Individual Tax Returns (1040)

Most people wait until they receive their W-2 in the mail before they even think about taxes. That approach works, technically, but it usually leads to a frantic scramble in late March or early April. A better path is to start organizing your tax documents in early to mid-January, well before the April 15 filing deadline. Here is a practical breakdown of what that timeline looks like and why starting early makes a real financial difference.

W-2 forms are required by law to be mailed or made available by January 31. So if you are a salaried employee, you should have that document by the first week of February at the latest. If you worked multiple jobs during the year, you will need a W-2 from each employer. Do not assume that because one arrived, the rest will follow quickly. Check with former employers or their payroll departments if anything is missing by mid-February. The IRS receives copies of every W-2, so if the numbers on your return do not match, you will hear about it eventually, usually in the form of a CP2000 notice months after you file.

If you earned freelance or contract income, you should expect 1099-NEC forms from any client that paid you $600 or more during the year. These are also due by January 31. However, not every client sends one, and the IRS does not require a 1099 for payments under $600. That does not mean you skip reporting the income. You are legally required to report all income regardless of whether you receive a form. Keep your own records of invoices and payment confirmations from apps like PayPal, Venmo, or Zelle. Starting in recent years, third-party payment platforms are required to issue 1099-K forms if your transactions exceed certain thresholds, so you may receive those as well.

Brokerage statements, known as 1099-B or consolidated 1099 forms, tend to arrive later than W-2s. Most brokerage firms issue them in mid to late February. If you hold mutual funds, stocks, bonds, or crypto through a brokerage account, these forms will detail your capital gains, losses and interest. Some firms issue corrected 1099s in March if there are adjustments, so if you file too early, you may need to amend your return later. Many accountants recommend waiting until at least March 1 before filing if you have investment income, just to avoid that headache.

For homeowners, your mortgage servicer will send a Form 1098 showing how much mortgage interest you paid during the year. That is deductible if you itemize. Property tax statements from your county or city are also relevant. If you paid points on a refinance, those may be deductible in the year paid or spread over the life of the loan depending on the situation. Gather your closing documents if you bought or sold property during the year because the settlement statement contains information your preparer will need to calculate gain or loss on a sale.

If you have children, you will want your childcare provider’s tax ID number and the total amount you paid for care. You will need this for the Child and Dependent Care Credit, which can save you up to $2,100 on your federal return. If your child is in college, the school will issue a Form 1098-T for tuition payments, which ties into the American Opportunity Credit or Lifetime Learning Credit. Those education credits can be worth up to $2,500 per eligible student per year for up to four years.

Health insurance documentation matters too. If you purchased coverage through the Health Insurance Marketplace, you will receive a Form 1095-A. This is necessary to reconcile any premium tax credits you received during the year. If you received too much in advance credits, you will owe money back. If you received too little, you will get a larger refund. Either way, you cannot file without this form if you used the marketplace.

Charitable contributions are another area where early organization helps. If you donated cash or property to qualifying organizations, keep receipts. For donations over $250, you need a written acknowledgment from the charity. If you donated a vehicle worth more than $500, you need Form 1098-C. Many people forget about non-cash donations like clothing or household items dropped off at Goodwill or Salvation Army. Those are deductible at fair market value, and keeping a log or spreadsheet throughout the year saves time in January.

If you paid estimated taxes during the year, which is common for self-employed individuals or people with significant investment income, gather your records of those quarterly payments. You should have confirmation numbers or canceled checks for each of the four quarterly payments due in April, June and January. Your tax preparer needs these to apply them against your total tax liability.

State and local tax documents round out the list. If you live in a state with income tax, you may need prior year state returns, records of state estimated payments, or documentation of credits available in your state. In New York City, residents file a city return in addition to the state return, and credits and deductions can differ from federal rules. If you live in New Jersey but work in New York, you need documents for both states. Getting everything in order by late January or early February gives your accountant time to review, ask follow-up questions, and file accurately rather than rushing to meet a deadline. Clients who bring organized records to their first meeting with us at The Reed Corporation typically get their returns filed weeks earlier and with fewer back-and-forth emails.

Multi-state filing is more common than most people realize, and the rules around it can get complicated quickly. The short answer is yes, you may need to file in more than one state if you earned income in a state other than where you live, or if you moved during the year. Let me walk through the different scenarios so you can figure out whether this applies to your individual tax return preparation.

