated tax payments if you are self-employed or earn a lot of money and don’t have federal and state income tax withheld.
To avoid paying twice, ensure you include those estimations on your tax return:
Estimated tax payments to the IRS and state and local tax authorities made.
Refunds from previous years are applied to the current year.
Any amounts paid as a result of the extension
Proof of losses
Deductions are available for different types of financial losses. If any of the following losses apply to you, provide evidence of the following:
Keep track of any stocks or other investments that have lost all value or for which you expect to file a loss claim, including the date and original purchase price.
Non-business bad debts that are not collected (an instance of a non-business bad debt is lending money to relatives from your bank account and having them not reimburse it.)
Letters from the IRS
You may receive different notices or letters from the IRS and state tax authorities that influence this year’s return.
So when preparing your 2021 return, make sure you have these on hand:
IP PIN or Identity Protection PIN that the IRS issues
It may take some time to gather all of this information before filing your return, but it will ensure you have everything you need to claim every tax deduction and credit.
After you submit your taxes, it’s a good idea to keep them in a safe place in case you’re audited. If the IRS or your state tax authority audits your return, they may request records to back up your income and tax benefits. In addition, having all of this information in one location can help you save time and avoid losing any deductions or credits.
With over 15 years of experience, AOTAX is the experienced team you need. We at AOTAX have taken care of the finances of numerous Indian IT professionals. We have assisted in reducing tax burdens and simplifying year-round tax preparation. So, if you’re going to trust a pro, go with AOTAX and sign up for free today!
As a relatively new resident in the US, there are many things to adjust to – a different culture, new sights, distinct workplace norms, and unfamiliar financial regulations. With so many things to get used to as an Indian professional in the States, taxes definitely sit high on the priority list.
IRS guidelines and the tax return system can be confusing, especially to newcomers who are unaware of the finer details that need to be considered when filing their income tax returns. The implications can include large and unnecessary financial losses. The best way to avoid receiving lower refunds and incurring penalties is to file your tax returns correctly.
What Are Some Common Mistakes That Individuals Make?
Mistakes are meant for learning, not repeating. That’s why we’ve compiled a list of the most common errors individuals make in their tax filings. Read on to know more about what they are, and how you can avoid them, while simultaneously maximizing returns.
1. Not Being Aware of Important Deadlines
Having a clear idea of important dates on the tax calendar can help you plan financially according to payment deadlines and refund dates, which is something many people neglect to consider. Paying your taxes on time and budgeting expenses according to when you’re likely to receive your refund can greatly ease financial burdens. Additionally, respecting IRS deadlines means you can avoid any nasty penalty fees, and also make the most of deductible contributions within the requisite timeframes. Being a fiscally responsible resident can help you avoid unnecessary legal obstacles, and does wonders for your personal finances.
2. Not Proofreading Your Forms
As is rightly said, the devil is in the detail. A shockingly large number of US residents receive delayed refunds because of their own doing. Silly spelling mistakes and small discrepancies in values declared on tax return forms can cause delays that can last weeks or even months.
Even the smallest of errors could result in you having to redo your taxes altogether, so make sure the information matches what is given on forms such as the W-2, or 1099, etc. Always remember to dot your I’s and cross your T’s!
3. Not Checking Your Eligibility and Residential Status
As an Indian professional and H1B visa holder, the Substantial Presence Test is an important component of being able to reside in the country legally and to receive the requisite benefits from paying taxes. The SPT is used to determine how long you have been in the country, and whether you are considered a resident for tax purposes. For more information, visit the IRS webpage.
4. Not Safeguarding Important Documents
Documentation is undoubtedly the most significant facet of filing your tax returns. The taxes you are liable to pay, and the refund you are eligible to receive, both hinge on the supporting documents you provide. This includes financial statements, mortgage statements, letters from the IRS substantiating credits you have claimed, etc. Additionally, keeping past tax returns is equally critical in protecting against potential audits. The IRS has up to three years to decide whether to audit an individual and in the event you are audited, the records can make the process easier.
