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4 steps to take now to make filing your taxes painless this year

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The 2020 tax season starts January 27, when the IRS will start accepting your 2019 tax returns. By getting your documents in order and planning ahead, you'll be poised to file quickly without having to rush through the process.

That's to your benefit, since hurrying through tax preparation can lead to mistakes that "increase penalties and interest, and reduce refunds," says Mark La Spisa, a certified financial planner and president of Vermillion Financial Advisors in South Barrington, Illinois.

Here's a step-by-step guide to making the process painless.

1. Gather information about your income

The IRS will need information about your income, and your spouse's, if you're filing jointly.

Typically, these forms arrive in the mail, although it's increasingly common for employers to make W-2 forms available exclusively online, says Matt Rosenberg, a certified public accountant and a member of the American Institute of CPAs' Financial Literacy Commission. Some investment income documents may also be available to download from your online bank or brokerage account.

Here are some of the key income documents to watch for:

  • Employee income: If you're an employee, you should receive a W-2 form no later than January 31. Your W-2 tells you your earned income over the course of the year and how much you've already paid in withholding tax on that income.
  • Self-employed or independent contractor income: If you work in the gig economy as a freelancer, independent contractor, or side hustler, you should receive a 1099 from any client from whom you've earned $600 or more. To stay organized, go through your calendar and track all the different employers or clients you've worked for over the course of the year, and check off each 1099 as it comes in, La Spisa says.
  • Investment income: If you have any sort of investment account, such as an IRA or a 401(k), or a savings account that earns interest, you should receive a 1099 from your bank or brokerage firm, such as a 1099-div. Your 1099 is a report of dividends and interest of more than $10, as well as capital gains and stock sales.
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2. Take advantage of last-minute tax breaks

There are still some moves you can make to reduce the taxes you owe on last year's income. You can still make a 2019 contribution to a qualified retirement account such as an IRA or a 401(k), for example, or to a health savings account (HSA), up until the mid-April filing deadline.

"The nice thing about these [qualified accounts] is that they're one of the few things that you can influence in 2020," says Rosenberg.

3. Tally up your deductions and credits

It's a good idea to start by looking at last year's tax return and see if any of the tax breaks you were eligible for in 2018 are still on the table for 2019.

Here are some of common deductions, which are expenses that can lower your taxable income and, in turn, reduce your tax liability.

  • Mortgage interest: If you're a homeowner, keep an eye out for a 1098 form, or Mortgage Interest Statement, which you'll need to deduct mortgage interest and related expenses.
  • Student loan interest: You may be able to deduct up to $2,500 of student loan interest paid, as long as your income is not over the earnings limit. If you're chipping away at student loan debt, look out for Student Loan Interest Statement, or 1098-E.

Tax credits are even more valuable because they directly reduces the amount of tax you owe dollar-for-dollar. Two of the big tax credits are the The Earned Income Tax Credit and the Child Tax Credit. Those can be worth up to $6,557 per filer and up to $2,000 per child, respectively. Roughly 1 in 5 taxpayers who are eligible for the EITC never claim it, so it's worth the research.

How income is taxed

$110,000

How a federal tax bill could break down for someone with a taxable income of $55,000 and $110,000.

$25,800

24%

$84,200

$44,725

22%

$55,000

$15,525

22%

$39,475

$29,775

12%

$29,775

12%

$9,700

$9,700

10%

$9,700

10%

Total tax bill: $7,960 (14.5% of income)

Total tax bill: $20,575 (18.7%)

Note: Brackets are for tax year 2019.

graphic: kiersten schmidt | grow Sources: irs, grow calculations

How income is taxed

$110,000

How a federal tax bill could break down for someone with a taxable income of $55,000 and $110,000.

$25,800

24%

$84,200

$44,725

22%

$55,000

$15,525

22%

$39,475

$29,775

12%

$29,775

12%

$9,700

$9,700

10%

$9,700

10%

Total tax bill: $7,960 (14.5% of income)

Total tax bill: $20,575 (18.7%)

Note: Brackets are for tax year 2019.

graphic: kiersten schmidt | grow Sources: irs, grow calculations

How income is taxed

How a federal tax bill could break down for someone with a taxable income of $55,000 and $110,000.

$110,000

$25,800

24%

$44,725

22%

$55,000

$15,525

22%

$29,775

12%

$29,775

12%

$9,700

10%

$9,700

10%

Total tax bill: $7,960 (14.5% of income)

Total tax bill: $20,575 (18.7%)

Note: Brackets are for tax year 2019.

Graphic: kiersten schmidt | grow

Sources: irs, grow calculations

4. Figure out if you're eligible for free tax prep

Depending on your income, you may be eligible to file your taxes at no cost.

Low- and moderate-income taxpayers earning about $69,000 or less a year can take advantage of Free File, a partnership between the IRS and the Free File Alliance, a nonprofit group of about a dozen tax-prep service providers. About 7 in 10 taxpayers, or roughly 100 million people, qualify for Free File. But in 2017 only about 3 million people used this service. Millions of eligible taxpayers missed out.

If you don't qualify for free filing, now is a good time to compare other affordable options. You may be able to get free tax help at your local library, for example, or compare estimates from different tax pros and services.

The IRS also has an abundance of resources, as does the American Institute of CPAs, says Rosenberg, adding that, whether or not you do your taxes alone, it doesn't hurt to educate yourself. Taxes are one thing you can almost guarantee you'll be paying next year and for the rest of your life.

"Try to develop some kind of literacy about what you're doing," says Rosenberg. "Ignorance is expensive."

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