Six Tips on Preparing for Tax Day

03/18/2015 05:35 pm ET | Updated May 18, 2015

Dear Carrie,

I always put off doing my taxes until the last minute and then I'm never sure if I'm doing them right. How can I make this process less painful?

-- A Reader

Dear Reader,

There's no question that preparing your tax return can be a daunting challenge. And the more complex your finances, the more complex your tax return.

Unfortunately, I can't change that. But whether you prepare your own return or work with a tax professional, there are ways to make the process less burdensome. It all hinges on a bit of upfront organization, and having a basic understanding of how your tax bill is calculated.

Have identification numbers handy
While this may seem obvious, make sure you have all the necessary Social Security or other Tax ID numbers handy. If you're married and have dependents, you'll need all of their Social Security numbers before you get started. You'll also need their birthdays.

Collect documents that show your earnings
There are different forms to designate different types of income. If you're an employee and your regular job is your only source of income, the only form you'll need is your W-2 from your employer. This will show what you've earned and the taxes you've already paid through withholding.

However, if you have other income, for example from interest, dividends, capital gains, freelance work, or Social Security, you should also receive 1099 forms that show how much you've earned. These forms are sent to the IRS by the issuing institution, so it's important that you report all of this income accurately, no matter how small the amount.

Companies are required to provide these forms by the end of January each year. If you don't receive them sometime in February, follow up. And if you don't receive an expected 1099, you still need to include the income on your tax return.

Finally, if you received income that won't be reported on a W2 or 1099, such as self-employment income or alimony, you're not off the hook. You also need to include this income on your return. Best to have some sort of written documentation, whether it's a bank statement or your own records.
All this adds up to your gross income.

Gather documents that reduce your taxable income
What you've earned is only one side of the equation. Equally important is documentation for what are called "adjustments to income." These include things like contributions to a traditional IRA, contributions to a health savings account, alimony paid, qualified student loan interest, higher education expenses, moving expenses if you moved for a new job and more.

Add up these adjustments and subtract them from your gross income to get your "adjusted gross income," or AGI.

Have appropriate records and receipts for itemized deductions
The next step is to decide whether to itemize or take the standard deduction. Itemized deductions include things like mortgage interest, medical and dental expenses that exceed 7.5 percent of AGI, state and local taxes, property taxes, charitable contributions, and casualty and theft losses. If the sum of these amounts is more than the standard deduction, that's the way to go. Otherwise, simply take the standard deduction, which is $6,200 for singles, $12,400 for married filing jointly for 2014. If you decide to itemize, make sure you have records and receipts to prove your expenses in case of an audit.

Now subtract your personal exemptions ($3,950 for 2014) from your AGI to get your taxable income. You get one exemption for yourself, one for your spouse if married filing jointly, and one for each qualified dependent.

When you know your taxable income, you can start to calculate the taxes you may owe. Remember, taxes are progressive, meaning you pay a proportionately larger amount of taxes on higher levels of income. That results in significant pieces of information: your marginal rate, which is the amount you pay on your last dollar of income (important to know, for example, when you get a bonus or other extra income); and your average rate, which is the average amount you pay taking into consideration all of your income (important when you're figuring out the tax impact of an investment, for example). So if your marginal rate is 25 percent, your average rate is probably lower. Knowing this may lessen the sting a bit.

Don't forget about tax credits
Finally, there are a number of tax credits available for things such as child and dependent care, qualified adoption expenses or an electric car. If you qualify, have those documents handy as well. You can subtract these credits from taxes you would otherwise owe.

Create a filing system to make next year even easier
Once you have a handle on this year's taxes, set up some simple files to keep on top of earnings, deductions, and credits for the coming year. While doing taxes may never be your favorite pastime, with a little organization you can look forward to getting it done sooner rather than later.

Looking for answers to your retirement questions? Check out Carrie's new book, "The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions."

This article originally appeared on You can e-mail Carrie at, or click here for additional Ask Carrie columns. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.


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