How Should You Do Your Taxes?

Quick answer

• You can file your taxes yourself using tax software, hire a tax professional, or use a combination of both.
• The best method depends on your financial complexity, comfort level with numbers, and budget.
• DIY software is often cost-effective for simpler returns.
• A tax professional is valuable for complex situations, significant life changes, or if you want expert advice.
• Always keep good records and understand the basic tax forms and concepts relevant to your situation.
• Filing on time or filing for an extension is crucial to avoid penalties.

What to check first (before you file or change withholding)

Filing Status

Your filing status determines your tax brackets, standard deduction amount, and eligibility for certain credits and deductions. Common statuses include Single, Married Filing Separately, Married Filing Jointly, Head of Household, and Qualifying Widow(er).

• What to check: Review your personal circumstances at the end of the tax year. Are you married? Do you have dependents?
• What “good” looks like: You’ve chosen the filing status that accurately reflects your marital and family situation and potentially offers the most tax benefit.
• Common mistake: Using the wrong filing status, which can lead to paying more tax than necessary or even penalties. For example, a married couple might incorrectly file as Single.
• Avoid it: Carefully read the IRS definitions for each filing status and confirm which one applies to you.

Income Sources

This includes wages, salaries, tips, freelance income, investment gains, rental income, and any other money you received during the tax year.

• What to check: Gather all income statements, such as W-2s, 1099 forms (for freelance, interest, dividends, etc.), and records of any other taxable income.
• What “good” looks like: You have documentation for every dollar of income earned.
• Common mistake: Forgetting to report all income, especially from side hustles or investments.
• Avoid it: Systematically go through all your bank accounts and financial statements, looking for any income that needs to be reported.

Withholding or Estimated Payments

This refers to the taxes already paid throughout the year, either through employer payroll deductions (withholding) or direct payments to the IRS (estimated taxes).

• What to check: Review your pay stubs for federal income tax withholding. If you’re self-employed or have significant income not subject to withholding, check your estimated tax payments.
• What “good” looks like: Your withholding or estimated payments are reasonably close to your actual tax liability for the year, avoiding a large bill or a huge refund.
• Common mistake: Under-withholding, leading to a surprise tax bill and potential penalties. This often happens after a life change like a new job or a second income.
• Avoid it: Use the IRS Tax Withholding Estimator tool or consult your payroll department to adjust your W-4 form if needed.

Deductions and Credits

Deductions reduce your taxable income, while credits directly reduce your tax bill. Understanding which ones you qualify for can significantly lower your tax liability.

• What to check: Keep records of potential deductions (e.g., student loan interest, medical expenses exceeding a threshold, charitable donations, business expenses) and credits (e.g., child tax credit, earned income tax credit, education credits).
• What “good” looks like: You’ve identified and gathered documentation for all eligible deductions and credits.
• Common mistake: Missing out on valuable credits or deductions because you weren’t aware of them or didn’t have the proper documentation.
• Avoid it: Research common tax credits and deductions that might apply to your situation, or work with a tax professional who can identify them.

Deadlines and Extensions (General)

The primary tax filing deadline is typically April 15th each year. If you need more time, you can file for an extension, but this is an extension to file, not an extension to pay.

• What to check: Note the current year’s tax deadline. Understand the process for requesting an extension if necessary.
• What “good” looks like: You are aware of the filing deadline and have a plan to meet it or have filed for an extension on time.
• Common mistake: Missing the filing deadline and not filing for an extension, resulting in failure-to-file penalties and interest.
• Avoid it: Mark the deadline on your calendar and start your tax preparation well in advance. If you anticipate needing more time, file Form 4868 for an automatic extension.

Step-by-step (simple workflow)

1. Gather Your Documents: Collect all W-2s, 1099s, receipts for deductible expenses, and records of any other income or tax-related transactions.

• What “good” looks like: You have a organized folder or digital directory containing all necessary financial paperwork.
• Common mistake: Rushing to find documents at the last minute, leading to missed items.
• Avoid it: Start gathering documents as soon as you receive them throughout the year, or at least a few weeks before tax season begins.

2. Choose Your Filing Method: Decide whether to use tax software, hire a tax professional, or use a combination.

• What “good” looks like: You’ve weighed the pros and cons of each method based on your financial situation and budget.
• Common mistake: Picking the cheapest option without considering if it meets your needs, or overspending on a professional for a simple return.
• Avoid it: Research different tax software options or interview tax professionals to find the best fit.

