Introduction to Tax Preparation
In the world of financial management, tax preparation plays a very crucial part. Tax preparation involves the chronological organization of an individual’s or entity’s liabilities and taxable income calculation. With efficient tax preparation, you can enjoy many advantages. For instance, when you recognize eligible deductions and credits, you will benefit from tax savings.
|Getting Organised Before Filing Taxes
|Understanding Tax Deductions and Credits
|Key Difference Between Tax Deductions and Tax Credit
|Essential Tax Filing Tools and Software
|Key Changes in Tax Laws and Regulations
|Avoiding Common Tax Filing Mistakes
|Planning for Next Year’s Taxes
|Tax Compliance For Small Business Owners
|Tax Filing Options for Freelancers and Independent Contractors
Getting Organised Before Filing Taxes
To get organized before filing your taxes, make sure you cover all the below-mentioned points:
Maintain Financial Record
Start by maintaining a thorough financial record throughout the year and make sure to update it from time to time. You can do this by keeping a tab on your income, salary, rental income, and business income, if any. Furthermore, maintain records of expenses, for example, medical bills, education expenses, and more.
Gather the Needed Documents
Make sure you have all the documents that are required for tax filing. Some of the names of the documents are Form 16, Form 16A, investment statements, rental agreements, and any other required documents.
Organize the Documents
The next step is to organize the documents so that it will be easy for you to both retrieve and take references. One of the approaches can be to create separate folders for income documents, investment documents, deduction documents, and any other documents.
Review and Reconcile
Before you apply for tax filing, ensure that all the information and documents are correct and not forged. For this, you need to double-check your income and expense details with the correct documents.
Understanding Tax Deductions and Credits
Tax deductions and credits are two separate concepts, and it is important to understand what makes them different from each other. The tax credit is when the taxpayer subtracts directly from the taxes that they tend to owe. Tax credit value circles on the nature of the credit. On the other hand, tax deductions help in lowering the taxable income of a person. It does so by acting as an investment in an instrument.
Key Difference between Tax Deductions and Tax Credit
|Reduction in the income that is taken into consideration for the calculation of the tax
|Reduction in the actual tax owed to the government
|It is applied before the tax credit is imposed
|It is applied to the tax owed after the application of tax deductions
Essential Tax Filing Tools and Software
With tax filing tools and software, you will be able to keep track of and file your taxes efficiently. A few of the best tax filing software are mentioned below and discussed thoroughly:
It is a desktop-based software that many small firms adopt as it comes with tax preparation services. With ProSeries, carrying out activities such as tax returns progress and submitting taxes become easy. The fact that ProSeries comes with an inbuilt sheet makes it easy for you to track missing data and plan events and such.
Irrespective of how small or big a firm is, Drake Software is used by almost all of them. It is mainly used by businesses for tax management so that enough time can be saved so that they can focus on more productive ways to grow their business further. Simultaneously, recognizing the mistakes in the tax returns becomes easy, and hence, rectifying the mistake becomes easier.
Through H&R Block, users will be able to prepare and file their tasks by searching for tax information, tools, articles, answers, and more. It prepares the tax returns by considering all of the important factors that are essential for tax preparation.
TaxSlayer is famous for being one of the easiest and most efficient tools to use. You can not only prepare files but also file your tax returns electronically through mediums such as communication links, calculations, and more. The best thing is that users can easily access it from anywhere and at any point in time.
Also Read: Know Everything About GST Billing Software
Key Changes in Tax Laws and Regulations
Many changes have been introduced in this financial year in the tax laws and regulations. Out of the many, few of them are mentioned below:
Raise in Tax Rebate
There is a rise in the tax rebate as well; earlier, it was Rs 5 lakh, but now it is Rs 7 lakh. In simpler terms, if a person is earning below Rs 7 lakh, he will not be liable to invest anything to claim exemptions. As a result of this, the entire income will be free of tax, irrespective of the volume of investment.
No changes in the standard deduction of Rs. 50000 have been introduced. In the case of pensioners, the benefit of the standard deduction is extended to the new tax regime. Persons who have a salary of income of Rs. 15.5 lakh or even more will be liable to be benefited by Rs.52,500.
New Income Tax Regime to be Default Regime
As of 1st April 2023, the new income tax regime will be the default regime. However, the tax assessors will still have the liberty to choose from the prior regime. Under this, the new system’s standard deduction for taxable income that crosses Rs.15.5 lakhs is Rs. 52,500.
Avoiding Common Tax Filing Mistakes
While filing for tax returns, you need to be very careful as you can’t risk making any kind of mistakes. Some of the mistakes that you should strictly take into consideration and ensure that you don’t commit are as follows:
Missing the Deadline
One common mistake that people do and should not make is missing the tax filing deadline. You must note that the last date for filing an income tax return is usually 31st July of a financial year. If, by any chance, you miss the deadline, then you will be liable to pay the penalty, and let’s be honest, none of us like to pay the penalty.
Not Being Thorough With the Form 26AS.
In the form 26AS, you will find each detail of the tax that has been deducted from your entire income throughout the year. This is why you must double-check Form 26AS to be sure that all the tax deductions that are mentioned in the form are correct.
Not Including all the Income
While filing income tax returns, ensure that you have covered all of your income. Not doing so will land you in legal and serious trouble, so why take the risk? To avoid such common mistakes, be careful that you include all of your income, such as rental income, interest income, capital, and salary, if any.
