How to Do Your Taxes Online

  • Disclaimer: The content of this page is intended for general informational purposes only and is not a substitute for professional financial advice.

Guide Note: Preparing your taxes can seem like a daunting task, but it doesn't have to be. There are dozens of online resources out there to help you through the process, and if you take the time to organize your records before you begin, preparing your taxes can even be fun. (Well, not fun, but it can be relatively painless.)

How to Do Your Taxes Online will walk you through the advantages to preparing your taxes online and how to get started with the most well-established and cost-effective services.

Table of Contents:

Disclaimer: The content of this page is intended for general informational purposes only and is not a substitute for professional financial advice.

Contact the IRS or a professional financial advisor for the most up-to-date and complete information regarding state and federal tax law.

Introduction

  • Online tax preparation services are lifesavers. They can save you hundreds of dollars and hours of your time by cutting through the bureaucratic language of the IRS and the ever-changing world of tax law. All you've got to do is show up to the party with your W-2s, 1099s and a box of receipts. The computer does the rest by prompting you with questions in plain English about your income and expenditures.
  • As if by magic, the program calculates your tax, prepares and files the correct forms and delivers your refund, if you're owed one, directly to your bank account within a matter of days. You'll also be helping the IRS out by turning in the most accurate return possible, and it's never a bad idea to stay on the IRS' good side.

Why File Online?

Save yourself the headache. File your taxes online. (Photo by Steve Woods)
Save yourself the headache. File your taxes online. (Photo by Steve Woods)
  1. Accuracy: Filing electronically increases the accuracy of your return. This is important because inaccuracies are one of the red flags that can trigger an audit.
  2. Simplicity: Online tax services like TurboTax make filing a breeze by literally walking you through every step and preparing whatever schedules and forms are appropriate.
  3. Efficiency: Not only can you file your federal and state returns simultaneously, they'll be filed instantly. You'll receive an immediate receipt for your return, and your refund will be processed within a matter of days.

Online Tax Preparation Services

  • The cost of preparing your taxes online varies from service to service and on the complexity of your return. If you plan on itemizing, are self-employed or have moved in the past year, you'll pay a bit more than users with relatively simple returns to file.
  • Keep in mind, however, that these services essentially pay for themselves because they are more likely than you are to catch all the exemptions, deductions and tax credits you are qualified to claim.
  • The major services also offer support should you ever be audited, and they save your data from year to year, which makes the annual tax-filing ritual much less of a hassle.
  • The major online tax preparation services include:
  • If you meet certain income requirements, you also have the option of filing online for free by using the IRS Free File service.

Is It Safe?

  • Services like TurboTax and TaxCut use the same encryption technology used by banks to e-File your tax return with the IRS, and their servers are firewall-protected.

Note: If your income is low enough, you may not have to file an income tax return. Refer to IRS Publication: Exemptions, Standard Deduction and Filing Information (501) or Smart Money's "In Some Cases, You Don't Need to File a Tax Return" for more information.

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Step 1: Gather Your Tax Records

  • Sadly, doing your taxes online doesn't mean you can do away with paper entirely. You still have to compile all your receipts, W-2s and various financial documents for the year. You'll also need to hang on to them in case you're ever audited.

The Basics

Pull together your records before you begin. (Photo by Sophie)
Pull together your records before you begin. (Photo by Sophie)
  • What you need to do your taxes will depend on how you make your money, the types of investments you have, whether you intend to itemize your deductions and a number of other factors. The following is a list of the basic information you'll need to start your tax return:
  1. Social Security Numbers: For you, your spouse (if you're filing jointly) and any dependents.
  2. W-2 Forms: You will receive a W-2 form, a statement of the wages you earned for the year, from your employer. You should receive your W-2 by January 31st. If you have not received your W-2 by then, contact your employer. If you are filing jointly with your spouse, you will need to collect the W-2 forms from both of your employers.
  3. 1099 Forms: 1099s are forms you receive for dividends, retirement accounts, scholarships and other forms of income. If you are self-employed, you will receive 1099s from the companies you worked for in the past year reporting any money you earned as an independent contractor.
  4. Receipts: If you plan on deducting any expenses or charitable contributions from your taxable income, you will need to have those receipts on hand.
  5. Bank Account Numbers: If you wish to receive any refund you might be due by direct deposit, you will need your bank's routing number and your bank account number.
  6. Adjusted Gross Income from the Previous Tax Year: You will need last year's tax return to accurately complete this year's.

