What you need to know about: Taxes

Whether you’re filing your taxes for the first time or fifth time, it can be tricky. Here’s an overview of what you need to know about the paperwork and process.

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Prepare

Prepare

We get it: Taxes can feel overwhelming if you have never filed your own return. But they don’t need to be as scary or as complicated as you might think. The best thing you can do to complete the process without a hitch is to prepare ahead of time.

First, you should determine how you need to file — or if you need to file a return at all. From there, you should gather the documents you’ll need from employers, banks, etc. well before tax day. Preparing now allows you to take your time, ask questions, and get help if you need it.

Do you need to file?

You’re required to file if you made a certain amount of money for the current tax year, known as the gross income threshold set by the IRS. Your gross income is everything you made in the year before accounting for things like taxes, insurance premiums, or retirement contributions.

Check out the chart below to determine if you need to file, based on how much money you made this year.

Filing status File if your gross income is more than
Single $10,350
Head of Household $13,350
Married Filing Jointly $20,700
Married Filing Separately $4,050

If you were a full-time student in the year you’re filing for and didn’t earn a regular income, you still should file a federal income tax return to see if you can get money back — for example, you had federal income tax withheld from your pay as a summer camp counselor or you qualify for a refundable tax credit.

What’s your status?

Confused about your filing status? You can check out this online tool at IRS.gov to help you determine how you should file. You’ll need to know if you’re single or married (“it’s complicated” is, unfortunately, not a status).

The IRS also provides a few guidelines that can help you determine your status. For example, you’re single for tax purposes if you are not married, are divorced, or are legally separated according to your state’s laws. If you qualify for more than one filing status, the IRS encourages you to choose the one that allows you to pay the least amount in taxes. Nice of them, right?

If you still rely on your parents or someone else for at least 50% of the financial resources you have, they may want to claim you as a dependent. You still need to file your taxes if someone does claim you, but you cannot claim your own deductions or tax credits if you’re a dependent on someone else’s return.

Coordinate with your parents, guardians, or anyone qualified to claim you on their own return. If you want to be able to start claiming your own deductions, you need to make sure they don’t list you as a dependent.

Documents

Documents

Now that you know if you need to file and what status to choose, it’s time to gather the documents you’ll need. Again, preparing throughout the year can help make the actual filing process a lot easier and faster.

“Create a file folder to drop all your year-end tax forms into as you receive them throughout the year,” suggests John McCarthy, CPA and founder of McCarthy Tax Preparation. “If you have general questions on how to file your return, a good place to start is the IRS Form 1040 instructions for Publication 17: Your Federal Income Tax. If you still feel uncomfortable filing your own taxes, find and interview a tax professional before tax season starts.”

Review this list of documents and have them on hand before beginning your return. Here’s what McCarthy says you likely need:

  • Copy of W2s or 1099s for any jobs held during the year. Your employer will provide these and they are very important.
  • Forms 1099-INT and 1099-DIV for interest and dividends, issued by banks and other financial institutions. They may be mailed to you, or sometimes your bank will allow you to download them via your account login.
  • Form 1098 for mortgage interest (if you own a home and paid interest on the mortgage). Again, this may be mailed to you, or available via your online mortgage portal.
  • Any and all records for real estate taxes or charitable contributions made during the year. (This is why you hold on to those Goodwill receipts!)
What to watch out for

What to watch out for

The first time you file your taxes, your situation will likely be pretty straightforward. For example, you may make a small amount of money if you work part-time while in school, or you earned your first full-time, entry-level salary after graduation.

Most people filing for the first time can file as single and they probably don’t own a home. You may have just started saving and investing for the future, but your accounts are probably limited to retirement savings accounts like a 401(k) plan and maybe a brokerage account.

But, as your life changes and you hit different exciting milestones, you need to think about taxes differently. If you experience any of these events throughout the year, they could affect how you file your return:

  • You get married (or you separate from or divorce your current spouse).
  • You buy a home or sell one.
  • You have (or adopt) a baby.
  • You claim someone as a dependent.
  • You earn significantly more or less money.
  • You start making contributions to tax-deferred retirement accounts, like a 401(k), a SEP IRA, or a SIMPLE IRA
  • You inherit financial assets or property.

These changes could move you into a new tax bracket or create a new tax deduction, impacting how much you owe. Or they could complicate your situation, requiring more or different tax forms. If you experience one (or many!) of these life events, it’s likely worth it to talk to a tax professional about how to file to make the most of all tax deductions and credits you can claim.

