Getting Started with Tax Filing
Since we all know what the other certainty in life is (death), maybe we shouldn’t hate on taxes so much. But if you’re just getting started with the annual ritual of “filing tax returns” (one for the federal government and another for state government), it can be overwhelming. And while it may seem that the tax code gets more complicated every year, the good news is there are also a lot more tools now than ever before to streamline the process of tax preparation and make sure you complete your return correctly.
Here are a few tax hacks to dial down the pain. (NOTE: This is general information only. It may not be applicable to you. For advice on your individual tax situation, consult a tax professional).
Get Your Stuff Together
Does your mail come to you? To your parents? Your landlord? If you are being “claimed” on Mom and Dad’s tax return as their “dependent”, you may be able to skip tax returns this year...enjoy that while you can.
If you are not a dependent, get your hands on your mail, because from January through April, everyone who was tracking a piece of last year’s “tax puzzle” will send you mail or an email with documents that give you helpful “clues” to solve the mystery of your tax return…so, piece it together. Examples include:
a W-2 statement of Gross and Net Income, from your employer(s) (this is where most income is, most of the time). And – usually, you get extra copies to send to the Federal government, and your state
a 1099 form that shows income you earned as an organization’s contractor (e.g. as a freelancer)
a 1098 form from a bank, that shows interest you earned from a savings account
a 1099-DIV form from another bank, that shows dividend income from investments
a 1098 from a creditor, that shows interest you paid that may be deductible (able to be subtracted) from your tax bill, such as for certain student loan payments
(These are just some common examples, but everyone’s situation is unique.)
Usually you can find “tax forms” on your bank’s website or maybe on your employer’s HR or payroll site and download them, but if they come through the mail, they often have “IMPORTANT TAX DOCUMENT ENCLOSED” or something similarly subtle on the envelope.
And recognize that at various points the year before, you might also have received a receipt for making a charitable donation. Try to find those too, as they might help you grab deductions (which can save you money!)
Understand that getting all your documents together is just pre-game. The basic steps to completing your taxes are at the end of the article. First, a couple more hacks you should know before the hardcore tax mathy-math starts:
2. Use Tax Software/Apps You’ve probably heard of Turbo Tax. It’s the market leader in tax prep software, but it’s not the only option. If your adjusted gross income is $66,000 or less (which is the case for the overwhelming majority of filers), you may qualify for free software to file your federal return. Go to the IRS website’s Free File page to learn more. Different companies have different eligibility criteria to get the freebie, so you’ll be asked to answer a few questions to match you with the right commercial tax software. And remember, not all of the IRS’ partner companies offer free state tax returns, so be sure to check those details before proceeding.
3. IRS Mobile App Can Connect You to Extra Help Some filers may also qualify for free tax preparation assistance, and you can use the IRS mobile app (IRS2GO) to find IRS Volunteer Income Tax Assistance (VITA) sites, where local volunteers help tax-filers get ready, usually at libraries and other public gathering places. You can also use the app to subscribe to tax tips from the IRS, follow the IRS on social media, and connect to other online tools from the IRS. And once your return is filed, if you have a refund due, the app will let you check your refund status simply by entering your Social Security number, filing status, and the refund amount you’re expecting. It’s a basic app, but useful.
4. Report Everything (yes, everything) Finally, few things will trigger an audit faster than failing to report all of the income that’s been reported to the government under your Social Security number. You’re not likely to forget income noted on the W-2 you get from your employer, but be sure to also include the other sources of income throughout the year, like freelance work, unemployment compensation, scholarships, income from sold investments, prize winnings such as gambling winnings, or proceeds from selling a car to another individual.
Now, to get your taxes right here are the calculation steps you will go through (again, get help from software!):
Determine GROSS INCOME (your pay from all sources, BEFORE taxes, insurance, benefits were taken out of your paycheck)
Calculate ADJUSTED GROSS INCOME/AGI…”Adjust (subtract) out from your GROSS INCOME the following, if they happen to apply to you;
Contributions to an IRA (SEP, SIMPLE, and qualified plans if self-employed).
Educator expenses.
Student loan interest.
Alimony payments.
Moving expenses (if you relocate to a job at least 50 miles farther from your home than your previous job).
Medical insurance premiums and ½ of your FICA taxes, if you are self-employed.
Health savings account deduction
Tuition and fees (but cannot use same expenses to claim education credits).
Subtract Deductions from AGI. (Deductions will usually decrease the amount of tax payment you will owe, so yay for them!). You can either stake your claim to the STANDARD deduction (a preset amount that the IRS allows you to deduct from your taxes, for some reason no one understands, really) or ITEMIZED deductions (what your deductions actually are, because you are sooo special). In general, it makes sense to take whichever the math says is higher.
Typical deductions include:
Medical and dental expenses, to the extent that they exceed 10% of your adjusted gross income.
State and local income taxes OR general sales taxes. (You can only claim one, and the better choice varies by state.)
Personal property taxes.
Home mortgage interest and points.
Gifts to qualified charities (that’s where finding those donation receipts comes in).
Subtract Exemptions Once you have subtracted your deductions from your adjusted gross income, you should calculate and subtract your exemptions. Exemptions are weird. Think of exemptions as some amount taken off your tax bill because you, like, exist and stuff. You can claim one exemption for yourself and one for your spouse (if applicable) IF no one can claim YOU as a dependent. (Be sure no one (such as Mom and Dad) is claiming you on their taxes if you are filing taxes!) You can also claim an exemption for each dependent that you have. (The IRS sets very specific rules on who qualifies as a dependent. See irs.gov for more information.)
Calculate Tax Liability and Subtract Credits
After subtracting your adjustments, deductions, and exemptions from your gross income, you have your taxable income. Now you can use the IRS’s tax table (available on their website) to calculate your preliminary tax liability for the year. You should subtract any credits you qualify for from this amount. This is your final tax liability.
Common credits include the:
Child Credit – for those that have qualifying children under the age of 17.
Child and Dependent Care Credit – for working individuals with child/dependent care expenses. (The dependent must be under the age of 19, a student under 24, or disabled.)
American Opportunity Tax Credit and Lifetime Learning Credit – for those with qualifying higher education expenses.
Earned Income Credit – for low-income taxpayers. (Income must be “earned”, such as from a job, not from a passive source, like interest income.)
There is a limit to how much you can claim for each credit, and taxpayers with higher incomes may not be able to claim them at all. Visit the IRS’s website for more information.
Step 6 – Determine Taxes Owed or Refund Due
Calculate the taxes that you have already paid for the year. (This includes taxes withheld from your paychecks – Form W-2 shows this amount – and quarterly estimated tax payments.) Subtract this amount from your final tax liability. If the number is positive, this is the amount you owe. If the number is negative, this is the amount of the refund you are entitled to.
Whew – like we said, a lot, right? Hang in there, get help, and whatever you do, IF YOU EARNED LAST YEAR, DON’T FORGET TO FILE THIS YEAR! Pay taxes now, or they will charge you even more later.