No matter what you do for a living, or how much or how little money you make, paying taxes is a fact of life. Understanding which types of income are reportable to the Internal Revenue Service and what kind of deductions you are eligible to take, can make the tax preparation and filing process at least a little bit easier.
If you have wages from employment, that income must be reported to the IRS. Your employer will typically issue a W2 form to you near the beginning of the year, typically by the end of February. That W2 form should show the total amount you earned for the previous year, as well as the amount you paid in federal income taxes, Social Security taxes, Medicare taxes, state taxes and local taxes. Contact your employer's human resources department if you have not received your W2 form by the end of February. If you held more than one job during the previous year, be sure you receive a W2 from each of those employers.
Interest and Investment Income
Income derived from investments, including interest, dividends and capital gains, is reportable to the IRS for tax purposes. This income is typically reported, to both you and the IRS, using a 1099-INT form for interest and a 1099-DIV form for dividends. The IRS receives a copy of every 1099 form issued, so be sure you have all your 1099 forms in hand before filing your taxes.
If you do freelance work or run a small business on the side, that income is typically reported on a 1099-R form. This income must be reported to the IRS, and it is subject to self-employment tax in addition to ordinary income taxes. If you do not receive a 1099-R form from a client or business partner by the middle to end of February, contact that person or entity to get the paperwork you need.
The interest you pay on your mortgage is deductible for tax purposes, but to take it you need to itemize deductions. The IRS provides a tax itemization worksheet you can use to determine if you are better off itemizing your deductions or taking the standard deduction provided to all taxpayers.
State and Local Taxes
If you itemize your deductions, you can take a deduction for state and local taxes you paid during the year. The amount of state and local taxes you paid should be reflected on your W2 form or your last pay stub for the year. Your local municipality should provide you with receipts for any additional local taxes you paid. Be sure to keep these receipts with your other tax documents to make the preparation of your return easier.
If you contribute to a traditional IRA, you might be eligible to take a deduction for your contribution. Consult the IRS website to get information about the current income limits for a deductible IRA. If you are eligible, putting money aside in an IRA can reduce the amount of taxes you owe, or increase the size of your refund.
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