In prior years, you may have taken your tax information into a tax preparation office. Then, a tax preparer would sit down with you and prepare your tax return on your behalf.
In 2021, this isn’t an option many people want to repeat. Due to the coronavirus, sitting in a small cubicle with another person for an extended period isn’t the best idea. Instead, many people have decided to try preparing their own tax returns at home or to take advantage of other options.
How taxes and your tax situation have changed this year
This tax season isn’t different just because people don’t want to go into a tax preparation office. People will be facing tax changes that happened in 2020 due to the coronavirus, too.
The most significant impact on most people’s taxes in 2020 was the stimulus checks that were passed and distributed. The good news is, this won’t impact most people’s actual tax refund or tax owed amount.
Basically, the stimulus checks were tax credits for the 2020 tax year. The payments Congress passed were an advance on that tax credit. Some people may be worried this could impact their tax refund.
Thankfully, Congress thought about this and addressed it. If your actual tax credit would have been lower than the stimulus check you received, you still get to claim the credit for the full stimulus check amount.
Congress also added a new charitable contributions deduction most people can take on their taxes without itemizing deductions. You can deduct up to $300 in qualifying cash contributions in 2020. If you made qualifying contributions, make sure you have your charitable contribution receipts ready when you prepare your taxes.
Your tax situation could have changed drastically
In addition to tax law changes in 2020, chances are your personal tax situation may have changed drastically.
Changes in income and deductions
Many people faced a rough 2020 in terms of personal finances. Companies laid off employees in droves as businesses had to shut down due to coronavirus regulations. Those that didn’t lay off employees may have had to cut hours or reduce salaries to stay afloat.
Beyond changes in income, people may have had their deductions reduced, too. Some student loan interest payments were put on hold which helped finances. That means you won’t get the deduction for student loan interest payments on that interest that wasn’t paid, though.
If you were unemployed, Congress did add increased unemployment compensation. Unemployment compensation is always taxable, but you may not have set aside enough money to pay the taxes due because of the higher amounts that were paid.
How to get ready to do your taxes at home
Now that you’re aware of some of the changes that may have impacted your 2020 taxes, it’s time to start figuring out how to prepare your taxes on your own at home.
Look at last year’s return
As a CPA, the first thing I always do when getting ready to prepare a tax return is looking at the prior-year return. Last year’s return gives you a good starting point. It allows you to see what documents you’ll likely need to prepare this year’s return.
Consider what happened in the current tax year
Using last year’s tax return isn’t perfect, though. People’s lives change constantly. After looking at last year’s return, consider what happened over the current tax year.
If you switched jobs, collected unemployment income, opened a new bank account, or had any other changes that could impact your taxes, make a list of new tax-related documents you’ll need to gather before filing your return.
Between last year’s tax return and reviewing the current tax year, it’s time to start gathering documents. Get your W-2s, 1099s, 1098s, and any other tax documents you have together in one spot.
If you have a small business, make sure you’ve completed your business’s bookkeeping and have matched all of your expenses to your receipts. Once all the tedious paperwork gathering is completed, it’s time to get started.
Schedule uninterrupted time
Starting your tax return online is easy. You just have to sign up for an account with a tax preparation software service and begin answering the questions they ask. It’s tempting to start whenever you have a free minute, but that isn’t always the best idea.
Instead, look for a time on your calendar when you can work on your taxes uninterrupted. This may be in the evening after your kids have gone to bed or early in the morning before they wake up.
Having uninterrupted time is critical, though. It allows you to read through each prompt and question carefully. You can also dig into the software’s help features if you don’t understand what a question asks.
By taking the time to understand exactly what you’re doing as you do it rather than rushing through the process, you have a better chance of preparing your return accurately. You also reduce the likelihood that the software finds errors that may be painful to go back and fix later.
Options to prepare your taxes from home
Once you’re ready to start preparing your taxes from home, it’s time to pick a service to use. Here are four options that offer different pros and cons that may meet your needs.
TurboTax is one of the largest tax preparation software options available. If you have a straightforward situation, you can even file your state and federal tax returns for free with them. People with more complex situations have to pay to file their returns.
The good news is TurboTax has a wide variety of preparation options depending on how much help you need. You can do it yourself at a lower price than their other options, although TurboTax is usually one of the most expensive software options around.
You can pay a slightly higher fee to access help from a tax expert, such as a CPA. You can ask them questions when you get stuck, need assistance, or if you want them to review your return.
If you’d rather have TurboTax complete your tax return for you, you can pay an even higher fee to have a professional set up a one-way video call to prepare your return. Other tax preparation software options may be cheaper, but TurboTax’s software is well-polished. For people that value paying for simplicity and ease of use, it may be worth the cost.
Credit Karma Tax
On the other end of the spectrum, Credit Karma Tax allows anyone to file their federal and state tax returns for free as long as they support your tax situation. Their software works well and offers accuracy and maximum refund guarantees, so it isn’t like you’ll be using substandard tax software.
You may think there’s a catch and you’re right. The software really is free, but you’re giving Credit Karma access to your tax return information. This gives Credit Karma direct knowledge of your income. Your income, combined with your credit score, is a powerful combination of information that can help them more accurately market credit-related offers to you. If you sign up for those offers, Credit Karma gets paid.
For most people, this isn’t a problem. Those interested in protecting their privacy at all costs may want to avoid Credit Karma Tax for this reason.
If you don’t want to pay the higher prices of TurboTax and don’t want to give away your tax information, you may want to consider TaxAct. TaxAct is another respected tax preparation software option that offers a more affordable pricing structure in many cases. TaxAct’s prices for federal returns are currently discounted to a lower point than TurboTax’s prices.
Like with TurboTax, TaxAct provides a do-it-yourself option or an expert assisted version. TaxAct’s free tax software for simple filers does charge to file a state tax return, though. Currently, it costs about $5 more to file a state tax return with TaxAct than it does with TurboTax, too.
If you’re unsure whether saving money is worth using TaxAct over another software, you can start your return for free to try it out.
TaxSlayer is another tax preparation software that focuses on affordability. Their free version includes a free state tax return and the ability to file simple tax situations. In a unique twist, TaxSlayer’s upgrade options aren’t based on your tax situation. Instead, it’s based on the features you want.
For instance, their Classic software can file all tax situations. Their Premium option upgrades you to skip-the-line phone assistance and email support. You can even chat live with a tax pro if you have questions. For self-employed people, you can upgrade to the highest package to get help with your self-employment situation. You can still file a return without that help using the Classic version, though.
Like with TaxAct, you can start your return for free with TaxSlayer if you’re unsure whether the software is a good fit for you.
2020 was not a typical year, especially for your taxes. Even though there were plenty of tax changes, tax preparation software programs are aware of all of them and can help you properly file your return.
Preparing your tax return yourself using online tax preparation software shouldn’t be too difficult for most people. Once you’ve taken the time to follow the tips listed above, it’s as simple as picking software and following the prompts. Make sure to follow the tips listed above to make your tax preparation process less stressful.