The ultimate 2020 tax prep checklist

by Brian Acton
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The ultimate 2020 tax prep checklist

While you aren’t required to file your tax returns until April 15, waiting until the last minute to get started can cause major headaches. You could lose track of important documents or miss out on valuable tax breaks if you’re scrambling to get things done.

Start gathering your tax documents now so you’re fully prepared to do your tax returns. Here’s a checklist to make sure you have everything you need in 2020.

1. Documentation of your income

The IRS is most interested in learning your income. Most forms of income are subject to tax, though there are a few exceptions (for a full list of taxable and nontaxable forms of income, check out the IRS website). You will need documents that state your income, including:

W-2

For standard employees without other sources of income, the W-2 is the tax return holy grail. Employers must supply W-2s by January 31st to any employee who earned more than $600 in 2019 and:

  • Had income, Social Security or Medicare withheld from their pay, or
  • Would have had income tax withheld if they had claimed no more than one withholding allowance or had not claimed exemption from withholding on their W-4.

1099s

If you are self employed or worked as an independent contractor, and a single entity paid you $600 or more in 2019, they required to provide you with a 1099 by January 31st. 1099s state the income paid to nonemployees and independent contractors.

Income from freelancing does not automatically withhold income tax, Social Security or Medicare. Self employed individuals are responsible for paying those taxes themselves, either through the course of the year with quarterly estimated tax payments or when they file their tax returns.

Here are six documents every freelancer needs to file their taxes.

Other sources of income

While wages and tips are the most common sources of income, you will need to report all forms of income you received. Sources of income that may require additional documentation include:

  • Unemployment income (Form 1099-G)
  • Investment income (Forms 1099 -INT, -DIV, -B and more)
  • Retirement income
  • Income from real estate sales (Form 1099-S), and resulting cancellation of debt (Form 1099-C)
  • Rental property income
  • Social Security benefits (Forms SSA-1099)
  • Distributions from an HSA, MSA or disability payments (Form 1099-SA)
  • Taxable alimony received from divorces finalized before January 1, 2019
  • Income received from jury duty
  • Income from state and local tax refunds (Form 1099-G)
  • Gambling or lottery winnings (Form W-2G)

Basically, if you made money in 2019 it’s a good idea to document it. Some sources of income will automatically generate documents that are sent to you, while others may require you to keep your own records.

2. Documentation for deductions and tax credits

Both tax credits and deductions can reduce your tax bill for 2019. Tax credits simply reduce the amount of taxes you owe on a monetary basis. For example, a $500 tax credit would lower your tax bill by $500.

Deductions reduce the amount of taxable income you earned in 2019. For example, a $1,000 tax deduction would be subtracted from your earnings and would not be subject to taxation.

It’s in your best interest to maximize the amount of tax credits and deductions you can take. In most cases, you will need documentation that supports your credits and deductions.

If you elect to take the standard deduction ($12,200 for single filers and for those married filing separately, $24,400 for those married filing jointly and $18,350 for heads of household), you will not need to itemize deductions. But it’s a good idea to keep supporting documents handy. If your total itemized deductions exceed the amount of the standard deduction, you will probably want to itemize.

Popular tax credits and deductions include:

  • Student loan interest deduction: deduct up to $2,500 from your income for interest paid on student loans.
  • State and local tax deduction: deduct up to $10,000 ($5,000 if married filing separately) of state and local property taxes paid, in addition to state income or state sales tax.
  • Mortgage interest deduction: deduct the amount of interest paid on your mortgage loan. Learn more here.
  • Medical expenses deduction: deduct unreimbursed medical expenses that account for more than 7.5% of your adjusted gross income.
  • Charitable donation deduction: donations to qualified organizations can be deducted from your taxable income.
  • Educator deduction: qualified educators can deduct up to $250 of business expenses.
  • College expense credits: Earn tax credits for qualified college expenses, using either the American Opportunity Tax Credit (up to $2,500 per eligible student) or the Lifetime Learning Credit (up to $2,000).
  • Child and dependent care tax credit: Receive a credit for up to 35% of dependent care costs (up to $3,000) including care for children under 13 or spouses and parents who require care. Learn more here.
  • Adoption credit: Receive a credit for up to $14,080 in adoption costs per child.
  • Earned income tax credit: Depending on how many children you have and your marital status, you may be eligible for the EITC if your income falls below a specific threshold.

Some of these deductions and credits, such as the student loan interest deduction and mortgage interest deduction, will automatically generate supporting documents that are sent to you by the service provider. Others, such as charitable donations and educator expenses, will require you to keep receipts.

If you’re reporting self-employment income, keep in mind that you can deduct business expenses. Deductions include:

  • Home office expenses, including a portion of your mortgage or rent and utilities, can be deducted from your income. Make sure to record information including your home size, office size and utility expenses.
  • Car mileage and business travel expenses (if you travel for your job)
  • Software, hardware, technology and other office supplies
  • 50% of meal expenses for client meetings or business travel
  • Records of estimated tax payments if you prepaid taxes throughout the year

3. Last year’s tax returns

Generally, you don’t need last year’s tax return to do your taxes. As long as you have all the necessary supporting documents, you can complete your tax returns.

However, having last year’s tax returns as a reference can be extremely helpful. You can use them as a guide to help you complete your 2019 return (remember to always refer to this year’s instructions, as rules can and do change from year to year). If you’re hiring a professional to do your taxes, they may request last year’s tax return as a reference.

If you are e-filing your tax returns this year, you will need to sign and validate your tax return using your prior year’s adjusted gross income on Line 7 of Form 1040. While you may have that info elsewhere, it’s a good idea to verify it by looking at your prior year’s tax return.

Got all your documents together? We have a complete guide to filing here.

Image: Freddie Collins