5. Not Checking Tax Brackets or Adjusting Tax Withholdings
Life is full of big changes: marriage, children, job changes, and relocations. What professionals often underestimate is the influence that these life changes can have on your taxable income. For instance, your marital status can impact the value of the deductions you can claim, and your employment status can influence the tax bracket you fall into. The IRS recommends revisiting your W-4 form on a yearly basis to retain control over your finances and potential tax liability.
6. Not Maxing Out Deductible Contributions
What seems to have become a buzzword, and rightly so, are deductions. We are revisiting this due to their sheer utility, although taxpayers seem to have forgotten them. When used correctly, tax deductions can considerably lower your taxable income, and therefore your tax bill. This is particularly useful while planning for your retirement, since contributions to 401k and IRA accounts are tax-deductible, hence affording taxpayers the twin benefit of smaller tax bills and growing nest egg.
7. Not Claiming Applicable Credits and Deductions
While deductions lower taxable income, credits lower tax bills. Both are incredibly useful in maximizing returns when harnessed strategically. Tax credits such as the Child Tax Credit, Kiddie Tax Credits, and Other Dependent Credits lower tax burdens. Additionally, proofs of payments towards loans, fees, charitable donations, and state taxes among others do the same. Most taxpayers fail to take note of where their money is going throughout the year, and then miss out on the opportunities to reap the benefits owed to them. It’s important to remember that the IRS cannot assume anything about your expenses and lower your tax bill in good faith. Getting sizable returns depends on what you declare and claim.
8. Not Filing Online or Asking for a Direct Deposit
The IRS is still battling large backlogs with skeleton staff amidst ongoing legislative changes, and hence urges taxpayers to file their returns online and opt for a direct deposit. Doing so will quell mounting frustration from both ends, and will quicken the refund process. Those who file electronically and provide their bank details can expect their accounts to be credited within 21 days of submission. Of course, it could take a little longer for those who have claimed credits that are prone to be misused (such as the Child Tax Credits), simply due to more stringent verification procedures.
9. Not Consulting a Professional
There is a reason we don’t self-medicate when we’re sick, a reason we don’t fiddle with our cars when it has broken down, and opt instead to visit a doctor or a mechanic. There is an implicit understanding and trust in the professional we choose to consult. We believe in their expertise and heed their advice.
There is no reason the same logic should not be followed when it comes to something as important as filing your taxes, especially when you’re dealing with tax returns in the US as a foreigner.
AOTAX is just the professional team you need: with over 15 years of experience, we’ve taken care of the finances of countless Indian IT professionals. We’ve helped ease tax burdens and made year-round tax preparations much easier. If you’re going to trust a professional, trust AOTAX and sign up for free today!
Of course, being your boss comes with its perks: Flexible working hours, flexible deadlines, control over your career trajectory, etc. However, those aren’t the only perks of a sole proprietorship. Running a one-person show has more advantages than you would expect.
For starters, it’s straightforward to set up. Low startup costs and no need for a formal structure make it simple to set up such a business entity. In addition, most individuals who have their own business don’t even know that they are considered sole proprietors by the IRS.
Secondly, if well-understood, tax preparation, and filing become much more straightforward when filing as a sole proprietor. For instance, in a sole proprietorship, there is no distinction drawn between your business and yourself.
In simple terms, you are considered both business and individual for tax purposes. In technical terms, this is known as a ‘pass-through’ entity—all business income passes through to the business owner.
Of course, this is taxable and must be declared in the individual’s tax return.
Who Is Likely to Be a Sole Proprietor?
Sole proprietorships generally do not require much in terms of brick-and-mortar start. Therefore, becoming an individual business owner can be easy.
Sole proprietorships are dominated by professionals who can work remotely or travel to customers. Common professions under this type of business formation include:
Freelancers (photographers, web developers, copywriters, editors)
Business consultants or public speakers
Professional cleaners and organizers
Home healthcare service providers (physiotherapists, personal trainers, at-home radiology services)
Landscapers, etc.
What Sort of Taxes Do Sole Proprietors Need to Pay?
