Please ensure Javascript is enabled for purposes of website accessibility

4 Things You Need to Know Before You Do Your Taxes

By Kailey Hagen - Updated Feb 3, 2020 at 8:28AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Keeping these four things in mind can save you from costly mistakes.

Taxes can be confusing, even for those of us who have done them a few dozen times. They can seem especially complicated to those who are new to doing their own taxes, but they don't have to be. Unless you really love math, you're probably going to use some sort of tax filing software, and that should give you step-by-step directions to help you through the process.

But there are still a few things you need to know in order to do your taxes correctly and get the largest refund possible. Here are four things you should be aware of before you sit down to do your taxes.

Woman doing financial calculations

Image source: Getty Images.

1. The tax deadline

You must either file your tax return or request an extension by Apr. 15, 2020 in order to avoid penalties. Not doing this could result in a failure-to-file penalty that costs 5% of your tax bill for every month that your return is late, up to a maximum of 25%. If you were expecting a refund and don't get your return in by the deadline, you miss out on the opportunity to reclaim hundreds or even thousands of dollars of your own money.

You should still file on time even if you anticipate having a tax bill that you cannot pay right now. The failure-to-pay penalty is just 0.5% of your tax bill, so it's much lower than the failure-to-file penalty. You might be able to avoid penalties altogether if you enter into a payment plan with the IRS. This enables you to pay your bill in monthly installments. Or you could try an Offer in Compromise where you tell the IRS what you're able to pay. If it agrees, you're off the hook for the rest.

2. Your tax filing status

Your tax filing status is important because it determines which tax bracket you fall into and what kind of a standard deduction you get. The standard deduction is the dollar amount that everyone with that filing status gets to write off if they decide not to itemize deductions.

Unmarried adults without dependents may only claim the Single tax filing status. Those with dependents who rely upon the worker to provide half or more of their support may claim Head of Household status. This enables you to earn more money before you move up to the next tax bracket, and it comes with a higher standard deduction, so you should definitely choose this status over Single status if you're eligible for it.

Married couples can choose to file taxes jointly or separately. Married Filing Jointly makes the most sense for most people. It essentially doubles your standard deduction and the amount of money you can earn before you're bumped up to the next tax bracket. Filing separately might make sense in certain cases, like if you think your spouse is hiding income from you. But if you file separately, you also miss out on the chance to claim certain tax deductions and credits, so think this decision through carefully.

Qualifying widow(er) status is available to individuals whose spouse has passed away. You can claim Married Filing Jointly status in the year your spouse dies and then Qualifying Widow(er) status for the two years following. This essentially gives you the same tax brackets and standard deduction as married couples, even though your spouse is deceased. Claim this status if you're eligible for it because it can significantly reduce how much you owe in taxes compared to filing as Single or Head of Household.

3. Which tax deductions you can claim

The government enables you to write off certain expenses to reduce your tax bill, as long as you have the documentation to prove that your deductions are legitimate. A full list of tax deductions is beyond the scope of this article, but some of the most popular deductions include:

  • Self-employment business expenses, like a home office or office supplies
  • Medical expenses that exceed 10% of your adjusted gross income (AGI), which is your income minus certain tax deductions
  • Contributions to your tax-deferred retirement accounts
  • Qualifying educational expenses
  • Charitable donations

You can't just guess or approximate how much you spent on these items. You must be able to prove them with documents. The IRS doesn't need you to submit these documents when you file your taxes, but if you're audited, it will request them. If you cannot provide them, it will disallow the deductions. 

Go back through your bank and credit card statements and any bills you received and note the cost of each of your deductible expenses. It might help to write them all down on a separate sheet or highlight them so that you can quickly find the numbers you're looking for when you're doing your taxes.

4. How to save yourself even more money 

2019 may be over, but there are still a few things you can do to lower your 2019 tax bill, if you have a little cash on hand. You cannot make any more contributions to your 401(k) for last year, but you can still make IRA and health savings account (HSA) contributions for 2019 as long as you do so before the tax deadline. Money you put in these accounts reduces your taxable income and could possibly move you into a lower tax bracket so you lose a smaller percentage of your income to the government. Plus, it'll just help you be better prepared for the future.

You may contribute up to $6,000 to an IRA for 2019 or $7,000 if you're 50 or older. Make sure your contribution is applied to last year if you want to claim the tax break now. Otherwise, you'll have to wait a year.

Individuals can put $3,500 in an HSA for 2019 while families can set aside $7,000 here. In order to make HSA contributions, you must have a high-deductible health insurance plan. This is defined as one with a deductible of $1,400 or more for individuals or $2,800 or more for families.

Understanding these four things can help you avoid costly mistakes and possibly result in a larger tax refund. Review them carefully before filing your taxes to ensure everything goes smoothly.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
331%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.