3. Determine Your Filing Status: Select the correct filing status (Single, Married Filing Jointly, etc.) based on your circumstances.

• What “good” looks like: You’ve confirmed your filing status aligns with IRS guidelines and potentially maximizes your tax benefits.
• Common mistake: Choosing a status that isn’t accurate, like a married couple filing separately when filing jointly would be more beneficial.
• Avoid it: Review the IRS definitions of each filing status and consult the IRS website or a tax professional if unsure.

4. Report All Income: Enter all your income from various sources into your tax software or provide it to your tax preparer.

• What “good” looks like: Every dollar of income earned is accounted for on your tax return.
• Common mistake: Forgetting to report freelance income, interest earned, or capital gains.
• Avoid it: Cross-reference your bank statements and brokerage statements with your income forms to ensure nothing is missed.

5. Claim Deductions: Identify and claim eligible deductions to reduce your taxable income.

• What “good” looks like: You’ve documented and claimed all deductions you qualify for, such as student loan interest or charitable contributions.
• Common mistake: Not keeping records of deductible expenses or not knowing what expenses are deductible.
• Avoid it: Keep receipts for all potential deductions and research common deductible expenses relevant to your situation.

6. Apply for Credits: Ensure you claim all tax credits you are eligible for, as these directly reduce your tax liability.

• What “good” looks like: You’ve claimed credits like the Child Tax Credit or education credits if applicable, lowering your tax bill.
• Common mistake: Overlooking eligibility for valuable credits like the Earned Income Tax Credit or education credits.
• Avoid it: Use tax software that prompts you about credits or consult a tax professional to ensure you don’t miss any.

7. Review Your Return: Carefully review your completed tax return for accuracy before filing.

• What “good” looks like: You’ve double-checked all numbers, names, Social Security numbers, and other critical information.
• Common mistake: Typos or errors in Social Security numbers or bank account information, which can delay your refund or cause issues.
• Avoid it: Take your time, read through each section, and have someone else review it if possible.

8. File Your Return: Submit your tax return electronically or by mail by the deadline.

• What “good” looks like: Your return is accepted by the IRS without errors.
• Common mistake: Missing the filing deadline without filing for an extension.
• Avoid it: File early, or file for an extension (Form 4868) if you need more time to file.

9. Pay Any Tax Due: If you owe taxes, make your payment by the deadline to avoid penalties.

• What “good” looks like: Your tax payment is submitted on time using your preferred method (online, mail, etc.).
• Common mistake: Not paying the full amount owed by the deadline, leading to interest and penalties.
• Avoid it: If you owe, make a payment even if you’ve filed for an extension. Use IRS Direct Pay or other secure payment options.

10. Keep Records: Store a copy of your filed tax return and all supporting documents for at least three years.

• What “good” looks like: You have a secure, organized record of your tax return and all related paperwork.
• Common mistake: Discarding tax documents too soon, making it difficult to respond if the IRS has questions.
• Avoid it: Create a system for organizing and storing your tax documents electronically or in a safe physical location.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
<strong>Incorrect Filing Status</strong>	Paying more tax than necessary; incorrect eligibility for deductions/credits.	Amend your return using Form 1040-X. You may get a refund if you overpaid.
<strong>Forgetting to Report Income</strong>	Understated tax liability, penalties, interest, and potential IRS audit.	File an amended return (Form 1040-X) to report the missing income and pay any additional tax owed.
<strong>Missing Deductions/Credits</strong>	Paying more tax than necessary.	File an amended return (Form 1040-X) to claim the missed deductions or credits.
<strong>Errors in Social Security Numbers</strong>	Delayed refund, rejected return, potential penalties.	If caught by the IRS, they will notify you. If you catch it, file an amended return (Form 1040-X).
<strong>Not Paying Estimated Taxes (Self-Employed)</strong>	Underpayment penalty.	Pay any outstanding estimated tax liability and file an amended return if needed. Future estimated payments should be adjusted to avoid recurrence.
<strong>Missing Filing Deadline (No Extension)</strong>	Failure-to-file penalty (often higher than failure-to-pay penalty) and interest.	File your return as soon as possible. The IRS may abate penalties if you can show reasonable cause.
<strong>Not Paying Tax Due by Deadline</strong>	Failure-to-pay penalty and interest on the unpaid amount.	Pay the full amount owed as soon as possible. The IRS may offer installment agreements if you cannot pay in full.
<strong>Incorrect Bank Account for Refund</strong>	Delayed refund or direct deposit sent to the wrong account.	If the direct deposit fails, the IRS will mail a paper check. If it goes to the wrong account, contact your bank and the IRS.
<strong>Not Keeping Records</strong>	Inability to support your return if audited; missed opportunities for future claims.	Reconstruct records as best as possible. For future returns, establish a robust record-keeping system.
<strong>Using the Wrong Tax Form</strong>	Inaccurate filing, potential rejection, or incorrect tax calculation.	File an amended return (Form 1040-X) using the correct form.