Deductions

Deductions

First, the difference between deductions and credits: “Deductions are a reduction in your taxable income and credits are a dollar-for-dollar reduction in your tax liability,” McCarthy explains. “These are both good things, but credits are generally better.” He gives an example to help illustrate why. “If you’re in the 15% tax bracket, a $100 deduction is only worth $15 in tax. Meanwhile, a tax credit is worth a full $100.”

Here are some common deductions you may qualify for when you file for the first time:

  • Student Loan Interest Deduction
    If your modified adjusted gross income is less than $80,000 and you made interest payments on qualifying student loans, you could deduct the interest from your taxable income.
  • Tuition and Fees Deduction
    You may be able to deduct qualified education expenses paid during the year for yourself, or your spouse if you’re married. You can’t claim this deduction if another person can claim an exemption for you as a dependent on his or her tax return.
  • Retirement Account Contribution Deduction
    When you contribute to tax-deferred retirement accounts, that helps lower your adjusted gross income. That, in turn, can help you save on taxes if it puts you in a lower tax bracket.
  • Health Saving Account (HSA) Contribution Deduction
    You can deduct payments you made to your HSA account. You can deduct contributions that anyone else (except your employer) made, too. You don’t need to itemize on your return in order to get this deduction.
  • Mortgage Interest Deduction
    If you own a house, the interest you pay on your home loan is tax deductible. Your mortgage must be secured debt on a qualified home in which you have an ownership interest. You need to itemize and fill out Form 1040 in order to claim this deduction.
  • Charitable Donation Deduction
    If you made donations to qualifying organizations, you may be able to deduct the value of what you donated — be it cash or another kind of asset like clothing or furniture — from your taxable income. Note that payments made to individuals are never deductible, you need to keep all receipts and documents from your transaction, and you need to include Form 8283 in your return.
  • Home Office Deduction
    If you’re part of the growing population of teleworkers, you may be able to deduct your home office. But there are strict requirements about what constitutes a home office (unfortunately, your kitchen table does not). If you work from home, figure out if you qualify — this deduction is for homeowners as well as renters!

In addition to your home office, you may be able to deduct certain qualifying job expenses. Common costs that qualify include moving expenses and expenses you incurred to seek out and secure a new job.

Credits

Credits

Next, on to credits. As you may notice, credits are generally designed to encourage or reward behaviors that are considered beneficial to the economy or the environment or that further any other purpose the government deems important.

  • American Opportunity Credit
    You can get a credit for qualifying education expenses during your first four years of higher education, i.e. college. The maximum credit is $2,500 per year, per eligible student.
  • Lifetime Learning Credit
    This is similar to the American Opportunity Credit, but applies even past your first four years of higher education. If you’re a qualifying student, you can get a credit for up to $2,000. See, it pays to stay in school!
  • Saver’s Credit
    You may get this credit if you make less than the income limit and saved to a qualifying retirement account. Click here to learn more about the Saver’s Credit and to see if you’re entitled to claim it on your return.
  • Earned Income Credit
    This credit is designed to help you if you’re working, but earn a low to moderate income. You need to meet a lot of qualifications, but it’s worth checking out to see if you can claim this on your taxes.
  • Child and Dependent Care Credit
    Have kids? Make sure to read up on this credit and claim it — but you may still get the credit even without children. If you paid for someone to care for your spouse or other dependent, you could qualify.
Filing

Filing

You’re prepared: Your documents are at the ready, you’ve got an eye on the deductions and credits you can take, and you’re ready to fill out your tax return for the first time. Now we just need to walk through how to find the right forms, make important choices about how you’ll file, and actually submit your paperwork to the IRS so they can process your return. We promise it’s not painful.

Start simple: Use the right form

Just like making sure you use a No. 2 pencil to take a multiple-choice test, making sure you’re using the right form for your taxes, ensures all your hard work isn’t for naught. You’ll use some variation of Form 1040 in order to file:

  • Income Tax Return for Single and Joint Filers With No Dependents: Form 1040EZ
  • U.S. Individual Income Tax Return (for those with a taxable income of less than $100,000): Form 1040A
  • U.S. Individual Income Tax Return: Form 1040

Use this handy questionnaire from the IRS if you need help determining which form is the right one for you to use when filing your taxes. Before you start, you need to know how much income you made, your filing status, and how much federal income tax was already withheld from your earnings. If you work full time, all this information should be on the W2 or 1099 you receive from your employer.

Standard or itemized deductions?

You have the option of taking the standard deduction on your taxes or you can itemize when you file. The standard deduction is a set amount that you can automatically deduct from your taxable income — hence, standard.

When you itemize, you list out every single deduction you can claim. Depending on your situation, itemizing may allow you to reduce your taxable income more than the standard deduction.

