A Step-by-Step Taxes Guide for Those Filing for the First Time
If this is your first time doing taxes, the process can seem a bit daunting. Whether you’re a recent college graduate or you just took your first job, it’s natural to be concerned about how to do it right. The good news is that tax season doesn’t have to be hard or stressful.
Here’s a handy step-by-step guide to approaching taxes for the first time.
1. Figure Out If You Have To File
This one can be tricky, so you might want to consult a tax professional or get free tax help before you decide not to file a return. In general, the IRS only requires a tax return if one of the following is true:
– Your gross income is over $12,400, or $24,800 for joint filers.
– You’re self-employed and earned at least $400.
– You sold your home.
– You owe taxes on retirement distributions.
– You owe Social Security, Medicare or income taxes that were not withheld.
This is not a comprehensive list, and penalties for non-filing can be severe, so verify you are exempt before not filing.
2. Know Your Due Dates
Dates are everything with the IRS, so make sure you know the tax deadlines. The most important one from a tax-filing perspective is April 15, when your tax return is due every year.
Please note that the The IRS has announced that the federal income tax deadline for individuals is May 17, 2021 for the 2020 tax year. State deadlines have not changed, however, so make sure to confirm your state’s due date before you file.
Some taxpayers, especially the self-employed and those who earn nonwage income, have to pay estimated taxes every quarter. Deadlines are not every three months as you might expect, however. Estimated taxes are due April 15, June 15, Sept. 15 and the following Jan. 15.
Check Your Calendar for Employer Deadlines
You should also know when you can expect to receive all your tax forms from your employers. The IRS requires that employers file tax forms like the W-2 and 1099-MISC by Jan. 31. If you haven’t received your forms by shortly after that date, you might want to contact the payer.
However, not all income forms are due on Jan. 31. For example, Form K-1, which reports partnership income, doesn’t have to be filed until March 15. If you understand the tax-filing calendar, you’ll know when to expect your relevant documentation.
3. Start as Soon as Possible
Even if taxes aren’t due until mid-April it’s never too early to start preparing. Know what to expect when you get your forms so you’ll have plenty of time to make corrections if there are any errors, which are common enough that the IRS has established procedures for resolving such problems.
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Set Aside Enough Time
Filing a tax return can take hours and hours of work — one study estimates that U.S. taxpayers take an average of 17 hours to complete their taxes.
Even if you decide to speed things up by using tax software, remember the old computer adage: garbage in, garbage out. If you don’t take the time to enter the right information, no tax software can correctly file your return.
4. Learn Your Forms
The IRS gets a copy of the income you earned, so it’s important that the information you file on your taxes matches what the IRS has. Here’s a shortlist of some of the more common and important forms employers send for you to use when filing your taxes:
– Form W-2, Wage and Tax Statement, for typical wage and salary payments
– Form 1099-MISC, Miscellaneous Income, typically for nonsalaried workers or contractors
– Form 1099-INT, Interest Income
– Form 1099-DIV, Dividend Income
5. Educate Yourself About Deductions
The good news about the tax-filing system is that you don’t have to pay taxes on your entire income. Tax deductions are one of the ways that you can reduce your taxable income. There are many deductions you might qualify for. However, if you are a first-time filer, it might be simpler to opt for the standard deduction rather than to itemize your deductions. But you should do the math to see which option will do the most to reduce your taxable income.
Be Sure To Claim Your Student Loan Deduction If You Decide To Itemize Your Deductions
If you’re paying student loans, there’s actually good news when it comes to filing your taxes; you get to deduct some of the interest. As of tax year 2020, you can deduct up to $2,500 in student loan interest. This will reduce your taxable income and lower the amount of tax you have to pay.
6. Educate Yourself About Tax Credits
Tax credits are somewhat similar to tax deductions, but rather than reducing your taxable income, they reduce your actual tax on a dollar-for-dollar basis.
For example, if you owe $3,400 in federal income tax but get a $1,000 earned income tax credit, you’ll owe only $2,400. Numerous credits are available, for expenses ranging from child adoption fees to the purchase of a first home.
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7. Consider Making Prior-Year IRA Contributions
One of the most generous provisions of the tax code is the ability to make an IRA contribution all the way up to the tax-filing date — traditionally April 15 — and have it count for the prior year. This allows you time to see where your tax return stands and if you will benefit from a prior-year contribution or deduction.
8. Choose the Best Filing Status
Most people know that you can file taxes as a single person or jointly with a spouse, but they might not be aware that there are actually five possible filing statuses:
– Single
– Married filing jointly
– Married filing separately
– Head of household
– Qualifying widow(er) with dependent child
If you qualify for more than one status, complete returns in each allowable way to see if one status is more advantageous for you than another.
