The Best Tax Software of 2020
The 2019 tax year has ended and the time to get started on your tax return is here. While this fills many with dread, deciding which tax software is the best tax software should not figure into this stress. To make filing your taxes easier, I performed research on several of the major providers’ offerings for 2020 to help you choose the ideal option for your tax situation to file taxes online. I chose to focus this review on well-known and widely-used tax preparation software to identify which features matter and are worth paying for, and what you don’t need for your circumstance.
The math behind calculating your tax liability will be the same with each tax software, but the functionality, features offered, and forms needed for preparing your tax return will differ by company and product. That’s why this best tax software of 2020 review takes the guesswork out of your tax software search and provides you with what you need to know.
Best Tax Software: Quick Summary of Our Picks
- Top Choice: TurboTax
- Best for Simple Returns: H&R Block Free
- Best Value: E-File, TaxSlayer
- Best for Ease of Use: TaxSlayer
- Best for Free Customer Support: TaxAct
- Best for Complicated Returns and In-Person Support: H&R Block
Top Choice: TurboTax
Undoubtedly, TurboTax remains the king of tax software in 2020. It has one of the most well-known brands and comes equipped with fancy design and interface features you want from a high-powered program.
The company’s flagship product, TurboTax Premier, assists you with calculating your investment and rental income as it comes fully-equipped with in-program support for Schedules D, E and K-1. For those with greater needs on account of self-employment income or from freelancing, TurboTax Self-Employed provides everything in the Premier version as a baseline but also adds additional support for many self-employment tax deductions of note like the home office deduction (both standard and simplified), additional deduction assistance with special features for freelancers and independent contractors.
Of special note, TurboTax Self-Employed also comes paired with an included one-year subscription to QuickBooks Self-Employed and proudly features a useful expense-tracking feature through QuickBooks, (think the ability to snap pictures of receipts and track mileage via your smartphone).
And if you don’t feel you can handle all this power by yourself or even need some extra assistance from a tax professional, you can reach out to one of them through TurboTax Live. The service offers a one-on-one review with either a CPA or enrolled agent before you file to assist with your return. You can have one-time of unlimited advice, depending on your needs. These tax professionals will also assist with signing and e-filing your return.
Simply make an appointment to fit your schedule or request a live talk (don’t worry, you don’t need to look your best. They can’t see you, only you can see them. They just have a view of your screen to provide better guidance). Finally, you can receive tax advice all year with this Self-Employed version, providing better financial planning.
When touring through the tax software and preparing your tax return, the program provides numerous simplified prompts on what to do with each section. These messages aid you in preparing your return correctly and smoothly. Along the way, TurboTax’s software performs regular checks to see if you qualify for numerous tax deductions and credits based upon the information entered into the tax software.
For those filing a basic return (i.e., only claiming the standard deduction without further adjustments) on a Form 1040, TurboTax allows you to file your federal and state tax returns for free. However, for those who wish to itemize their deductions or use some of its other, more-powerful features, they will need to consider upgrading to some of TurboTax’s other paid versions.
- TurboTax commonly sets the high end of the online tax software market, and while confident filers may not need all the fancy features offered by the software package, many filers — especially those with complex tax situations — will find the enhanced experience worth a few extra bucks.
- Prices: In 2020, TurboTax packages run from $60 to $120. With their powerful TurboTax Live feature, the prices almost double to between $120 and $200. Adding further cost: filing a state return adds $45, or $55 with TurboTax Live.
on TurboTax’s website
Best for Simple Returns: H&R Block Free
Let’s get straight to it: what exactly qualifies as a “simple” tax return? For the purposes of this review, I define it as one with only salary income from a Form W-2 and minimal added income sources (i.e., interest or dividend income of $1,000 or less); only claims the standard deduction (nothing is itemized); and potentially qualifies to claim the refundable earned income tax or child tax credits. In other words, very minimal time investment needed to prepare your return and little complexity in your tax circumstances- hence “simple.”
