How to Prepare for Your End of Year Tax Return

An annual tax return is the process of reporting your income, deductions, and credits to the Internal Revenue Service (IRS). This determines whether you owe additional taxes or are due a refund for the year. The process involves financial planning before the year ends, gathering documents, and understanding your obligations after filing.

Key Year-End Tax Planning Strategies

Before the calendar year ends on December 31st, you have a window to make financial moves that can directly impact your tax liability. These proactive strategies involve adjusting your financial picture for the closing year.

One strategy involves maximizing contributions to tax-advantaged retirement accounts. For workplace plans like a 401(k), contributions made by year-end can lower your taxable income. For 2025, you can contribute up to $23,500, or $31,000 if you are age 50 or over. While you have until the tax filing deadline to contribute to a traditional IRA, contributions to workplace plans must be made by December 31st.

Individuals with a high-deductible health plan can contribute to a Health Savings Account (HSA). For 2025, you can contribute up to $4,300 for self-only coverage or $8,550 for family coverage. These contributions are tax-deductible, the funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free.

Strategic charitable giving is another effective approach. Donating to qualified charities can result in a deduction if you itemize. For those 70½ or older, a Qualified Charitable Distribution (QCD) allows for a direct donation from an IRA to a qualified charity, with a 2025 annual limit of $108,000 per person. This distribution is excluded from your taxable income and can satisfy all or part of a Required Minimum Distribution (RMD) for those age 73 or older.

For those with investment accounts, tax-loss harvesting is a method to offset capital gains. This involves selling investments that have decreased in value. The resulting capital losses can be used to offset capital gains you may have realized, and if losses exceed gains, you can use up to $3,000 of the excess to offset ordinary income annually.

Required Information and Documentation

Personal Information

The foundation of any tax return is accurate personal information for every individual included. You will need the full names, dates of birth, and Social Security Numbers (SSNs) for yourself, your spouse, and any dependents. It is important that the names and SSNs match the information on file with the Social Security Administration to avoid processing delays. Your prior-year Adjusted Gross Income (AGI) may be required to verify your identity for e-filing.

Income Documentation

After the year ends, you will receive various forms that report your income from different sources. You will need to gather all of these documents.

• Form W-2 reports wages and taxes withheld from each employer.
• Form 1099-INT reports interest income from banks.
• Form 1099-DIV details dividends and distributions from investments.
• Form 1099-G is for government payments like unemployment compensation.
• Form 1099-R shows distributions from pensions or retirement plans.
• Form 1099-NEC is for nonemployee compensation if you are self-employed.
• Form 1099-MISC reports other income like rent or royalties.
• Schedule K-1 is for income from a partnership, S corporation, or trust.

Records for Adjustments

Adjustments, often called “above-the-line” deductions, reduce your gross income to arrive at your AGI. You will need records for items like contributions to a traditional IRA or a Health Savings Account, for which you will need Form 5498-SA. If you paid interest on student loans, you will receive Form 1098-E. Alimony paid, if pursuant to a divorce agreement executed before 2019, also requires records of payment.

Records for Deductions and Credits

If you plan to itemize deductions, you will need detailed records. For medical expenses, this includes receipts from doctors and hospitals, as well as records of health insurance premiums paid. You will also need documentation for state and local taxes paid.

Mortgage interest paid on your primary residence is reported on Form 1098. For charitable contributions, you need receipts from the organizations, and for non-cash donations over $500, you must complete Form 8283. To claim tax credits, specific documentation is necessary, such as the care provider’s information for the child and dependent care credit or Form 1098-T for education credits.

Choosing Your Tax Filing Method

After organizing your financial documents, the next step is to decide how you will prepare and file your return. This choice depends on the complexity of your financial situation, your comfort with technology, and your budget.

Many people opt for do-it-yourself (DIY) tax software. This method offers control over the process and is a cost-effective option. These programs guide you through a question-and-answer format and are well-suited for individuals with straightforward tax situations. The main drawback is the potential for error if your situation is more complex than you realize.

Hiring a tax professional, such as a Certified Public Accountant (CPA), is another choice. These professionals have expertise in tax law and can provide personalized guidance, which is valuable for those with complex finances like business owners or investors. While this is the most expensive option, it can save time and potentially uncover tax savings.

The IRS offers free filing options for eligible taxpayers. The IRS Free File program allows taxpayers with an AGI of $84,000 or less for the 2024 tax year to use guided tax software from partner companies at no cost. The IRS Direct File program is another free option for taxpayers with simple returns, which is expanding to become a permanent, nationwide option for the 2025 tax season.

How to Submit Your Tax Return

E-Filing

Electronic filing is the most common and recommended method for submitting a tax return. After completing your return, you will run a final review and provide payment for the software if needed. To receive a refund via direct deposit or to pay a balance due, you will need to enter your bank’s routing and account numbers. The final action is to electronically sign and transmit the return, after which you should receive and save a confirmation that the IRS has accepted it.

Filing by Mail

You can still file a paper tax return by mail. After you have filled out the forms, you must print, sign, and date the return. You can find the correct IRS mailing address on the IRS website, as the address varies depending on your location and whether you are including a payment. Attach a copy of your Form W-2 to the front of your Form 1040. It is highly recommended to use a mailing service that provides tracking, such as certified mail.

Making a Payment

If you owe taxes, you must make the payment by the tax filing deadline to avoid penalties and interest. The IRS offers several payment options.

• IRS Direct Pay allows you to pay directly from a checking or savings account for free on the IRS website.
• Debit card, credit card, or digital wallet payments are available, though third-party processors charge a fee.
• A check or money order can be mailed with your return or with Form 1040-V. Make the check payable to the “U.S. Treasury” and include your name, address, and Social Security number.

After Your Return is Filed

Tracking Your Refund

Once your return has been accepted, you can monitor the status of your refund using the “Where’s My Refund?” tool on the IRS website. To use the tool, you will need your Social Security number, your filing status, and the exact refund amount. The system provides updates, starting within 24 hours after the IRS receives an e-filed return or about four weeks after you mail a paper return.

Handling a Tax Bill

If you owe taxes and cannot pay the full amount by the deadline, you should still file your return on time and pay as much as you can. The IRS offers a short-term payment plan of up to 180 days to taxpayers who owe less than $100,000 in combined tax, penalties, and interest. For larger balances or longer repayment periods, you can apply for a formal installment agreement, which allows you to make monthly payments for up to 72 months.

Record Keeping

You should keep a copy of your tax return and all supporting documents you used to prepare it, including W-2s, 1099s, and receipts. The general rule is to keep tax records for at least three years from the date you filed the return or the due date, whichever is later. It is recommended to keep records for seven years if you file a claim for a loss from worthless securities or a bad debt deduction.

Responding to IRS Notices

Receiving a notice from the IRS does not automatically mean you are in trouble. Notices are often sent to inform you of a change to your refund amount, to request more information, or to verify your identity. Read the notice carefully to understand the issue and the deadline for a response, and do not ignore it. If you agree with the notice, you may simply need to make a payment, but if you disagree, send a written explanation and supporting documentation by the specified due date.