The most straightforward scenario is that you live in one state and work in another. This happens all the time in metro areas that cross state lines. If you live in New Jersey but commute to New York City for work, you will file a New York nonresident return reporting your New York-sourced income and a New Jersey resident return reporting all of your income worldwide. New Jersey will typically give you a credit for taxes paid to New York so you are not taxed twice on the same income. The mechanics of this credit vary by state, but the principle is the same: your state of residence gets to tax all your income, but gives you credit for taxes you already paid to the state where you actually earned the money.

Remote work has made this issue even more complicated. Some states, like New York, have a “convenience of the employer” rule. Under this rule, if you work remotely from New Jersey for a New York-based employer, New York still considers that income to be New York-sourced unless your employer requires you to work from outside the state for business necessity. That means you could end up paying tax to New York even though you never set foot there during the year. Connecticut has a similar rule. Most other states do not, but the rules keep evolving as legislatures adjust to the reality that millions of people now work from states other than where their employers are located.

If you moved from one state to another during the year, you are typically a part-year resident of both states. You file a part-year resident return in each state, reporting only the income earned while you were a resident of that state. The exact method varies. Some states use an allocation formula based on the number of days you lived there. Others look at when specific income was actually received. This matters a lot if you received a large bonus or exercised stock options close to your move date, because the timing can shift thousands of dollars in tax liability from one state to another. For example, if you earned a $50,000 bonus in March while living in California (13.3% top rate) and then moved to Texas (no state income tax) in April, California will tax that bonus. But if the bonus was paid in May after you moved, the situation gets contested. California may still try to tax it if you earned it while living there.

Freelancers and independent contractors who perform work in multiple states face this issue frequently. If you are an actor shooting a film in Georgia, a consultant who travels to client sites in multiple states, or a performer doing shows across the country, each of those states may have a right to tax the income you earned within their borders. Some states have minimum thresholds before they require a nonresident filing, but those thresholds vary widely. Georgia and Illinois have no minimum for nonresidents. Other states may require filing only if income exceeds $1,000 or if you worked there for more than a certain number of days.

Rental property is another trigger for multi-state filing. If you live in New York but own rental property in Florida, you are in luck because Florida has no state income tax. But if that rental property is in California, Pennsylvania, or any other state with an income tax, you will need to file a nonresident return in that state reporting your rental income and expenses. The same applies to income from a partnership or S corporation that operates in another state. If you receive a K-1 showing income allocated to a state other than where you live, you almost certainly need to file there.

Military service members have special rules. Under the Servicemembers Civil Relief Act, active duty military personnel generally pay state income tax only to their state of legal residence, even if they are stationed elsewhere. Military spouses have similar protections under the Military Spouses Residency Relief Act, which allows them to keep their tax domicile in the service member’s state of legal residence. This can be a significant advantage if the legal residence is in a state with no income tax like Texas, Florida, or Nevada.

Athletes and entertainers are heavily impacted by multi-state rules. Professional athletes file nonresident returns in every state where they play games. The allocation is usually based on duty days, meaning the number of days spent working in each state relative to total duty days for the season. A baseball player might file in 15 or more states. Entertainers face similar obligations based on where they perform. This is sometimes called the jock tax, and it results in a significant compliance burden.

The practical effect of filing in multiple states is that your overall tax burden usually stays about the same, because credits prevent true double taxation in most cases. But the filing cost goes up. Each additional state return means more forms, more preparer time, and more potential for error. If you think you may owe in multiple states, it is smart to talk to a tax professional early in the year rather than trying to sort it out at the last minute. Failing to file a required state return can result in penalties and in some cases, the state coming after you years later with an estimated assessment that is almost always higher than what you would have owed if you had filed properly.

At The Reed Corporation, we deal with multi-state filings regularly, especially for clients in the entertainment and creative industries who work across state lines throughout the year. If you are unsure whether you owe in another state, bring us your W-2s and 1099s and we will figure out the 1040 filing requirements for every state as part of your individual tax return preparation.

People use the terms tax preparer and tax advisor interchangeably, but they actually describe two different roles, and understanding the distinction matters when you are deciding who to trust with your individual tax return. A tax preparer fills out your tax return. A tax advisor helps you make decisions throughout the year that affect how much tax you owe. The best professionals do both, but knowing the difference will help you get more value from whoever you hire.

A tax preparer is someone who takes the documents you provide, W-2s, 1099s, receipts, and so on, and enters them into the appropriate forms to calculate your tax liability. At the most basic level, that is the job. The IRS requires anyone who prepares federal tax returns for compensation to have a Preparer Tax Identification Number, or PTIN. Beyond that, the qualifications vary widely. Some preparers are seasonal workers at chain tax shops who received a few weeks of training. Others are Enrolled Agents, meaning they passed a rigorous three-part IRS exam covering individual and business taxation. And then there are Certified Public Accountants, or CPAs, who have passed the CPA exam, met education and experience requirements, and are licensed by their state board of accountancy.