And while some tax software packages come jam-packed with features (hello TurboTax Self-Employed), you don’t always need to bring a gun to a knife fight. Sometimes simple circumstances call for simple solutions. In the world of tax preparation software, the best free tax software undoubtedly is H&R Block Free. This version handles simple returns at a reasonable price and still brings the user-friendly design and format the more powerful version provides. Stated succinctly: the H&R Block Free version stands out among its peers.
To illustrate, most free software only allow you to prepare and file your Form 1040 with a few tax credits (i.e., earned income and child tax credits) should you qualify. The H&R Block Free version sweetens the deal by also allowing you to prepare and file Schedules 1, 2 and 3, very common forms many taxpayers need to file their returns.
H&R Block Free grants you access to report (though not calculate) important items like business income and expenses, alimony and child support, deductible student loan interest, specific retirement contributions, the alternative minimum tax (though not likely something you will encounter using the Free version since this has a complicated set of items for calculating), the tax credit for dependent care expenses, the Lifetime Learning Credit and the Saver’s Credit. H&R Block Free allows you to include this information in its free version whereas no competitors we reviewed does. You’re getting more for less (or nothing)!
The H&R Block Free version also carries the intuitive Q&A format and provides an easy to use interface. If you don’t have all of your information gathered at once and wish to fill out sections in a different order than it requests information, you can skip around and keep track of your progress in the top banner display.
H&R Block Free Pros –
- Offers ability to prepare Form 1040 plus Schedules 1, 2 and 3. More than most other free versions.
- Can receive a Refund Advance Loans on a debit card to receive a refund but may need money sooner, especially those who claim the earned income tax credit and must wait until mid-February.
- Comes with free audit support with additional assistance from the company’s Worry-Free Audit Support, providing direct contact with an Enrolled Agent
H&R Block Free Cons –
- Doesn’t automatically import previous year’s H&R Block return
- In-office service starts at $69, which can be steep if you have a simple question to answer.
- $0 (federal) | $0 (state)
- What H&R Block Free can do: Income from wages (W-2), income from bank interest (1099-INT) and dividends (1099-DIV), student loan interest (1098-E), Schedules 1, 2 and 3.
- What H&R Block Free can’t do: Itemized deductions (Schedule A), Deductions and expenses from side hustles or self-employed work (Schedule C), HSA distributions (1099-SA).
- See our H&R Block review.
Start your return
on H&R Block’s website
Best Value: e-File
e-File is new to the tax software scene, debuting in 2014. On cost, e-File compares favorably to competitors reviewed here, amounting to half the price of many comparable programs. As a result, the product is priced to sell and the results speak for themselves: in just 5 years, e-File been used by over 1 million taxpayers to prepare their tax returns.
e-File has captured market share primarily by offering its product at a low price point. To many, it demonstrates remarkable value. The product offers a free basic federal e-file, preparing your federal return for free and then only $28.95 for unlimited state returns. However, there are stipulations for meeting these low cost hurdles. In particular, you must earn less than $100,000, be under the age of 65, and also be single or married, filing jointly with no dependents.
e-File Pros –
- Great budget pick. Cost-effective if you meet the restrictive criteria for its free product.
- Its premium product only costs $49.95, less than half the costliest TurboTax product.
- Best for people with very simple tax situations.
e-File Cons –
- Simpler design and functionality of its free software version can be limiting with a more complex tax situation.
- Offers no phone support.
- The best option if only looking for bare functionality at the best price. But buyer beware: if you can’t handle your tax return by yourself, this option might prove a false choice because you won’t have the best functionality nor assistance preparing your taxes.
- Considered the best value if you know what you’re doing with your return and have little doubt about the forms needed or positions you plan to take.
- See our eFile review.
on eFile’s website
Best for Ease of Use: TaxSlayer
TaxSlayer has some easy-to-use features which make it a great elementary level tax software to use. The software includes videos to explain each step of the process, associated definitions, and resources to answer your questions if they should arise. TaxSlayer appears to be the best option if you have a high level of comfort doing your own taxes and don’t have a desire to pay full freight for some of the more powerful software packages mentioned above. It doesn’t come equipped with the flash of TurboTax or H&R Block and doesn’t charge for hand-holding you’ll encounter with the priciest options.