To decide which makes the most sense for you, start by knowing your standard deduction. Here are the amounts for the 2016 tax year:

Filing status Standard deduction
Single $6,300
Married Filing Jointly $12,600
Married Filing Separately $6,300
Head of Household $9,300
Qualifying Widow(er) $12,600

This means if you file your taxes as single, you automatically receive a $6,300 reduction to your taxable income. It makes sense to itemize on your tax return if your itemized deductions add up to more than $6,300. You’ll reduce your taxable income more if you itemize, meaning you’ll likely owe less.

McCarthy says many first-time tax filers will find the standard deduction is more than their itemized deductions. “But if you’re a homeowner, have high medical expenses, have made significant donations to charity, or if you have high unreimbursed employment expenses,” he advises, “you should take a close look at itemizing.”

Get your return to the right place

When you’re ready, you have a few options for actually filing and getting your return to the IRS. The easiest is to work with a tax preparer who can help you prepare your entire return and will submit it on your behalf.

But you can also prepare your own return and submit it to the IRS yourself. You can fill out and send in a paper return, or you can file electronically using the government’s E-File options. Depending on your income, you can file for free through the IRS’s website.

Note that paper refunds can take up to six weeks to process. Filing online is much faster — and safer. If you’re entitled to a refund, you should get it within 21 business days of filing your return. In addition, the online e-filing option really walks you through the process, step by step, and offer guidance on where to find certain numbers on your forms.

Once you click “submit” (or your tax preparer does), you can check the status of your return or refund after you file using a portal provided by the IRS. You’ll need your Social Security number, your filing status, and your refund amount to access your status.

Deadlines

Deadlines

The IRS requires you to submit your return by April 15 each year. But it’s always worth checking the exact date you need to turn in your paperwork. If the 15th falls on a weekend or holiday, the deadline gets extended to the next business day. For instance, in 2017 the deadline is Monday, April 18th, giving you three extra days. Though, you should not wait until the last minute to file — trust us, it can be stressful if a question arises on Sunday at 10:00 p.m.

Be sure to check the federal deadline and your own state’s deadline. Some states, like Massachusetts and Maine, have state holidays that can push the deadline out an extra day. A quick web search can point you in the right direction.

The IRS starts accepting returns on January 23 in 2017. Again, this can change so always check for the current tax and filing years. You can file your taxes as soon as you have all the paperwork you need.

Need help?

Need help?

The IRS publishes an incredible amount of information on their website, IRS.gov. Here you can find forms; explanations; details about tax brackets, filing status, rules around who qualifies for what; and so much more.

It’s a great resource, but it’s also overwhelming for many first-time tax filers trying to understand all the terms and steps in the process. Don’t be afraid to get a professional on your side to help you learn about filing your tax return. “If you have an unfamiliar or unusual situation, it can be a good idea to work with a tax specialist the first year you file a return,” suggests McCarthy. “Look for a Certified Public Accountant (CPA) or Enrolled Agent (EA). Get a referral from someone who has worked with them in the past. A good professional can answer your questions and prepare you to file your own return in future years.”

You can turn to your bank for help, too. Wells Fargo provides a Tax Center where you can go to get questions answered, learn more about tax rates and how to file, and see each year’s tax calendar.

Glossary

Glossary

Adjusted gross income (AGI): All income made in the year minus specific, qualifying deductions. This is what determines your tax bracket. Adjustments that lower your AGI include self-employed retirement and IRA contributions, half of self-employment taxes paid, health savings accounts or self-employed health insurance payments, and student loan interest and qualified tuition costs.

Deductions: Events or statuses that reduce the amount of your income that’s taxable.

Dependent: A qualifying child or relative that meets the IRS requirements for relationship, age, residency, support and return filing status.

Exemption: An amount that you subtract from your AGI for yourself, your spouse, and each qualifying dependent.

Filing status: Status that determines what kind of tax return you need file. Includes: Single, married filing jointly, married filing separately, head of household, and widow(er).

Gross income: All income made in the year before accounting for things like deductions, credits, and taxes owed.

Modified adjusted gross income (MAGI): Usually your adjusted gross income, with specific credits and deductions added back to the total. Things like tuition-related costs and deductions, IRA contributions, and student loan interest can increase your MAGI.

Nonrefundable credits: Credits that don’t increase your tax refund, because you cannot save more than you owe on your taxes.

Refund: A payment received from the government when the amount of tax you owe is less than what you paid through withholding or estimated tax payments.

Refundable credits: Credits that reduce your tax liability below $0 and produce a refund.

 

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