Decision rules (simple if/then)

• If your financial situation is complex (e.g., multiple income streams, investments, self-employment, significant life changes), then consider hiring a tax professional because they can navigate complex rules and ensure you claim all eligible benefits.
• If you have a straightforward tax situation (e.g., only W-2 income, standard deduction), then using tax preparation software is likely cost-effective because it guides you through the process at a lower price point.
• If you received significant freelance, gig, or business income, then you likely need to make estimated tax payments quarterly because taxes are not withheld from this type of income.
• If you are married, then compare filing jointly versus separately because filing jointly often results in a lower tax bill due to more favorable tax brackets and credit availability.
• If you have significant medical expenses that exceed a certain percentage of your Adjusted Gross Income (AGI), then you may be able to itemize deductions because these expenses can be deductible.
• If you have children or dependents, then explore credits like the Child Tax Credit and the Child and Dependent Care Credit because these can significantly reduce your tax liability.
• If you made charitable donations, then keep detailed records and receipts because these donations are often deductible.
• If you are unsure about your tax withholding, then use the IRS Tax Withholding Estimator tool to adjust your W-4 with your employer because this helps prevent owing a large amount or getting too large a refund.
• If you anticipate owing a significant amount of tax, then make estimated tax payments throughout the year to avoid penalties and interest because penalties are assessed on underpayments.
• If you need more time to gather documents or make decisions, then file for an extension (Form 4868) because this gives you an automatic six-month extension to file, but not to pay.
• If you made a mistake on your filed return, then file an amended return (Form 1040-X) as soon as you discover it because correcting errors promptly can prevent further issues.

FAQ

Q1: What is the difference between a deduction and a credit?

A1: Deductions reduce your taxable income, meaning you pay tax on a smaller amount. Credits directly reduce the amount of tax you owe, dollar for dollar. Credits are generally more valuable than deductions.

Q2: How do I know if I should file my taxes myself or hire a professional?

A2: If your tax situation is simple (e.g., one W-2 job, no major investments), tax software is often sufficient and affordable. If you have complex income, investments, self-employment income, or have experienced major life events, a tax professional can be very beneficial.

Q3: What happens if I don’t file my taxes?

A3: The IRS can charge a failure-to-file penalty, which is typically a percentage of the unpaid tax for each month or part of a month that a tax return is late. Interest also accrues on the unpaid tax.

Q4: What happens if I can’t pay the taxes I owe?

A4: You may face a failure-to-pay penalty and interest. The IRS offers payment options, such as installment agreements, and may abate penalties if you can demonstrate reasonable cause. It’s best to pay as much as you can by the deadline and then arrange a payment plan.

Q5: How long should I keep my tax records?

A5: Generally, you should keep records for at least three years from the date you filed your return or the due date, whichever is later. For certain items, like records related to the value of property, you may need to keep them longer.

Q6: Can I amend my tax return if I made a mistake?

A6: Yes, you can amend your tax return using Form 1040-X, Amended U.S. Individual Income Tax Return. You can do this to correct errors, claim missed deductions or credits, or report additional income.

Q7: What is the IRS Tax Withholding Estimator?

A7: It’s a tool on the IRS website that helps you determine the correct amount of federal income tax to be withheld from your paycheck. You can use it to adjust your W-4 form with your employer to avoid owing a large sum or receiving too large a refund.

What this page does NOT cover (and where to go next)

• Specific investment strategies or tax implications of complex financial products. (Next: Consult a financial advisor or research investment-specific tax guides.)
• State and local tax laws. (Next: Visit your state’s department of revenue website or consult a local tax professional.)
• Tax implications for businesses or corporations. (Next: Seek advice from a CPA or tax attorney specializing in business taxation.)
• Detailed explanations of every tax credit or deduction. (Next: Refer to IRS publications or use tax software that prompts for eligibility.)
• Guidance on tax audits or disputes with the IRS. (Next: Consult a tax professional or attorney specializing in tax controversy.)