Photo of a man who is preparing for tax season.

Tax prep: 5 things you can do right now

Some people wait until the last minute to work on their income taxes. Not you. You want to be ready to roll so you can cross taxes off your “to do” list and make the most of the money you earn.

Here’s what you can do now to prepare to file your income taxes in 2021 and help make the whole process a little less stressful.

1. Organize your list of tax documents.

Start compiling your tax-related forms and information, so everything’s organized in one spot. Not sure what to include? Here’s a list to get you started:

  • Social Security numbers for you, your spouse, and your dependents (if applicable)
  • Last year’s federal and state tax returns
  • Bank statements
  • Mortgage interest statement
  • 1099 forms (for income outside of your regular salary)
  • Charitable donations (monetary or in-kind)
  • Information on any credits or deductions you may be eligible for, including employment-related expenses (the IRS has a handy list)

Why file your taxes early?

  • If you’re getting a refund, you get it sooner. (And if you’re using it to pay off holiday debt, sooner means less interest.) If you think you’ll owe, filing early gives you (a little) more time to save for the payment.
  • It can help protect you from identity theft/fraud. Yes, someone could file a return on your behalf and bank the cash.
  • Your tax preparer may not be as busy in January and February, meaning there could be more time and attention for you.

Want to make it easier next year? Set up a system to gather this information throughout the year. You can tackle it each month (or quarter). Collect receipts and any documentation and put it in your tax folders, whether that’s a paper or digital file.

“Some people prefer to use an app on their smartphone, such as Expensify or Shoeboxed, to help make it easier to scan, track, or store receipts—especially to track business expenses,” says Tyler De Haan, director of business development retirement solutions for Principal®. “This not only helps you prepare your taxes, but digital copies could come in handy if you’re ever audited by the IRS.”

Considering tax deductions for your home office? The pandemic shift has spiked interest in this possible deduction, but the average remote worker likely won’t benefit from what some jokingly call the “Zoom tax credit.” A few basic parameters:

  • Employees aren’t eligible for a home office deduction.
  • For those eligible, “home” may include an apartment, garage, houseboat, etc.
  • The home must be used exclusively for conducting business.

More from the IRS: “Here’s what taxpayers need to know about the home office deduction.”

2. What tax forms do you need? Start a folder.

Companies have until February 1 to deliver W-2 forms to their employees. This is also the deadline for businesses to send Form 1099 statements that report non-employee compensation, bank interest, dividends, and distributions from a retirement plan.

Whether you receive statements via snail mail or email/online, gather and keep them in a safe place. Get a folder or large envelope, make a checklist on the outside of all the financial institutions that will send you tax documents, and add your statements as they arrive.

Here’s a list of some of the tax forms you may receive, depending on your personal tax situation:

  • Wages and earnings statements like the Form W-2, W2G, SS-1099, 1099-R, and 1099-MISC
  • Interest and dividend income statements for bank accounts and investments (Forms 1099-INT and 1099-DIV)
  • Statements needed to adjust your income, like Form 1098-E and 1098-T

Graphic of a thumbtack. Tip: Remember tax brackets and deductions changed because of 2018 tax reform. Want to brush up on the changes that impact you for the third year in a row? Get the full list of changes.

3. Decide who’s preparing your income taxes.

You have several options.

  • Do it yourself, using tax preparation software, such as Turbotax, H&R Block, or TaxAct, and file the return electronically.
  • Work with a tax preparer. If you choose this option, you could book your appointment now with a CPA or tax-prep service.
  • Do it yourself the old-fashioned way. Meaning, fill out the tax forms on paper and submit via mail (or scan and e-file).

De Haan says however you get your taxes done, consider filing electronically. For the tax year 2019, more than 91% of tax returns were e-filed. (Bonus: faster refund, more accurate, saves you time.)

4. Figure out how you’ll pay or what you’ll do with a tax refund.

If you think you may receive a refund (lucky you), start thinking about what you’ll do with the money. Pay down debt? Beef up your emergency fund? Contribute to your IRA? Maybe add to a 529 college savings plan for children or grandchildren? Have a little fun?

And if you think you’ll owe Uncle Sam, you have time to save the money if you don’t have it set aside already.

You can use a tax calculator to give you a quick sense of what kind of refund you may get, if any. (Or what you may owe.)

Graphic of a thumbtack. Tip: Expecting a refund? We have five ideas that keep the “fun” in your “refund” while still being responsible and strategic with your money.

5. Tax planning: Think about next year.

A little tax planning now can go a long way toward helping you keep more of your money next year.

“Review your withholdings so you don’t have an unexpected tax bill next year. There’s an IRS Withholding Calculator that only takes a few minutes to complete and will help you know if you need to make changes,” De Haan says.

You may find other potential savings from tax credits and deductions. Read “Tax planning: 10 ways to keep more of what you earn.”

“The other key thing to think about is what changes have happened in your life, or will happen in 2021 that may require you to rethink your tax strategies,” De Haan says. For example, are you retiring this year? Paying off your mortgage? Did you experience divorce or death in your family?

Taxes are complicated, and everyone's situation is different. Consult your tax advisor before you make any final decisions.

Laid off or furloughed in 2020?

Millions more Americans this year received unemployment compensation due to temporary or permanent job loss—including payments through the Coronavirus, Aid, Relief, and Economic Security (CARES) Act. Remember that this compensation is taxable—including CARES Act relief. But withholding some of that compensation for tax purposes is voluntary; if you didn’t withhold any or enough during the worst of the crisis, you could face a surprise tax bill in 2021. Get more information from the IRS.

Next steps

Expensify, Shoeboxed, Turbotax, H&R Block, TaxAct are not an affiliate of any company of the Principal Financial Group.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities are offered through Principal Securities, Inc., 800-547-7754, Member SIPC. Principal Funds Distributor, Principal Securities, and Principal Life are members of the Principal Financial Group®, Des Moines, IA 50392.

Tyler DeHaan is a Registered Representative of Principal Funds Distributor, Inc.