As a one-person team, sole proprietors are both bosses and employees. This means, when filing as a sole proprietor, there are a few additional taxes that you need to pay over and above your income taxes.
Sole proprietors are responsible for paying:
Federal and state income taxes
All sole proprietors must declare their business’ profits and losses, as well as any other personal income. The IRS will decide tax brackets and tax bills based on the combination of these two factors.
Self-employment taxes
If you were to work for an employer, you would have to withhold a certain amount of your pay, which is meant for FICA taxes (Social Service and Medicare). However, being your own boss means that you can make these contributions while paying your taxes.
Federal and state estimated taxes
When employed in an organization, employers withhold taxes from your paycheck for you. On the contrary, as a self-employed individual, you must budget for estimated taxes owed for your business and pay them throughout the year. Ideally, you should estimate the total tax bill for the year, and make quarterly payments as required by the IRS.
Which Deductions Do Sole Proprietors Qualify For?
Like any other organization, business expenses are deductible and can reduce your tax bill. Therefore, keeping separate checkbooks for business and personal expenditures is a good habit to follow.
As long as you have accurate and detailed records of the money spent for profit, you can claim deductions for the following:
Automobile and transport expenses
If you depend on your vehicle to keep your business running, you can deduct some of the expenditures you make to commute. You could choose to claim deductibles using either the Actual Expense Method or the Standard Mileage Rate.
Start-up costs
Once your business is functional, there are many operational costs that business owners must incur to keep doors open: repairs, advertising, office supply purchases, and utilities.
These expenses can be deducted from your taxable income up to a limit of $5,000 for the first year you’re in business. After that, any remainders can be removed over the next 15 years.
Professional and legal fees
Seeking professional help from lawyers, accountants, and consultants comes with hefty fees. Luckily, such services are deductible as long as you can provide a receipt and proof of service done for your business.
Insurance
You can deduct any premiums paid toward insurance for health, property damage, loss from theft, etc., from your taxable income. This falls under the ambit of a business operating expense.
Courses for continuous professional development
You may need to upskill from time to time to continue running your business. Therefore, any educational fees paid toward courses that enhance professional abilitiesare tax-deductible.
Apart from the documents required for your tax filing, the following are required:
Form 1040, Schedule C
You must fill the Schedule C, Profit or Loss from Business (Sole Proprietor) of Form 1040. The Schedule consists of five parts:
Part I: Income,
Part II: Expenses,
Part III: Costs of Goods Sold,
Part IV: Information on your Vehicle,
Part V: Other Expenses.
Business owners should keep the following handy:
Business Income Statement
Mileage records (if you plan on claiming deductions for the use of your vehicle to do business)
Inventory count and valuation (if you sell any sort of product)
Records and receipts of all expenses
Schedule SE
If your business earned more than $400 worth of revenue in the year, as a sole proprietor, you must report and pay your FICA taxes (Social Security and Medicare).
Consulting a Tax Professional
Financial advisors can help you set goals according to your business needs while maximizing your tax savings. For instance, you may want to consult a professional to help you prepare for filing as a sole proprietor—-and AOTAX is the best out there for Indian professionals.
With close to 20 years of experience, we at AOTAX are well-versed in US taxation laws and how they apply to Indians working in the US. Therefore, we can help you optimize your tax strategy in the best way possible. Sign up for free today!
Of course, being your boss comes with its own set of perks and perils: you can wear your pajamas to your home office or take a day off anytime you like. However, these advantages look bleak when you sit down to file your taxes, don’t they?
Moreover, tax filing as self-employed gets complicated if you are a self-employed non-resident Indian (NRI) in the US. So, we’ve put together a guide to help NRIs claim their tax breaks and reap the benefits.
What are the Tax Implications for Self-Employed NRIs in the US?
There are over 3.1 million NRIs in the United States, and most of them are self-employed. The Tax Cuts and Jobs Act (TCJA) of 2017 provides a 20% tax deduction on qualified business income (QBI).