Where TaxSlayer differs, aside from price and design, is how it prices its products. In fact, TaxSlayer chooses to price its offerings in line with the level of support you need and not what each level of software can do. In other words, the cheapest and most expensive software packages from TaxSlayer offer the same functionality, just differing levels of support. Every tax form and situation comes available with all versions and can handle tasks as important as itemizing deduction, claiming credits, tracking investment income, capital gains and losses, rental income self-employment items and more.
For those with few questions about how to handle their situation nor a desire to prepare taxes with appealing visual effects and on-screen explanations along the way, TaxSlayer pairs an easy-to-use design with value and support if you feel the need to pay for it. The only free support you will receive comes from technical questions and are addressed through email.
The Premium and Self-Employed packages offer “Ask a Tax Pro,” where users submit their questions directly through their TaxSlayer accounts. Afterward, TaxSlayer’s tax professional reaches out within one business day via phone or email to provide tax help. Unlike the major online tax providers, the tax help does not come with a video or face-to-face encounter.
Of special note: for Self-Employed package purchasers, tax pros specialize in self-employment tax items, providing the best-suited tax help for your situation.
In review, the program does not come with many fancy features, but this could be what makes it so easy to use (an cost effective). Despite this stripped-down look, TaxSlayer gets the job done at an affordable price point. The software option offers free minimal federal tax return functionality and one free state return. Each additional state return adds $29.
TaxSlayer Pros –
- Offers explanatory video tutorials on numerous sections of the return.
- Maintains a rewards program for referring friends and family – offers gift cards to Target, Amazon and Apple.
- Provides available phone support to answer tax questions.
TaxSlayer Cons –
- Not very sleek look or feel; employs a minimal design.
- Stripped down capabilities only make the software suitable for a simple tax return.
- TaxSlayer represents one of the best options on the market for those confident enough to prepare their own taxes but still prefer a nice design interface and functionality in line with market leaders. It offers all of this at half the price, offering competent tax filers a great value proposition.
- Prices: Packages run from $17 to $47. Filing a state return adds $29.
- See our TaxSlayer review
Start your return
on TaxSlayer’s website
Best Free Customer Support: TaxAct
TaxAct appears as a lower cost tax software program suitable for simpler returns. Further, the tax software offers most of the standard options which come with other tax software, items like importing your previous year’s return, and this year’s W-2 and some 1099s, while also offering a donation assistant on the non-free options. Additionally, TaxAct offers some useful planning tools and calculators alongside tax deductions and credits self-employed individuals will find of use. Further, TaxAct offers a feature called the 100% Accuracy Guarantee, which ensures their tax software delivers 100% accuracy and will result in the maximum refund possible.
When lining up TaxAct’s products against those of H&R Block and TurboTax, you might not find them as visually appealing, nor will they wow you with all the bells and whistles. However, TaxAct makes up for this shortcoming by instead offering far more competitive pricing and they also prioritize delivering good functionality for a good price. For some, this might be enough to sway their consideration from the mainstays of the online tax preparation space.
In further comparison to the other online tax software heavyweights, they also bring help to the table by providing access to tax professionals and their support (not advice). This support comes standard with paid versions via in-app email or phone. Where they differ slightly from other paid tax professional help offered by the major players in this space, is the dynamic for how they provide support. Unlike TurboTax, there is no video but a screen-share which allows the user and support agent to see each other’s screens. This allows for each to watch cursor moves and clicks
Unlike TurboTax and H&R Block, however, your tax professional might not come credentialed with a CPA license (certified public accountant). That means you won’t receive assistance from someone like myself who went through years of coursework, exams and continuing education, but you will work with a tax specialist who has previously prepared taxes in addition to having taken and completed relevant tax classes. At a minimum, these tax professionals will have taken a company tax certification course and will have received 80 to 100 hours of in-house training. These tax professionals will be supervised by an enrolled agent.
Finally, much like other online tax software companies, TaxAct claims it will refund the value of the program and make up for the difference in either your lower refund or higher tax liability. TaxAct also offers to cover any legal costs or penalties up to $100,000 which accrue as a result of using their system and claiming an errant tax position. Another feature (for a premium price) offered through TaxAct is their Audit Defense program, which offers a comprehensive response to any possible IRS audits.
