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!
Do you need to travel outside the US this April? Are you short on time to file your federal tax returns? Then it would be a good idea to file a personal tax extension with the IRS. If you are an Indian in the US who is unsure to file a personal tax extension, we can help you.
Our easy 8-step guide will walk you through the process on how to file a tax extension in eight easy steps.
But, first things first.
What Is Personal Tax Extension Form 4868?
The deadline to file federal taxes in the United States is April 15. However, many people are unable to meet the deadline due to various reasons. In this scenario, one can fill out Form 4868 to file a personal tax extension. However, you have to submit this form to the IRS (Internal Revenue Services) before the due date. This will let you avail a six months extension till October 17 to file your income tax returns (ITR).
However, this extension is on filing the ITR and not on the tax payment. You will be required to make the income tax payment by April 15. Failing to do so will attract penalties. Moreover, this form is to be filled by individuals and not by businesses or corporations.
Form 4868 is available on the IRS website. You will need the following details to complete the form:
Your social security number (and your spouse’s too if filing a joint return)
Address
Estimate of tax liability for the year
Taxes already paid (tax withheld by an employer)
Calculation of deductions and credits
Where to file?
Filing a personal tax extension is easy, free, and convenient. One can file it electronically on the IRS website. Or print a form from the website, fill in the requisite details and mail it to the IRS directly.
How To File A Personal Tax Extension?
Filing a personal tax extension may sound more difficult than it is. But it is convenient if done before the due date. Here is a guide to help you file a personal tax extension:
1. Electronically
You can use IRS Free-file (IRS Free File | Internal Revenue Service)to file a personal tax extension via form 4868. Once you fill in the required information and make the tax payment, you will receive an acknowledgment from the IRS. Keep it as a record to submit it in October when you file your returns. One can use Free File to file form 4868 if their adjusted gross income is under $73,000 for the last financial year. If your income is above the threshold, opt for the IRS Fillable Forms tool(Free File Fillable Forms | Internal Revenue Service (irs.gov) to file for a personal extension. Your tax preparer can also help you with it.
2. Mailing A Tax Extension Request
If you are planning to send your request for a personal tax extension by mail, print form 4868 from the IRS website. You can also get the form from your local post office or the IRS.
Fill in the details, attach your tax payment check, and mail it to the IRS. Snail mail takes time, so rather than waiting until April, do it now.
3. Tax Payment
Form 4868 buys you more time to file your taxes. However, this does not defer your payment till October. One is required to pay their dues by April 15. Hence, you can pay a portion or all of your taxes online through a debit or credit card, or DirectPay. You can also mail a check or send a money order to the ‘United States Treasury’ along with your form 4868.
4. Special Tax Payment Extensions
Certain individuals get an automatic 60 days extension on filing and payment of their ITR. These are citizens or resident aliens of the United States who live outside of the United States or Puerto Rico. They could be serving in the military or on the naval outside of the United States or Puerto Rico.
Similarly, those in the Armed forces working in combat zones in or outside the US also get 180 days tax payment extension. All the above-mentioned individuals should explain the reason for the delay when they file their returns. However, if you owe taxes to the IRS by the due date, be prepared to pay the interest on the amount accrued.
5. Tax Extension Approval
If you apply for a tax extension online, you will receive confirmation within 24 hours. However, you may need to phone the IRS office to see if your request has been received if you’ve sent it via snail mail. The IRS will usually allow you an extension unless there is a problem with your form. And will not contact you unless there is a problem with your form.Also, you will not be contacted by the IRS if you have filled the form properly.
6. Tax Payment Options
If you can’t pay your taxes in full by the April deadline, you can choose to pay them in installments. The IRS’s website allows you to select a payment plan.
7. Tax Relief Options
If you require tax relief due to financial difficulty, you must file Form 843 (Form 843 (Rev. August 2011) (irs.gov). The same holds if you haven’t paid your taxes in a while or if the IRS has given you incorrect written advice. You can file an appeal if they reject your request.
8. State Tax Extensions
The above method is applicable for federal tax extensions. Some states offer a six-month automatic personal tax extension, while others do not collect state taxes at all. For more information, get in touch with the appropriate state officials.
It is easier to file a personal tax extension if the preceding steps are followed. Do not, however, use it as an excuse to pay your taxes late. You’ll get in trouble with the IRS and face a penalty if you do.
Are you still skeptical about filing a personal tax extension yourself? Then we are here to help you out. Use the services of AOTAX to remain on top of your tax deadlines. Over 2 lac Indians have benefited from our team of skilled tax consultants and planners who have helped them submit their US taxes on time.
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!
March has arrived, and you have more than 40 days to file your income tax forms. After that, it’s time to pay the IRS and claim certain tax credits/refunds. If you are an Indian citizen in the United States or a US resident, we can show you how to fill out the...
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!
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