NRIs and US residents can claim this deduction on their QBI. Thus, any income you earned while in the US is eligible for this deduction which expires in December 2025. In addition, there are 28 other deductions you can claim during tax filing as self-employed. Below we list out 14 such deductions:
14 Deductions and Benefits of Tax Filing as Self-Employed Individuals in the US
Freelancers and small business owners often worry about paying a significant chunk of their earnings to the IRS as taxes. However, they can avail of 28 other deductions and reduce their tax burden while filing as self-employed.
In addition, they can reinvest the saved money to grow their businesses.
Let’s take a look at some of these deductions:
1) Self-employment tax deduction
Self-employed individuals must pay 15.3% of their income as self-employment tax. The 12.4% goes to social security and 2.9% to Medicare.
This tax is paid by employees and employers jointly. However, you have to pay the entire amount as a self-employed individual. The good news is that you can deduct half of it from your taxes while filing as self-employed.
2) Home office deduction
If you work from home, you can claim a tax deduction for it. However, there are two formulas for calculating the amount: standard and simplified. For the standard option, you must keep track of all expenses such as electricity bills, repairs, and so on.
There is a pre-determined IRS rate for the simplified formula that changes each year. The current rate is $5 per square foot, and your home office should be no more than 300 square feet.
The best way is to calculate which formula provides the most benefit for you and apply it accordingly. For example, you can debit mortgage interest and depreciation if you own the home.
3) Deduction for internet and phone bills
Nowadays, almost all businesses are online and have a website. In this tax benefit, you can claim the costs of running the website, including internet connectivity.
Moreover, if you work from home and have a single phone line, you can deduct 100% of long-distance business phone calls. Nevertheless, if you have a second line for work only, you can claim back the entire phone bill from your taxes.
4) Health insurance premium
If your spouse’s healthcare plan does not cover you, deduct your healthcare premiums from your tax bills. However, if your plan covers your spouse, dependents, and children under the age of 27, you will gain extra benefits.
5) Meal deduction
The burger you ordered for work lunch is not tax-deductible. However, meals ordered during business travel or to entertain a client falls into this category.
The cost of entertainment, on the other hand, is not covered. Only food and beverages purchased from a restaurant qualify for this deduction. Currently, a full deduction is allowed, but it will expire after December 20, 2022.
6) Travel deduction
This deduction is available for business trips to meet new clients or learn new skills. While it covers the entire cost of transportation, only 50% of meals are covered. Moreover, the travel should be away from one’s work city and purely for business reasons.
7) Vehicle use deduction
If you are a baker, you can deduct the cost of driving your car to deliver your sweet treats. Instead, you can opt for the standard rate of 58.5 cents per mile.
Alternatively, you can opt for actual expenses that require you to record the times you drove your car for work. You can also claim tax incentives on vehicle repairs, insurance, and depreciation. Choose the formula which gives you the most benefit.
8) Interest deduction
The interest you pay on your business loan may be credited back to you through tax refunds. Nevertheless, you should use it for business purposes. For example, if you use the money for a quick trip to Hawaii, you will not receive tax benefits.
9) Education deduction
Being a student for life not only keeps you young but also generates tax benefits. As a result, taking courses to improve your current business skills will earn you a tax deduction. However, if you are a travel agent, a drawing course on Craftsy is not tax refundable.
10) Deduction for business insurance
Insurance is taken to protect your business, office space, and equipment, such as fire insurance, car insurance, and credit insurance, which is also tax-deductible.
11) Rent deduction
Renting office space, office equipment, or canceling a business lease is tax-deductible. However, you cannot deduct the rent if you own the space.
12) Deduction for startup costs
Startups can claim a maximum of $5000 for a business. In addition, startups can deduct their market research costs, travel expenses, attorney and accountant fees, and advertising costs in this segment. If their startup is an LLC or corporation, they can deduct an additional $5000 in organizational costs.
13) Advertisement deduction
Money spent on Facebook and Google ads, as well as on billboards, are tax-deductible.
14) Deduction for retirement plan contributions
This deduction is an investment in your future security. When you purchase a Simplified Employee Pension plan, the premium is tax-deductible.