TaxAct Pros –
- Offers protection against not receiving your maximum refund.
- 5 different options are available depending on the complexity of your tax return.
TaxAct Cons –
- Not geared toward more complicated returns.
- Does not come with added support of tax professionals or CPAs if you have a question about your tax return.
- TaxAct has made some noise in this year’s online tax software market by shooting across the major players’ bows and producing a solid choice for preparing your tax return.
- Prices: Packages run from $29.95 to $74.95. Filing a state return can add $39.95 to $49.95.
- See our TaxAct review.
on TaxAct’s website
Best for Complicated Returns: H&R Block
H&R Block can help with the more-complicated returns because they combine their online tax software with their extensive network of many tax professionals.
In fact, you have the ability to begin working with the software to prepare your return and then choose to visit a local H&R Block tax professional. This can happen at any point in the tax return preparation process should you need in-person assistance and allow for smooth information transfer. Depending on your tax professional needs, in-office visits start at $59.
H&R Block offers a free version which is more robust than the other free tax software versions reviewed here. H&R Block’s version allows you to claim the child and earned income tax credits, student loan interest, and retirement and Social Security income.
As an additional feature, H&R Block’s tax software allows you to upload PDFs of your tax forms to make the data input part of the tax return quick and simple.
H&R Block Pros –
- Offers the chance to do your own return but has in-person professional help available as needed for a fee.
- Offers Refund Advance Loans to tax filers who will receive a refund but may need money sooner, especially those who claim the earned income tax credit and must wait until mid-February.
- Preparing Schedules 1-3 is included in the free version of the software
H&R Block Cons –
- Isn’t as cheap as competitors.
- In-office service starts at $69, which can be steep if you have a simple question to answer.
- $49.99 (federal) | $36.99 (state)
- What H&R Block Deluxe can do: Everything handled by H&R Block Free; additionally, can manage itemized deductions (Schedule A) and HSA distributions (1099-SA).
- What H&R Block Deluxe can’t do: Deductions and expenses from side hustles or self-employed work (Schedule C), capital gains and losses (Schedule D), rental property income (Schedule E).
- See our H&R Block review.
Start your return
on H&R Block’s website
How do the Best Tax Software Packages Compare?
The companies covered in this review offer multiple packages based on your needs. Have a review of them all in a side-by-side look at the top providers and what each can do:
|Free version offered?||Simple Tax Returns Only||Simple Tax Returns Only||Simple Tax Returns Only||Simple Tax Returns Only||Simple Tax Returns Only|
|Other Pricing Options (1)||TurboTax:|
(+$39.95/state for Deluxe+;
$49.95 for Self-Employed+)
|Deluxe: $39.95 (2)
Premium: $49.95 (2)
(+$28.95 for unlimited state returns)
|Import Return into Tax Software?||Yes; may import PDF of return from previous software||Allow for a W-2 photo import; can import previous year’s return information from H&R Block on all non-free versions||Yes, may import last year’s tax information or third-party software information. May import PDF files of IRS forms from TurboTax and H&R Block||May upload PDF of previous year’s return;|
pulls in data automatically if used TaxSlayer previous year
|Service & Support||24/7 live support||Phone and live chat; in-person assistance at branch network||Email or phone||Email or phone, FAQs, video tutorials, definitions of key terms|
|Audit Assistance||Provides basic audit support for all returns and personalized audit assessment with Premier||Peace of Mind®, In-person audit support||Audit Defense services||Audit protection included in Premium and Ultimate plans||None displayed|
(2) Discounted prices shown at time of review were $29.95, and $39.95, respectively.
What is Tax Software?
To make your life easier when complying with the sometimes-onerous tax return standards in the United States, tax preparation software compiles the numerous rules and regulations for federal and state income taxes for you to prepare on your own computer and time.
You can use tax software either online or have it directly installed and run on your computer. Both versions come equipped with prompts, forms, and information to assist individuals and businesses prepare their income taxes. Because of the simplicity and on-demand nature of tax software, many choose this path to file their taxes.
