Best Tax Prep

Tax Terms to Know

It’s easy to get lost in the complicated world of tax preparation and end up more confused than you were when you started researching. Below, we’ve compiled a simple, albeit non-comprehensive, list of a few terms you’re likely to encounter a lot in your tax research. 

If you still have questions about tax preparation or concerns related to your specific tax situation, we recommend asking these questions when you talk or meet with a certified tax pro or enrolled agent.

CPA — Stands for Certified Public Accountant. These are people who have completed training in accountancy from a college or university and have also met other requirements related to their experience and character. Some CPAs specialize specifically in tax preparation.

Deduction — Any money that can be subtracted for your taxable income, thus lowering the amount of taxes you will have to pay. Common deductions include charitable contributions, mortgage interest paid, IRA contributions, and 401K contributions, though there are others that might apply to your tax situation.

Dependent — Your dependents include any children or qualifying family members for whom you provide the primary source of financial care. You cannot claim a spouse as a dependent, nor can you typically claim children over the age of 24 except in special circumstances.

EA — Stands for Enrolled Agent. This is the highest credential awarded by the IRS. Enrolled agents can represent any type of taxpayer before the IRS and handle all tax-related matters. They receive their training through passing a comprehensive IRS test or through being a former IRS employee, and complete 72 hours of continuing education courses every 3 years.

Filing status — Your filing status is essentially how the IRS determines at what rate your income will be taxed. It also determines which tax forms you will need to fill out when you file your taxes. The five common filing statuses are as follows:

• Single
• Married filing jointly (you and your spouse file taxes together)
• Married filing separately (you and your spouse both file taxes but fill out separate forms)
• Head of household (you are single but be entitled to least one exemption, such as a child or parent in your care)
• Qualifying widow(er) with dependent child

IRS — Stands for Internal Revenue Service. The IRS is a service of the United States government that oversees the collection of taxes.

PTIN — Stands for Preparer Tax Identification Number. Anyone who prepares your taxes or assists you in preparing your taxes and gets paid for it must have a valid PTIN. Thus, ensure that any company you choose to work with to prep your taxes has one.

Taxable income — This is the portion of your income for the given tax year for which taxes can be collected. If you are eligible for certain deductions, your taxable income will be lower and you will pay taxes accordingly.

Tax Documents

When you are ready to file your taxes, the IRS expects to see a number of forms depending on your employment status, level of income, assets held, etc. Some of these forms are provided by other people, such as your W-2 form, which comes from your employer. Others, like the IRS 1040 form, you fill out yourself, or have your hired tax expert work with you to fill out on your behalf.

The infographic below gives a brief overview of the most popular tax forms that you should be familiar with, and more detailed explanations of each one can be found below the graphic.

Tax forms to be familiar with:

1040
The 1040 form is the main form that you use to report your income to the IRS, claim any tax deductions or credits that apply to you, and figure out the tax refund you will receive if you overpaid your taxes (or how much your tax bill will be for the year, if you underpaid your taxes).

W-2
Usually around January or February, you will receive a W-2 tax form from your employer(s). This form shows you the amount of money you got paid from your employer during the previous year, as well as how much you contributed to your company-sponsored retirement plan (401K) and the amount of taxes that your company withheld on your behalf.

1098
You typically receive a 1098 form for one of two reasons: 1) You have a mortgage for which you are making interest payments, or 2) You are a college student paying tuition and/or student loan interest. In either case, many times these interest or tuition payments can be deducted from your taxable income, so the 1098 form is very important.

1099
While close in number to the 1098 form, the 1099 form serves a very different purpose. The 1099 is mainly for reporting other types of income that you receive that aren’t from your employer. This could include income from dividends, interest, or distributions you earned from your investments, or even money you made from freelance work. Basically, your miscellaneous income gets reported on the 1099, which is why the form is actually called the 1099-MISC.

Selecting the Best Tax Prep Company

Depending on your situation, you may need outside assistance in order to file your taxes. For example, many tax filers who own their own business take their taxes to a tax preparer for outside assistance rather than do them themselves through tax software, such as TurboTax. 

However, if you have a simpler situation such as being single and having one simple W-2, the better route may be to do your taxes through online tax software. Whatever your tax situation, make sure you identify the resources that will make your tax prep and filing as easy as possible.

Do Your Tax Research

Humans are creatures of habit, and if filing their tax return a certain way works once, they most likely want to stick to it again the next year. However, life is constantly changing, so deciding how to do your taxes should be something you research and think about every year. 

Starting a business, having children, getting married, and getting divorced are life events that can dramatically change the way you file your taxes. Make sure you find the best tax filing option every year; just because filing taxes one way worked perfectly last year, that doesn’t mean that it is the best option this year and every year after. And taking time to figure out your personal tax situation and what tax filing option works best will also help you narrow down your search in finding the best tax prep service for your needs.

Look for Customer Assistance Features

Whatever tax prep company you choose, customer assistance is one of the most important things to take into consideration. You want to make sure that you have the help you need when you have pressing questions that need immediate answers before you can proceed with your taxes. 

If you use a tax software program rather than outside assistance, live chat and easy access to customer service is going to be essential. When considering tax prep companies, make sure their customer assistance is compatible with your needs. 

Read Verified Customer Reviews

While this may be your first time seeking a tax preparer, you are not alone. Thousands of Americans get help filing their taxes every year, and their experiences can help inform yours. Be sure to look for companies with positive reviews from verified customers.

Chances are, the more reviews you read, the better sense you will get about whether a tax prep company really has your best interests in mind and is truly reputable. Plus, the more success stories you read, the easier it will be to trust a tax prep company to take care of the hard parts of the tax preparation process.

Check for Accreditations

Tax preparers are able to earn certain certifications or accreditations that make sure they are held to ethical standards and have the necessary knowledge and experience to prepare taxes for compensation. 

An A+ rating with the Better Business Bureau is a good first thing to look for. This means the company is operating ethically and adhering to all laws and codes applicable to its industry. Other accreditations you can look for include the following:

• Accredited Business Accountant (ABA) — This prestigious recognition certifies that the credential holder is proficient in the fields of accounting, financial statement preparation, and tax-related matters.
• Accredited Tax Preparer (ATP) — This is a national credential for tax practitioners with a thorough knowledge of both how to prepare individual tax returns and an understanding of the existing tax code. These individuals are experts in the 1040 form and its various schedules, self-employed returns, and more. 

Even if you don’t see these accreditations listed for the tax prep company you are researching, you will want to check that the company’s tax preparers have valid PTINs and are either CPAs, Enrolled Agents, or tax attorneys. 

If you are skeptical about the qualifications of the person or company preparing your taxes, you’ll want to find someone else. There are plenty of accredited and trustworthy tax prep companies out there, and you don’t want to waste your time or money on one that is potentially a scam.

The Bottom Line

Selecting a tax pro and understanding the many forms and vocabulary associated with tax prep might seem daunting, but luckily, many companies make what’s hard feel easy. 

Needing to prepare and file a tax return is not a one-time deal, and as your tax situation evolves, so might your needs and requirements that you’re looking for in a tax preparer. The important thing is to know enough about the industry to ensure you don’t get scammed, and reading customer reviews about the top tax prep companies can help you gain confidence in the tax preparer you choose to help you.

The questions answered below should give you a good start when it comes to wrapping your head around tax preparation and what will be required of you vs. what you can hire someone else to do for you. If you have more questions, we suggest consulting with a tax professional from one of our top-ranked tax prep companies.