The difference in quality can be dramatic. A seasonal preparer at a chain shop may correctly enter your W-2 income and standard deduction, but they might miss the deduction for educator expenses, the student loan interest deduction, or the Saver’s Credit if you contributed to a retirement account. They probably will not ask about your cryptocurrency transactions, foreign bank accounts, or whether you qualify for the Earned Income Tax Credit. An experienced CPA or Enrolled Agent will ask those questions because they know what to look for. The difference between a $200 refund and a $3,800 refund can come down to whether your preparer knew to ask about your IRA contributions.

A tax advisor goes well beyond filling out forms. They look at your financial situation completely and recommend strategies to reduce your tax burden legally. For example, a tax advisor might tell you in October that you should max out your 401(k) contribution before year-end because it will drop you into a lower bracket, saving you $3,000 or more. They might recommend that you harvest investment losses in your brokerage account to offset $15,000 in capital gains from stock sales earlier in the year. Or they might suggest that you defer a $20,000 bonus to the following year if you expect to be in a lower bracket because you are planning to take a sabbatical or start a business.

Tax advisory also extends to major life events. Getting married, having a child, buying a home, starting a business, receiving an inheritance, and retiring all have tax consequences that are best planned for in advance. A tax advisor will help you model different scenarios. Should you file jointly or separately? For most married couples, filing jointly saves money, but if one spouse has high medical expenses or significant student loan debt, separate filing can sometimes produce a better result. Is it better to take the standard deduction of $30,000 for married filing jointly in 2024 or itemize? Should you convert your traditional IRA to a Roth IRA this year or wait until retirement when your income may be lower? These questions require year-round attention and an understanding of your specific goals and financial picture.

Business owners especially benefit from the advisory relationship. If you are running a sole proprietorship and your net income is above $50,000, a tax advisor might recommend that you form an S corporation to save on self-employment tax. That single move can save $5,000 to $15,000 per year depending on your income level. But that conversation should happen before the election deadline, not after you have already filed your return. A preparer who only sees you once a year for filing probably will not bring it up. An advisor will because that is literally their job.

Another area where the advisor role matters is IRS representation. If you receive an audit notice or a CP2000 letter, you want someone who can represent you before the IRS. CPAs and Enrolled Agents have unlimited representation rights, meaning they can represent you in audits and collection matters. An unenrolled preparer with just a PTIN can only represent you for returns they personally prepared, and even then, their rights are limited. If you are dealing with something like unreported foreign accounts or a business audit, having a CPA in your corner makes a massive difference in the outcome.

The cost difference reflects the difference in value delivered. A basic tax preparation at a chain might cost $200 to $400 for a simple W-2 return with a standard deduction. A CPA-prepared return for someone with W-2 income, investment accounts, rental property, and itemized deductions might run $600 to $1,500. A full advisory relationship with a CPA firm, including quarterly check-ins, year-end planning, and proactive strategy, might cost $2,000 to $5,000 per year depending on complexity. But the planning often pays for itself many times over. One well-timed Roth conversion, one correctly structured business entity, or one properly harvested set of investment losses can save you $5,000, $10,000, or more per year in taxes.

At The Reed Corporation, we handle both sides of this equation. We prepare your individual tax return using Form 1040 and whatever schedules apply, but we also provide year-round advisory for clients who want to be proactive about their taxes rather than reactive. We find that clients who engage with us throughout the year rather than just in April consistently end up with lower tax bills and far fewer unpleasant surprises. If you are looking for more than just a preparer, we are happy to talk about what the advisory relationship looks like for your specific situation.

Yes, and this is more common than you might think. People fall behind on their taxes for all kinds of reasons: a major life event like a divorce or illness, the stress of owing money they do not have, a move that caused paperwork to pile up, or simply the anxiety of dealing with the IRS. Whatever the reason, the most important thing to know is that the IRS already has your income information. They received copies of your W-2s, 1099s, and other information returns. So ignoring the problem does not make it go away. It actually makes it worse, because penalties and interest continue to grow every single month.

Here is how the process typically works when someone comes to us who has not filed in two, three, or even five or more years. The first step is to figure out exactly which years are missing. We pull IRS transcripts for each unfiled year using Form 4506-T or through our online practitioner account. These transcripts, called Wage and Income Transcripts, show every form that was reported to the IRS under your Social Security number. This gives us a baseline of your income for each year without needing you to hunt down old W-2s or 1099s that you may have thrown away or lost during a move.