Additionally, for those who file their own taxes using tax software each year, most programs allow you to pull in the previous year’s return and auto-populate information. Further, tax software eliminates the need for taxpayers to prepare their returns on actual forms.
Instead, after inputting your required information, the tax software populates the fields in the necessary forms on your behalf, removing the headache of navigating different forms and schedules.
The tax software helps by taking simple or complex tax situations alike and providing understandable prompts for the user to submit the necessary information. From here, the software compiles the information and completes the tax return for you. At this juncture, you can either send the completed tax returns (federal and state) via mail or digitally through e-file, the IRS’ preferred manner for transmitted your completed tax return.
And the best part? No math! Computers handle the heavy lifting and eliminate the possibility of simple arithmetic errors. This proves immensely useful when it comes to tax time because no one wants to make mistakes and catch the attention of the IRS. Instead, you want to file your federal and state tax returns without headache or controversy.
Tax Software vs Tax Accountant
Tax Software Pros –
- Offers an intuitive, Q&A-based format. Most tax software asks for simple information like your name, address, filing status, and dependent information. It asks you for specific information with detailed instructions of where to look on your W-2, 1099s, or other IRS tax forms. The tax software walks you through your income sources (e.g., earned income, passive income, investment income, etc.) by type and follows with a detailed Q&A about certain expenses which might be tax deductible. The software will ask about common tax deductions in addition to those you might not have known about.
- No hassle with filing. Tax software also helps make filing your return easy. If the software is worth its cost, you should be tasked with inputting your information, reviewing it for errors, and then submitting it to the IRS. You can do this either through printing and mailing it or e-file, the electronic transmission service used by the IRS. Tax software offers this advantage and dramatically reduces the time necessary to receive your refund directly deposited into your bank account.
Tax Software Cons –
- More technical questions require extra help. If you have very complicated taxes to handle, sometimes you need more guidance than what the on-screen prompts provide. In fact, your complex tax situation might require a tax expert’s discerning review to have full capability of advising you beyond the tax software’s programmed abilities.
Tax Accountant Pros –
- CPA or tax professional has the ability to provide tailored advice based on your tax situation. Depending on your needs, you may require more hands-on assistance preparing your taxes. Often, even the most robust tax software programs lack the wherewithal to handle complex tax situations. Or, in the cases when tax software can handle your tax circumstances, you might not have the time to complete your tax return in a timely manner. In this circumstance, it could make sense to consider handing over your tax forms to a professional and have your taxes prepared for you. Some things in life are worth paying a premium for, and peace of mind certainly qualifies.
- If you have a dispute which requires a finer understanding of tax laws. Some situations may present in your personal or professional life where no clear tax regulation or laws exist for which to guide you on how to claim certain positions on your tax return. By having a tax professional handle these circumstances on your behalf would be strongly advised and go well beyond the scope of tax software.
- You have little-to-no-understanding of tax preparation and don’t feel you can handle the task on your own. Stated simply, taxes can be difficult to grasp. There are so many formulas and numbers to know. Which number goes where? Do I have any Section 1231 loss carryovers or MACRS depreciation to claim on my rental property? Don’t worry, you’re not alone in finding these questions difficult to answer. If you don’t feel you can navigate your tax forms and the tax software, it would be advised to seek a certified tax preparer to aide you in preparing and filing your tax return.
- If you are likely to be audited by the IRS. In this case, it is strongly advised to seek the assistance of a paid preparer.
Tax Accountant Cons –
- Expensive. Professional service and advice comes with a price. In many cases, receiving paid tax advice can be costly, especially compared to using tax software. However, if any of the above pros apply, avoiding IRS penalties and fines (or worse) make the cost well worth it.
- You have a simple tax situation. If you have the same tax situation as previous years and no major life changes have occurred in your life, it could be easier (and cheaper) to prepare your own return. Most of the tax software packages include free versions for handling such tax situations. If you only claim the standard deduction and no other complexities exist for your tax situation, paying a tax professional might act as a poor use of your financial resources.
