Filing Taxes: What You Need to Know Before Tax Season

“…In this world, nothing is certain except death and taxes.” – Benjamin Franklin

Almost no one enjoys filing taxes. Fortunately, Prosper’s here to make things a little easier this year. We’re here to give you some tips and guidance on how to make doing your taxes as painless as possible. 

We’ll go over the following information: 

  • What documents and information to gather
  • Why you might want to consider last-minute deductions
  • The best time to file depending on whether you’re expecting a refund versus owing additional tax

Please note that tax laws vary from state to state and between individual situations. For specific questions or concerns about filing taxes, it’s best to consult a trusted accountant or tax professional.

Filing Taxes on a laptop

Filing Taxes: Professional or DIY? 

Your first task is deciding whether you want to hire a professional to do your taxes or do it yourself. There are plenty of great apps and software packages to help you puzzle through it on your own, which can save you money over a professional preparer.

However, if you have complications in your tax picture for 2022, a professional may help maximize your refund and minimize your frustration. You’ll want to ask yourself a few questions before making this decision:

  • How complicated do you expect your tax situation to be? 
  • Did you have a major change last year, like a divorce or marriage?
  • Did you start a business, cash out a 401(k), or have a child?

If so, professional tax preparation may be very beneficial for you. 

The Internal Revenue Service reports that more than 80 million taxpayers used paid professionals to complete and submit their tax returns last year.

If you plan to go this route, it’s important to organize your receipts, forms, and other documents well before tax time. Prices often go up closer to the tax filing deadline — which is April 18 this year. 

IRS Free File

If your tax situation doesn’t require a professional this tax filing season, you may want to look into IRS Free File.

This public-private partnership between the IRS and the tax preparation software industry provides brand-name tax filing products for free to qualifying taxpayers. 

Gather Documents

You’ll want to gather the filing documents before beginning the process of filing taxes:

  • W2s
  • 1099 forms
  • Donation receipts
  • Calculated childcare costs
  • Medical bills paid out of pocket
  • Investment interest tax forms
  • Property tax receipts
  • Student loan interest payments
  • Real estate and mortgage documents (including vacation and/or rental homes)
  • Any other financial documents from the past calendar year
  • Last year’s tax return (helpful for cross-referencing)

You or your tax professional may not need it all, but being armed with more is better than less with tax filing. 

Compile Personal Information

If you have dependents or are filing taxes jointly with a spouse, make sure you have their personal information accessible.

Whether you file taxes electronically yourself or with the help of a tax professional, you’ll need to have your spouse’s Social Security number if filing taxes jointly, as well as the SSN of any dependents you plan to claim.

Consider Last-Minute Retirement Plan Contributions

For 2022, the IRA contribution limit is $6000, with an additional $1000 in catch-up contributions allowed for those 50 and older.

If you have extra savings and haven’t maxed out your retirement plan contribution yet, a last-minute deduction may lower your taxable income and reduce your taxes for this year. 

Be Mindful of Tax Scams

One thing you need to know before filing taxes is that there are many tax scams out there to be mindful of. Also, some tax preparers may use improper methods to get you a bigger return.

Remember that you sign your returns under penalty of perjury. Even if you work with a tax professional, you are responsible for any incorrect or misleading information, whether it’s a mistake or fraud.

Make sure that if you hire a tax preparation professional, they are reputable and credentialed. Also, look over your taxes and if you have any questions or anything seems improper, get clarification before submitting them to the IRS. 

Additionally, you should never respond to telephone calls or emails claiming to be from the IRS or the US Treasury. The IRS will only correspond with you through the US Mail, so phone calls and emails are often scam attempts. 

Need More Time?

If you need an extension this tax filing season, you can submit a request by April 18, 2022. In many cases, you can get an extension of up to six months to prepare your taxes, although if you owe taxes it may still be necessary to pay them by the deadline.

Make a Plan for Your Refund

It’s easy to think of a tax refund as a windfall and spend it frivolously, but remember that if you get a tax refund, that’s money you overpaid and are getting back. So be as strategic and thoughtful with your refund as your regular pay.

What you do with your refund is up to you, but it’s best to have a plan before your tax refund arrives in your bank account. It’s easier to resist impulse decisions if you’ve already developed a plan.

Some great options to use your refund include:

  • Pay off credit cards or other debt
  • Give to charity (which can reduce your taxable income for next year)
  • Invest (such as investing in your peers through Prosper)
  • Make home improvements (and improve your home’s value)
  • Build up or add to your emergency fund 

If you expect to receive a tax refund, make a plan for what you’ll do with that money so that you make the most of it. Will you put some away in savings, pay off credit card debt, or give to charity? 

File Your Taxes

Filing taxes may not be the most fun activity, but it’s the civic responsibility of all Americans. It doesn’t have to be a hassle, if you properly prepare and have all your ducks in a row. Whether you use a professional tax preparer or do it all yourself, keep our tips in mind and you’ll have your taxes done in no time! 

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