Once we have the transcripts, we prepare the returns for each missing year. We use the tax law that was in effect for that specific year, not the current year’s law. Deduction amounts, bracket thresholds, and credit eligibility all change from year to year, so we need to apply the correct rules for each period. If you had deductions or credits that would have reduced your tax, we include those. Many people who are afraid to file discover that they actually would have received refunds in some of those years, especially if they had taxes withheld from their paychecks through W-2 employment. However, there is a catch: the IRS only allows you to claim a refund for three years from the original due date. If you are more than three years late, any refund for that year is forfeited permanently.

The penalties for late filing are real and they add up fast. The failure-to-file penalty is 5% of the unpaid tax for each month the return is late, up to a maximum of 25%. The failure-to-pay penalty is 0.5% per month, also capping at 25%. And interest accrues on top of both the tax and the penalties. So if you owed $10,000 for a year that is two years overdue, the penalties alone could add $3,500 to $5,000 to your bill before interest. That is why filing sooner rather than later is always the right move, even if you cannot pay the full balance right away. Filing the return stops the failure-to-file penalty from growing further, which is the larger of the two penalties.

If the IRS has already filed a return for you, which they can do under what is called a Substitute for Return or SFR, the numbers are usually not in your favor. The IRS files these using the single filing status with a standard deduction and no credits, so the tax they assess is almost always higher than what you would actually owe if you filed your own return. By filing your actual return, you replace their SFR with your real numbers, which typically reduces the balance substantially. We have seen cases where a client owed $25,000 under the IRS’s substitute return, and after we filed the actual return with proper filing status and deductions, the balance dropped to $8,000.

Once the returns are filed and the total balance is determined, we help you figure out how to deal with the amount owed. If you can pay in full, that is the simplest and cheapest path because it stops all further penalty and interest accrual. But if you cannot pay everything at once, the IRS offers several options. Installment agreements allow you to pay over time, typically up to 72 months. For balances under $50,000, you can usually set up a payment plan online without even speaking to an IRS agent. For larger balances, we may need to negotiate directly with the IRS or submit what is called an Offer in Compromise, which is a formal proposal to settle your debt for less than the full amount owed.

The IRS accepts Offers in Compromise when they determine that the amount offered is the most they can reasonably expect to collect from you based on your income, assets and future earning potential. These are not rubber-stamped approvals. The acceptance rate for OICs is only about 30-40%, and the process can take 12 to 18 months. But when they work, the savings can be dramatic. We have seen six-figure debts settled for $15,000 or $20,000 when the taxpayer genuinely could not pay the full amount.

In cases involving financial hardship, the IRS may place your account in Currently Not Collectible status, which pauses all collection activity including levies and garnishments. This does not erase the debt, but it stops the IRS from actively pursuing you. They will review your financial situation periodically, and if your circumstances improve, they will resume collection. The statute of limitations for IRS collection is generally 10 years from the date the tax was assessed, so in some cases, remaining in CNC status until the statute expires can result in the debt being written off entirely.

We have helped many clients at The Reed Corporation catch up on multiple years of unfiled returns and get their 1040 filing requirements back on track. Some were freelancers who never realized they needed to pay estimated taxes. Others were expats who did not know they still had a U.S. filing obligation while living abroad. A few were simply paralyzed by fear and could not bring themselves to open the IRS letters piling up on their counter. In every single case, the outcome was better than what they expected going in. The IRS is much more willing to work with you when you come forward voluntarily than when they have to come find you. If you are behind, reach out to us. We will pull your transcripts, prepare the returns, and help you get back on track.

Estimated tax payments are quarterly payments you make to the IRS throughout the year to cover income that does not have taxes withheld at the source. If you have a regular W-2 job, your employer withholds federal income tax from every paycheck and sends it to the IRS on your behalf. But if you have income from self-employment, freelance work, rental properties, investments, or any other source where no one is withholding for you, the IRS expects you to pay as you go rather than waiting until April to settle up. That is what estimated payments are for, and understanding how they interact with your Form 1040 can save you from penalties and cash flow headaches.

The IRS divides the tax year into four uneven quarters for estimated payment purposes. The due dates are April 15, June 15, September 15, and January 15 of the following year. Notice that the second quarter is only two months long while the third quarter stretches to three months. This trips people up regularly because they expect even quarters. Missing a payment or paying late triggers an underpayment penalty calculated on a quarterly basis, so even if your total payments for the year are correct, you can still owe penalties for individual quarters where you were short.