Not Claiming the Deductions
To reduce your tax liability, tax reductions can come in handy in the long term. There are times when people often forget to claim their taxes, for instance, those with investments under 80C or some medical expenses such as 80D. It is your responsibility to be aware of the deductions and claim for all the deductions that you are eligible for.
Planning for Next Year’s Taxes
The equation of saving more is to plan your tax earlier, so make sure you participate in tax planning. A few of the key approaches that can help you in planning for your upcoming year’s taxes are as follows:
Be an Early Bird
Refrain from sitting and doing all of the work at the last minute because if you do that, then you will inevitably end up making a lot of mistakes, and there won’t be any suitable outcome. So always be an early bird and plan your tax as soon as your tax investments and expenses start.
Select a Tax Preparer
A newbie is always advised to choose a tax preparer who is qualified enough to file for income tax returns. Or if you already have your own CA or Chartered Accountant, it is recommended that you have an in-person meeting with him not less than a few weeks before the end of the financial year. This is essential because then they will be able to give you suggestions on how to lower your taxes.
Collect all the Documents
Just like salary slips, Form-16, Form 26AS, Form-16A, Form-16B, and Form-16C, ensure that you have collected all the documents that are required to file for Income tax returns.
Calculate Your Gross Total Income
To do this, you need to start by considering your income from all the sources during a financial year. Here, sources can be either salaried, business, house property or many others.
Calculate the Net Taxable Income
Here, all the deductions underlying the chapter VIA, which are eligible under the Income Tax Act, are taken into consideration. You can reduce your taxable income to a greater extent at this very stage.
Compute Your Tax Liability
Just in case you have generated income from any other source, then you will be required to have a tax liability. When you claim for exemptions and Deductions here, you can greatly reduce your tax liability.
Apart from the above mentioned approaches, you must keep updated on the changing tax laws. Simultaneously, keep track of all the major expenses or investments along with keeping a copy of the last year’s return.
Also Read: Tax Planning Tips For Small Businesses
Tax Compliance for Small Business Owners
Irrespective of how small or big a business is, it is important that the business is familiar with the rules and regulations and follows them accordingly. When it comes to tax compliance, it mainly depends on several factors. To name a few, there are the nature of business, its activities, and its legal structure. However, some of the selective tax compliances that a business incurs are discussed below:
Just like individuals have to pay taxes on their income, businesses are required to pay taxes on their income that come in the form of profits. However, if you are registered as a corporation, then you will be liable to pay corporate tax instead of income tax.
If you are a business and have employees in your company, then you must deduct payroll taxes from their salary. This tax is to be deposited to the authorities. Down the line, these very taxes play a key role in the employee’s social security or Medicare benefits.
This tax is for the small business owner and includes road taxes, municipal taxes, and more. To pay local taxes, small business owners must have adequate knowledge.
Under this, you need to calculate and pay taxes for a financial year on a quarterly basis in the very year. This is where your compliance requirements actively changed to a quarterly basis instead of an annual basis. Here, an estimation of the income that you will earn during the year is made.
Tax Filing Options for Freelancers and Independent Contractors
Freelancers and Independent Contractors are those who enjoy the flexibility of their work. However, they have a different tax filing system. It can also be defined as self-employment. In terms of tax filing options for freelancers and independent contractors, some of the common options are mentioned below:
The Manual Hands-on Approach
If you are a freelancer who is more confident in the conventional manual hands-on approach, you can move ahead with it. The tax forms can be easily issued from government sources. Although this approach is termed cost-effective at the same time, it demands enough time along with a thorough understanding of prevailing tax rules and regulations.
Opting for Tax Software
For freelancers who are looking for time-saving efficiency and an accurate approach, there is always an option for tax software. There are many software, a few of which are discussed above, that cater to your needs and give you the desired results. Some of the common features that the tax software offers are computing deductions, tracking income, and more.
Seeking Professional Help
If you are a freelancer who needs a touch of professionalism and perfect accuracy, you can always seek professional help. There are tax professionals who provide this service by guiding freelancers with all the information that they need to know. Furthermore, you will be offered a strategy that will help in running long-term financial planning.
Irrespective of whether you are handling it through professional tools or just personal, it is important to understand that tax preparation is essential for determining the financial condition and preventing potential legal damages. It is extremely important to pay income tax and file income tax returns, and you, as a responsible citizen, should do both. Although, at first, it may all seem very complicated to you, with the right approach, you will be able to understand and file your income tax returns efficiently.
Q1. What is the deadline for tax filing?
Ans. July 31st is the last date for tax filing in India.
Q2. In what ways can I maintain records of expenses?
And. You can maintain receipts and make sure to organize the documents.
Q3. What are the potential penalties for late tax filing?
Ans. The penalties will depend on the nature of the period.
Q4. Is there a tax on agricultural income in the country?
Ans. Generally, agricultural income is expected from tax. However, it is considered for rate purposes.
Q5. Are there any special tax benefits for senior citizens in the country?
Ans. Yes, there are special tax benefits for senior citizens.
Q6. Is it possible to claim dedication for education expenses in the country?
Ans. Yes, education-related expenses can be claimed for deductions.
Q7. Is the e-filling option available in India?
Ans. Yes, e-filling has been made available to people of the country and is very efficient to do.
Q8. What are the ways I can report income if I am a freelancer or independent worker?
Ans. If you are a freelancer or independent worker, you can maintain invoices for documentation.
Q.9 Is it possible to correct the errors in my tax filing?
Ans. You can opt for a revised return within a given time frame to rectify your tax filing.
Q10. Is it possible to carry the losses forward for future taxes?
Ans. There are selective losses that you can carry forward for future tax.