Beyond the Basics: Additional Financial Records

Won big in Vegas? You'll have to report that, too. (Creative Commons photo by Mark Hardie)
Won big in Vegas? You'll have to report that, too. (Creative Commons photo by Mark Hardie)
  • Depending on your financial situation, you may need to collect additional documentation related to your income and expenses for the year in order to complete your tax return.
  • Some of this documentation will be sent to you in much the same way your W-2s and 1099s are. If it is not, you are responsible for providing it.

Employment & Income Data

  • Partnership and Trust Income
  • Pensions and Annuities
  • Alimony Received
  • Jury Duty Pay
  • Gambling and Lottery Winnings: Documentation provided by the casino or lottery authority via Form W-2G.
  • Scholarships and Fellowships: Documentation provided by the administrators of these programs via Form 1099-MISC.

Homeowner Data

  • Mortgage Interest: Documentation provided by your lender via Form 1098.
  • Sale of Your Home: Documentation provided by your lender or closing agent via Form 1099-S.
  • Moving Expenses

Financial Assets and Liabilities

  • Interest Income Statements: Documentation provided by financial institution via Form 1099-INT or 1099-OID.
  • Dividend Income Statements: Documentation provided by company paying dividends via Form 1099-DIV.
  • Tax Refunds & Unemployment Compensation: Documentation provided by agency via Form 1099-G.
  • Student Loan Interest Paid: Documentation provided by lender via Form 1098-E.
  • Early Withdrawal Penalties on Time Deposits: Documentation provided by financial institutions.

Deduction-Related Documents

  • Gifts to Charity: Documentation provided by charity for single donations of $250 or more.
  • Unreimbursed Expenses related to Volunteer Work or Your Job
  • Education Expenses
  • Child Care or Adoption Expenses
  • IRA, Keogh & Other Retirement Plan Contributions
  • Medical Expenses

Self-Employment Documents

  • Receipts and Documentation for all Business-Related Expenses

Step 2: Determine Your Filing Status

Have kids? You may be able to file as "head of household". (Photo by Asif Akbar)
Have kids? You may be able to file as "head of household". (Photo by Asif Akbar)
  • The IRS requires that you identify your tax status in one of the following five ways:
  1. Single: If, on the last day of the tax year, you were unmarried or legally separated, your filing status is "single." [1]
  2. Married Filing Jointly: You and your spouse report your incomes on one tax return. You are both required to sign the return. [2]
    • Due to the passage of the Federal Defense of Marriage Act in 1996, gay and lesbian couples cannot file joint federal tax returns. However, legally-married couples in Massachusetts can file a state return jointly. Other states dictate civil unions and domestic partnerships differently. Consult About.com's Tax Tips for Gays, Lesbians and Same-Sex Couples for state-by-state rulings on joint filing.
  3. Married Filing Separately: If it reduces your tax bill, you and your spouse can file separately. You and your spouse are then each responsible for your own taxes. [3]
  4. Head of Household: Head of Household is a special status, which entitles you to a lower tax rate. You may be able to file as "head of household" if you are single, paid more than half the cost of keeping up a home and have a "qualifying person" such as child living in your home for more than half the year. [4]
  5. Qualifying Widow(er) with Dependent Child: This status may apply to you if your spouse died in either of the two preceding tax years and you have a dependent child. [5]

Step 3: Do Your Taxes

(Photo by Bazilrr)
(Photo by Bazilrr)
  • The absolute best thing about doing your taxes online is that services like TurboTax and TaxCut translate IRS tax forms into plain English. You'll be prompted with basic questions about your income, lifestyle and expenses. Answer the prompts, and like magic, all the correct tax forms and related schedules will be complete.
  • The following is a rough outline of the process the online tax programs will walk you through to complete your return:
  1. Calculate Your Gross Income
    • Your gross income includes all of your income—your wages, interest earned on investments, stock dividends, business income, rental income, alimony, prize money, tips, etc. The majority of your income is documented in the various W-2s and 1099s you receive at the beginning of the year. You may or may not receive documentation for things like tips, but you must report all of your income. (See IRS Tax Topic: Tips (402) for more information.)
  2. Calculate Your Taxable Income
  3. Calculate Your Tax
    • Once the program knows your taxable income, it can calculate your tax based on the IRS tax tables for the current year. Another useful feature of a program like TurboTax is that it will actually keep track of your tax in the sidebar of the screen as you complete your return so you can see that figure rise and fall as you input your financial info.
(Photo by Steve Woods)
(Photo by Steve Woods)