These and other deductions are detailed in Schedule C of Form 1040, downloadable from the IRS website. Take advantage of it now and reap the rewards later. First, however, keep all records, receipts, and documents for the mentioned expenses if you are filing as self-employed. If the IRS conducts an audit, these will be used to support your claims.If you are a self-employed NRI in the United States and are unsure how to file your taxes, contact AOTAX. With over 15 years of experience in US taxation laws, we have helped over 2 million tax compliant. Our tax experts will assist you in tax filing as self-employed.
To file a yearly tax return is unavoidable for millions of people in the United States. However, the IRS granted everyone until July to file their tax returns last year because of the COVID-19 pandemic. Since no such extension has been offered this year, you will have until April 15 to submit your forms.
However, just because you have the option of filing later does not mean you should. To file early this year, you must do it in February. In February, the IRS will accept returns for the 2021 tax year.
Early filing can result in a more accurate return, more time to pay a tax payment, and a lower risk of identity theft related to taxes. In addition, there is no reason to wait for individuals with simple tax returns.
This article will see why claiming tax returns early on is beneficial and how can AOTAX help Indians working in the US.
Why File Taxes Early?
Although many taxpayers file their tax returns on or before April 15 each year, there is no need to put it off until the last minute. Indeed, submitting your tax return early can make sense for several reasons, including obtaining your refund faster and reducing your risk of identity theft.
Even if you don’t file early, there are compelling reasons to start your tax planning as soon as possible. For example, it offers you the time you need to gather the documents and information you’ll need to claim all of your deductions—avoiding the stress of rushing for receipts at the last minute.
The Benefits of Filing Taxes Early
There are several advantages to filing tax returns early instead of waiting until Tax Day:
1. File early for a faster refund
You may prevent procrastination, get peace of mind, and cross this critical item off your new year’s to-do list by filing early. So, why not submit yours once the IRS announces that it will begin processing returns?
The IRS issued refunds to 129.8 million filers for the 2020 filing season, averaging $2,815 per refund.There’s no reason to let the government keep your money for any longer than necessary if you have money flowing to you. In addition, because the IRS will not be as busy early in the tax season as it would be in April, filing sooner means a faster refund.
Some people rely on their tax refunds to cover significant expenses. If you file early, you’ll get the money sooner and avoid having to take out an expensive short-term loan to meet those charges, which is especially important if you’re still paying off your holiday obligations.
2. File early to avoid identity theft
The sooner you file, the less time a fraudster has to file in your name and steal your money. This can cause havoc, especially if the fraudster claims bogus deductions, fails to declare income, or otherwise taints a tax return filed in your name.
It might take months to clean up a mess like this. Unfortunately, you may not realize you’ve been a victim of identity theft until the IRS alerts you to a potential problem with your tax return. The IRS warns that you should be on the lookout for tax-related identity theft if:
According to IRS records, you have to pay money for an employer you did not work for.
Due to a duplicate Social Security number, you cannot e-file your tax return.
When you haven’t taken any action, you receive an IRS notice that your current online account has been accessed or disabled.
You get a notice from the IRS that an online account in your name has been created (and you did not make it.
You receive a letter from the Internal Revenue Service (IRS) inquiring about an unfiled tax return that appears suspicious.
You get a tax transcript in the mail even though you didn’t ask for it.
You receive notification from the IRS that you owe extra tax or that your refund has been offset, or that measures have been taken against you for a year in which you did not file a tax return.
Filing early allows you to fully comprehend any changes in tax legislation and deal with life situations that may affect your filing status. Last-minute mistakes can result in audits, resulting in penalties and interest. This premise is more essential than ever, given the Tax Cuts and Jobs Act (TCJA).
Your certified public accountant (CPA) or other tax preparers will be less busy than in April in January and February. Early access implies your CPA will have more time to properly analyze your case and assist you with your tax return.
You will need information from your most recent tax return, whether you’re purchasing a house or going back to school (and applying for financial aid). You will have the most up-to-date information if you prepare your taxes early.
