What information is needed for tax returns?

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 piece of information you need to start preparing your tax return is the total amount of income you earned during the year. Any employer that pays you a salary must send you a Form W-2 each year, which reports your annual income and the amount of taxes that were withheld. Independent contractors typically receive income reports on Form 1099-NEC (1099-MISC in prior years). If you are a sole proprietor of a business, then you are responsible for compiling all information regarding the profit and loss of your business for later reporting on Schedule C attached.

Previous tax payments

If you have taxes withheld from your work income during the year, you can enter them at the end of your tax return to reduce the amount of tax 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 the Form 1099 does not reflect any tax withholding, your Form W-2 will report the total amount of tax you paid during the year.

Report 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, credits for energy production on a residential property, and the Earned Income Credit. Each has its own eligibility criteria that you must meet.

Tax deductions, on the other hand, only reduce the amount of your income subject to tax and do not provide a dollar-for-dollar reduction in taxes owed as credits do. However, all taxpayers qualify for certain deductions, such as the standard deduction. To qualify for any deduction or credit, you'll need some basic information, such as your filing 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've made during the year.

Interest and dividend income

If you receive any income from an investment, you will typically receive a Form 1099 that shows the type and amount of income that was paid to you. Interest received on investments typically includes interest on savings accounts and dividends received on shares of stock. This is reported on Forms 1099-INT and 1099-DIV. Regardless of the type of investments you make, if you make money you should keep track of it and report it to the IRS.

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