Understanding Adjustments

  • The following describes the types of adjustments you can make to your gross income to arrive at your taxable income:

Above the Line Deductions [6]

  • Online tax services like TurboTax and professional tax preparers will prompt you with questions to figure out if you qualify for any of these deductions. If you are doing your taxes independently, follow the instructions provided by the IRS and consult IRS Tax Topics: Adjustments to Income (450).

Tax Credits [7]

  • Unlike deductions which only reduce your taxes by a marginal rate of 25%, credits give you a dollar-for-dollar reduction in your taxes. (If you had a $100 deduction, you'd only get to take $25 off your taxes. If you have a $100 credit, you get to take $100 off your taxes.)
  • There are different types of tax credits—child tax credits, adoption tax credits, retirement savings contribution tax credits, etc. To figure out if any tax credits apply to you, consult IRS Tax Topics: Tax Credits (600).

Exemptions [8]

Standard or Itemized Deductions [9]

Work from home? Consider itemizing. (Creative Commons photo by Fernanda Mancini)
Work from home? Consider itemizing. (Creative Commons photo by Fernanda Mancini)
  • You have a choice when you do your taxes. You can either take the "standard deduction" or "itemize your deductions." What does that mean, and which should you choose?
  • The "standard deduction" is a set amount that the government allows you to subtract from your gross income to arrive at your AGI. (For a person filing as single in 2008, that amount is $5,350.) That figure allows you to avoid all the accounting necessary to itemize your deductions and, if you don't think you have many expenses that qualify as deductible anyway, than you're just as well off going with the standardized amount.
  • However, if you believe you'll be able to take more money off your gross income by itemizing and subtracting all your qualifying expenses, than you should consider itemizing. What qualifies as a legitimate deductible expense?
  • But, this is where things get tricky. The rules that apply to each deduction can be difficult to interpret. What actually qualifies as a deductible "miscellaneous" expense? What percentage of that expense can you actually deduct?
  • This is why people use tools like TurboTax or seek professional help. Being an expert on these rules, which change from year to year, is a full-time job. So, be cautious if you wish to itemize. Don't claim anything dubious. Have documentation for every penny you deduct. And, seek help from a tax professional if you need it.

Should You Itemize? [10]

  • The rule of thumb is that you should itemize if your allowable itemized deductions equal a greater amount than the standard deduction. (The only time you are required to itemize is if you and your spouse file separately. If one of you itemizes, you both have to itemize.)
  • But, how do you tell which is greater without going to all the trouble itemizing in the first place? One way to find out is to estimate with the help of an online calculator like TurboTax's Deduction Finder. If you're self-employed, you may also find it advantageous to itemize because your business-related expenses can be written off as deductions, which can help off-set the fact that taxes are not automatically withheld from the income you receive as an independent contractor.


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Step 4: E-File Your Tax Return

Services like TurboTax will e-file your return directly with the IRS. (Screenshot by Mahalo)
Services like TurboTax will e-file your return directly with the IRS. (Screenshot by Mahalo)
  • While completing your return online increases it's accuracy, that doesn't mean you shouldn't check it over. You'll want to be sure that the numbers you inputed were correct, and you'll want to print out a hard copy to keep in your personal files.
  1. Be sure that you have entered all of the necessary information into the program.
  2. Preview the tax forms you will be electronically submitting.
  3. Check the forms for accuracy, and remember that you must have documentation on file for any deduction you claim.
  4. If you owe the government money, you will be prompted to enter a credit card or bank account number to pay your taxes. If you are owed a refund, you will be asked for a bank acccunt and routing number so that a refund can be issued to you via direct deposit.
  5. Using the eletronic signature option, e-sign your return. (This will typically consist of choosing a unique PIN number.)
  6. Print out a copy of your completed tax return for your records.
  7. Electronically file your return.

Note: Another bonus of using an online tax preparation program: Your state and federal returns will be filed simultaneously!

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Have any great tips on How to Do Your Taxes Online? Post your thoughts to the discussion board or email them to Julia: Julia at mahalo dot com.