9. Choose Who Will Do Your Taxes
If you’re not comfortable filing your own tax return, especially the first time, you have options. Since filing yourself can take a lot of work — or result in errors — hiring a professional can ease stress and maybe even get you a bigger refund.
The downside is that it costs money. Another option is using tax-filing software, which is efficient and affordable, and it usually comes with an accuracy guarantee.
10. Decide How You Will File If You Do Your Own Taxes
If you will be doing your own taxes, you have a number of decisions to make, including what forms you will submit and whether to file by mail or electronically.
EZ or Not EZ? That Is the Question
If this is your very first tax return, you might have a much simpler return than someone who owns a business, has rental properties or invests in oil partnerships.
For the most basic returns, the IRS allows taxpayers to file Form 1040-EZ, which is the easier version of Form 1040. Learn if you’re allowed to file Form 1040-EZ, and your first tax filing could be much less complicated.
File for Free If You Qualify
The IRS offers free tax-filing software for many taxpayers. Under the IRS Free File program, 70% of all taxpayers qualify for some form of free tax software.
Qualification is based on income. If your income is above $72,000, however, you can’t use Free File software options as a first-time filer. But you can complete your tax return using the IRS Free File Fillable Forms.
File Electronically If Possible
Filing a tax return electronically provides some benefits: It’s more secure, it’s less likely to result in errors and it’s more convenient. Since 2012, the IRS has required most tax preparation firms to file returns electronically.
11. Don’t Forget To File a Self-Employed Tax Return If You Are Required To
You might not think of yourself as a self-employed business owner, but the IRS has a pretty low threshold of just $400 when it comes to filing a self-employed income tax return. You can easily hit that level if you have a side gig where you earn a few hundred dollars, or if you sell some personal property and make some money. So, be aware of your responsibility.
12. Don’t Forget About State Taxes
Seven states don’t have state income taxes, so you don’t have to file a state income tax return if you earned income there.
Taxpayers in the other states aren’t so lucky. For example, in California, the top tax rate for individuals is 13.3%. The good news is that you can deduct your state income taxes on your federal tax return.
13. Double-Check Your Math
If you do your taxes by hand, it can be easy to make a math error. However, even using tax software isn’t always enough to catch a math error, as a transcription error — say, inputting $510 as a dividend payout instead of $150 — won’t likely be caught by the software program.
However, the IRS will certainly notice. If that mistake means you’ve underpaid your taxes, you could face penalties and interest. Be especially wary of the common mistakes first-time filers make.
14. Always File on Time
Even if you can’t pay all your taxes, you should still file your return. Filing but not paying your taxes generates a monthly penalty of only one-half of 1%. The failure-to-file penalty, on the other hand, is a whopping 5% of your unpaid taxes every month, to a maximum of 25%.
Or Better Yet, File Early To Help Prevent Fraud and Get Your Refund Faster
Since the IRS only accepts one tax return per Social Security number, filing early can help prevent fraud. Once your tax return is accepted, any crooks who might have your Social Security number can no longer file a fake return in your name.
In addition to stopping fraud, a tax return filed early can speed up the receipt of your refund. The sooner you turn in your taxes, the closer you are to the front of the line when it comes to getting a refund. On average, expect to wait no more than 21 days for your tax refund.
15. Make a Plan To Pay Your Taxes Owed If You Can’t Pay Them All Upfront
You can set up an installment plan with the IRS to pay off your taxes over time. Short-term plans, lasting 120 days or less, can be set up online for free. Longer-term plans charge fees ranging from $31 to $225. You’ll still be subject to taxes and penalties until your balance is paid off.
16. Set Up Direct Deposit If You Are Owed a Refund
Just like direct deposit of your paycheck results in faster access to your funds and fewer errors in transmission, choosing direct deposit for your tax refund generates the same benefits.
With direct deposit, you won’t have to worry about a check being lost or delayed in the mail. And you can even split your refund into different financial accounts.
17. Check Your Refund Status
If you can’t handle the wait, check the status of your refund at IRS.gov/refunds, or use your smartphone to download the IRS2Go app. Know that the 21-day window is just a guideline, and if you mailed your return, or your return has errors, the refund process can take longer.
18. Keep Current
If this is your first time filing taxes, you’re ahead of the game in one sense: The tax-filing information you’ll be learning will be current, at least for this year. To ensure you file an accurate return and get every tax break you’re entitled to, keep abreast of current tax news every year.
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Gabrielle Olya contributed to the reporting for this article.
This article originally appeared on GOBankingRates.com: A Step-by-Step Taxes Guide for Those Filing for the First Time