The amount you need to pay in estimated taxes depends on your total expected tax liability for the year. The IRS provides Form 1040-ES with a worksheet to help you calculate this, but most people work with their accountant to estimate the amounts based on prior year income and expected changes. There are two safe harbor rules that protect you from underpayment penalties even if you end up owing when you file. The first safe harbor is paying at least 90% of your current year tax liability through a combination of withholding and estimated payments. The second is paying at least 100% of your prior year total tax liability, or 110% if your adjusted gross income was over $150,000. Meeting either safe harbor means no penalty regardless of what you owe on April 15.

Many of our clients prefer the prior year safe harbor because it is simple and predictable. If your total tax on last year’s 1040 was $40,000 and your AGI was over $150,000, you would divide $44,000 (which is 110% of $40,000) by four and pay $11,000 per quarter. That is straightforward and protects you even if your income increases significantly during the current year. The downside is that if your income drops, you may overpay and have to wait until you file to get the excess back as a refund. For people whose income varies a lot from year to year, the current-year 90% method can sometimes result in lower quarterly payments, but it requires more precise forecasting.

Self-employed individuals have an additional layer of complexity because they owe self-employment tax on top of income tax. Self-employment tax covers Social Security and Medicare and is currently 15.3% on net self-employment income up to the Social Security wage base ($176,100 for 2024), with the 2.9% Medicare portion continuing on all net earnings above that threshold. There is also an Additional Medicare Tax of 0.9% that kicks in on self-employment income above $200,000 for single filers or $250,000 for married filing jointly. If your self-employment income is strong, this can add substantially to your quarterly payment amounts. Someone earning $150,000 in net self-employment income might owe $25,000 to $35,000 in combined income tax and self-employment tax beyond what any W-2 withholding covers.

You can make estimated payments in several ways. The easiest is through IRS Direct Pay at irs.gov, which lets you pay directly from a checking or savings account with no fee. You can also use the Electronic Federal Tax Payment System, known as EFTPS, which requires registration but is useful if you make payments regularly and want to schedule them in advance. Credit and debit card payments are accepted through third-party processors, but they charge a convenience fee, typically around 1.87% for credit cards, which adds up quickly on large payments. A $11,000 quarterly payment made by credit card costs you an extra $205 in processing fees. Some people still mail a check with a paper Form 1040-ES voucher, but electronic methods are faster, provide immediate confirmation, and create a reliable paper trail.

State estimated taxes work the same way conceptually, but the due dates, safe harbor rules, and payment methods differ by state. In New York, the state estimated tax due dates generally align with the federal dates, but New York City residents owe city tax on top of state tax, so the quarterly amounts can be significant. A New York City resident earning $200,000 might owe $5,000 or more per quarter in combined state and city estimated taxes on top of their federal payments. California has its own unusual schedule: the first two quarters are each 30% of the annual estimate, the third quarter is 0% (nothing due), and the fourth quarter is 40%. If you do not know your state’s specific rules, you can end up with state underpayment penalties even though your federal payments were perfectly timed.

When you file your Form 1040 at year-end, your estimated payments are reported on Schedule 3, line 8, and carried to line 26 of the 1040. They reduce your total tax liability in the same way that W-2 withholding does. If the total of your withholding plus estimated payments exceeds your actual tax, you get a refund. If it falls short, you owe the balance by April 15 plus any applicable underpayment penalty. The underpayment penalty is calculated using Form 2210, and your tax preparer will typically run this calculation automatically as part of your return preparation.

One strategy that some clients use is to increase their W-2 withholding late in the year instead of making a large fourth-quarter estimated payment. The advantage is that W-2 withholding is treated by the IRS as if it were paid evenly throughout the year, even if every dollar was withheld in November and December. So if you realize in November that you are behind on estimated payments for the year, having your employer withhold a large additional amount from your final few paychecks can effectively backfill the earlier shortfall without triggering quarterly underpayment penalties. You do this by submitting a new Form W-4 to your employer requesting additional withholding. It is a legitimate and well-known technique, but it requires enough W-2 income to make it practical.

At The Reed Corporation, we calculate estimated tax payment amounts for our clients as part of the annual individual tax return preparation process. When we finish your 1040, we provide estimated payment vouchers for the coming year based on your prior year results and any anticipated changes in income or deductions. If your income varies significantly during the year, which is common for our clients in entertainment and creative fields, we recommend a mid-year check-in to adjust the estimates so you are neither underpaying and risking penalties nor tying up too much cash with the IRS unnecessarily.

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