- Time crunch. If you tend to procrastinate when it comes to filing your taxes, it might be hard to find an available tax preparer as the tax filing deadline looms. With tax software, you can prepare them at your own pace and not be dependent on someone else’s availability.
Tax Software Buyer’s Guide
Because so many tax software packages exist as available options, deciding to narrow down some key considerations you should make before settling on one purchase would be advised. The following items are the most common things to look for when deciding which tax software package is best for your needs.
1. Ease of Use
The rationale for using tax software comes down to making the preparation and filing of a tax return less complicated. Therefore, picking an intuitive, easy-to-understand tax software package would make the most sense. If you have filed your taxes before with tax software, you would most likely want to have your previous year’s info automatically populate in this year’s forms. Talk about hitting the “Easy” button.
If you’re considering changing software packages, you will want one capable of integrating smoothly with your old software. Having this cross-functionality would make switching much less painful when it comes time to pull in your old data.
2. Cost of Software
As with most purchases, consumers are very conscious of cost. Why would tax software be any different?
Based on these reviews, you can find packages ranging from free to over $200 for a premium plan if you have a very complicated tax situation requiring multiple forms to be filed with your return and also have need of professional assistance. Depending on your tax circumstances, you should make sure you aren’t overpaying for software you don’t need. Likewise, you shouldn’t skimp if what you need is only available in a higher tier package. In other words, pay for what you need but not what you don’t.
As a means for avoiding the fees posed by most tax software packages, you should make it a point to check if you qualify for filing your federal taxes for free through the IRS’s Free File program. Choosing this route could land you branded tax software from more than 10 tax software providers if your adjusted gross income is below $66,000.
3. Design and Interface
When selecting your tax software, it’s important to use a design and interface which make sense to you. You would want a package which prompts you with questions to make sure you understand what is being done as well as provides understandable explanations of what is happening on your return. Part of this is having a good design where the preparation process flows smoothly and logically. A clear and coherent interface is equally important. Above all, you want this process to be as painless as possible.
4. Service and Support
If you confront issues with your return and don’t know what to do, it is nice to know there is available support to assist you. If your tax situation is simple and you have a decent understanding of what you’re doing, this may not be important. However, if you’re new to filing your taxes and aren’t an experienced filer, have a complicated return with a high likelihood of being audited by the IRS, or in a situation where you need tax assistance, you want to know there is available support from the tax software vendor.
Some tax software, including some on our Top 5 list, offer assistance by tax professionals. This includes the help of licensed CPAs. These tax software hybrid plans can offer you the benefits of tax software, with the available assistance of tax professionals on-demand.
New Laws Came into Force in 2018 through 2025
Many people had anxiety last tax season because they did not know how tax reform changes would impact their tax situation. Prior years had a continuation of the status quo whereas some major changes which impacted how much taxpayers paid throughout the year and thus the amount paid or owed after filing their returns.
Politicians saw the spirit of tax reform as simplifying the tax planning process for individuals. It aimed to do so by dramatically increasing the standard deduction, rationalizing this would reduce the number of people who itemized deductions on their returns. In turn, this would reduce the complexity of filing your taxes.
However, some other provisions of the bill will affect your taxable income and how much you pay Uncle Sam. These items are listed below.
1. Lowered Individual Tax Rates
America has a progressive tax system, which means as you make more income and exceed certain thresholds, the amount of tax paid on an additional dollar of income increases. For example, if you made $25,000 as a single filer in 2019, you would pay 10% on the first $9,700 ($970.00) and 12% on the remaining $15,300 ($25,000 – $9,700) or $1,836. You would not pay 12% on the entire $25,000.
The new tax law changed two things about the individual tax rates in 2018:
- Lower Marginal Tax Rates – The tax law kept the seven existing federal income tax brackets, however, it lowered the tax rate of every bracket save two. This reduces the amount of money you pay on each additional dollar of income by varying amounts.
- Different Taxable Income Ranges – The law also changed the income bracket ranges for tax filers. Meaning, the income ranges applicable to each tax rate either widened or narrowed, depending on the level of income. On the low end, the bottom two brackets remained unchanged, while on the upper end, the highest tax rate (37%) does not kick in until a single taxpayer has earned $510,301 of taxable income as opposed to $426,701 under the old tax brackets.
