OVERVIEW

A tax return is a document that must be filed with the government reporting the amount of income you earned in a particular year.

Income Documentation
The first information you need to begin preparing your tax return is the total amount of income you earned during the year. Any employer who pays you wages must send you a W-2 form each year, which reports your annual income and the amount of taxes withheld. Independent contractors generally receive income reports on Form 1099-NEC (1099-MISC in prior years). If you are the sole proprietor of a business, then you are responsible for compiling all information related to your business profits and losses to report on the attached Schedule C.

Previous tax payments
If you have taxes withheld from your earned income during the year, you can enter them at the end of your tax return to reduce the amount of taxes you still owe. Contractors or workers who receive 1099 income do not have taxes withheld and must make estimated payments during the year, which must also be entered on the tax return. Although no withholding is reflected on Form 1099, your Form W-2 will report the total amount of taxes you paid during the year.

Reporting Deductions and Credits
There are several tax credits available that directly reduce the amount of tax you are responsible for paying. Some frequently claimed credits include the child tax credit, residential energy production credits, and the Earned Income Tax Credit. Each has its own eligibility criteria that you must meet.

Tax deductions, on the other hand, only reduce the amount of your taxable income and do not provide a dollar-for-dollar reduction in taxes owed like credits do. However, all taxpayers qualify for certain deductions, such as the standard deduction. To qualify for any deduction or credit, you will need some basic information, such as your marital status, the number of dependents you have, and a list of your deductible expenses. You may need documentation to support your deductions and credits, as well as receipts for charitable donations you have made during the year.

Interest and dividend income
If you receive any income from an investment, you will generally receive a Form 1099 showing the type and amount of income paid to you. Interest received from investments usually includes interest from savings accounts and dividends received on shares of stock you own. This is reported on Forms 1099-INT and 1099-DIV. Regardless of the type of investments you make, if you earn money you must keep a record of it and report it to the IRS.