4. Avoiding amended returns
You’ll have more time to file a correct return if you start early. An incorrect return will most certainly be rectified. Audits are more likely to occur when returns are amended.
Here are some things to keep in mind as you strive for precision:
Official documents contain errors. W-2s, 1099s, interest statements, and anything else used to substantiate a deduction should all be checked. In addition, mistakes are made by businesses, banks, and financial organizations. Before you file, ensure you correct any such errors.
Early filing may result in the loss of essential documents, such as a 1099 or K-1 that arrives late. Therefore, double-check that you have all the necessary documents before clicking “submit” or dropping your return in the mail.
Amendments that are not complete. If you have to change your return, don’t just fix the parts that benefit you. Anything incorrect should be corrected.
Changes to tax forms. Form 1040 has changed due to the Tax Cut and Jobs Act (TCJA) of 2017. If you previously filed Forms 1040-EZ or 1040-A, you will no longer be able to do so. If you’re above the age of 65, you can now use the new 1040-SR “U.S. Tax Return for Seniors”.
Legislation enacted before April 15 may not be implemented into paper tax forms or outdated tax software. So keep an eye on the news. Also, keep an eye out for any alterations that may have gone unnoticed. You can file an updated return if necessary.
5. Time to save
If you owe the IRS money, filing early provides you more time to save. However, even if you owe the IRS money, there may be a compelling reason to file your tax return right away.
You don’t have to pay any taxes you owe until the filing deadline if you file your return in the middle of January. However, if you prepare your Form 1040 ahead of time, you will have more time to coordinate your payment.
In addition, those that need to calculate out how much they will owe the IRS will benefit from the extra time.
Waiting to find out you owe more than you anticipated could put a strain on your finances. So, to avoid an unexpected tax bill, the IRS recommends monitoring your withholding and tax payments in the fourth quarter of the year.
6. Avoiding a tax extension
If you file your tax return early, you may not need to file an extension. Rather than being a financial need, time extensions are frequently required owing to disorganization.
Some people who wait until the last minute to file their taxes simply need more time to hunt for more deductions or gather receipts.
If you rush the process too close to the deadline, you’ll almost certainly need the assistance of a tax professional to help you organize your finances and file your return.
Even worse, if you file an extension but don’t pay what you owe if there is a balance owing, the IRS will charge you interest and penalties on the unpaid tax bill until it is paid in full.
What Happens If You File Your Taxes Late?
Most people have until April 15 to file their federal income tax returns and pay any taxes they owe. However, the IRS is authorized by law to impose penalties on taxpayers who fail to file a tax return or pay taxes owed by the due date. In the absence of reasonable cause, a failure to file a penalty is assessed on returns filed after the deadline or extended deadline.
What are the consequences of filing taxes late?
Is a penalty imposed by the Internal Revenue Service for not filing taxes on time? Yes, there is:
For each month or part of a month that your return is late, the combined penalty is 5% (4.5% late filing and 0.5% late payment), up to a maximum of 25%.
The late filing penalty is imposed on taxes that are not paid by the due date. Therefore, the total tax displayed on your return fewer amounts paid through withholding, estimated tax payments, and allowable refundable credits equals unpaid tax.
If you still haven’t paid after five months, the failure to file a penalty will be increased to 25%; however, the failure to pay fine will remain in effect until the tax is paid.
Failure to file and pay results in a total penalty of 47.5% of the tax (22.5% late filing and 25% late payment).
If your return is more than 60-days late, the minimum penalty is the lesser of $435 or 100% of the tax that must be declared on the return.
The Bottom Line
Many people wait until the last possible moment to file their federal income tax returns every year. Despite this tendency, there are several reasons to file your taxes as soon as feasible.
You should file your return as quickly as possible if you are eligible for a refund. There are additional benefits to filing early for individuals who owe a balance.
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We are Registered Tax Agents with vast hands-on expertise, and we take great pride in assisting our clients in achieving their objectives. Thanks to a team of highly skilled and experienced Tax Accountants, we do everything we can to reduce your tax liability while making the overall taxation process as efficient, simple, and cost-effective as possible.
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