2. Standard Deductions
As stated above, the standard deduction nearly doubled in 2018. Further, this will simplify many people’s tax returns because they will not have the ability to claim enough deductions to itemize.
3. Personal Exemptions
Tax reform nixed personal exemption when the standard deduction almost doubled. Previously, each person claimed on the tax return received a personal exemption and thus lowered the applicable amount of taxable income. For example, if you were a family of 4, you received 4 exemptions. Under the current tax law, you no longer retain the ability to claim personal exemptions on your tax return.
4. State and Local Taxes
Perhaps one of the biggest areas of tension in the new tax law has been the change to the treatment of state and local taxes, commonly referred to as SALT taxes. Under previous tax law, no limit existed to the amount of SALT taxes eligible for deduction against your taxable income. In effect, this mollified the cost of living in areas with high costs of living and higher regional tax burdens. Expensive real estate with proportionate property and real estate taxes levied against their inflated values make for a difficult pill to swallow if you can only deduct up to $10,000 per year against your federal taxable income.
Many taxpayers in high cost of living areas have been adversely impacted by this change in the tax law and cut into any tax savings they might hope to receive in other areas.
5. Mortgage Interest Deduction
One of the most important itemized tax deductions taxpayers have used in the past was the mortgage interest deduction. While the new tax law did not eliminate this deduction, it did reduce the generosity.
Previous to tax reform, taxpayers could deduct the interest resulting from the first $1,000,000 of your mortgage as well as the interest associated with the first $100,000 of a home equity loan (assuming the funds are used for qualifying home improvements).
Tax reform reduced these thresholds by now only allowing the interest expense associated with the first $750,000 for taxpayers who are married and file jointly, and $375,000 for single taxpayers. In other words, instead of $1,100,000 in principal counting as eligible, a total cap of $750,000 now applies.
Of note, this limit only applies to new loans originated after 2017. Pre-existing mortgages receive grandfathered treatment and continue as the same under the old limits.
Important Documents Needed to File Taxes
Each year when you file your taxes, you will need certain forms to complete your tax return. Below are the most common forms tax filers use to prepare their tax returns.
1. W-2 – Wage and Salary Employee
The W-2 form is the most common form which tax filers need to prepare their income tax returns each year. This document comes from your employer through the mail and contains income, benefits, and deductions information regarding your employment.
In particular, this important form provides details about taxes withheld from your pay, money saved in employer-sponsored retirement accounts, dependent care expenses paid for through your flexible spending account, Health Savings Account (HSA) contributions and other compensation-related items.
By law, these must be sent to employees by January 31 each year or the employer may face fines from the IRS. Otherwise, you should contact your employer and possibly the IRS if you have not received this form through the mail by that time.
2. Form 1099 – Contractor, Gig-Economy Workers, Freelancer
This form provides information about income you may have earned as a contractor. There are numerous types of 1099 forms, such as those for dividends (1099-D), rental income, cancelled debt (1099-C), foreclosed homes, and other types of miscellaneous income not included on a W-2 form. The most common form is the 1099-MISC, which covers self-employed income.
This form is most commonly how gig-economy workers, freelancers, and contractors identify their taxable income. The threshold for being required to send 1099-MISC forms is $600. Below this amount, the principal paying the contractor is not required to provide a 1099-MISC. See this article for more ways on how 1099s vs W-2s compare.
3. Schedule C – Small Business Owner
Also known as Form 1040, Profit and Loss, is a year-end tax form used to report profits and losses if you own a small business (sole proprietorship or single-member LLC). Any business startup costs, operating expenses, or other related items will display on this schedule.
4. Form 1098 – Eligible Expenses to Deduct
The 1098 Form provides eligible expenses to deduct against your taxable income. The three items covered are mortgage interest paid (standard Form 1098), eligible student loan interest paid (Form 1098-E) and tuition costs paid (1098-T). If you are a student or pay on student loans, you should use these forms to see if you are eligible to take various qualified deductions.
About the Site Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey and connect with and help others who share the same goal.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see my the disclaimer on my About Young and the Invested page.
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