Published: Tuesday, April 04, 2017 @ 2:23 PM
By: Kat Tretina, Credit.com
— When I was living on my own and working my first job, I decided to do my taxes myself.
I had no real idea how to file taxes, so I made a lot of mistakes. And because I was utterly clueless, it cost me. I missed important deductions and credits. Even worse, I messed up the math.
I ended up owing money to the IRS because of my errors, but I learned a lesson. Afterward, I did my homework and made sure I did my taxes correctly.
The government doesn’t require everyone to file a tax return, so the first step is to figure out if you actually need to file. Three main factors determine if you need to file your taxes:
If you’re single and under the age of 65, you have to file taxes if you make more than $10,350 a year. If you’re married, filing jointly and your household income is more than $20,700, you also have to file a return.
If you make less than those annual amounts and are a dependent on your parents’ taxes, you do not need to file an individual return.
If you’re still not sure if you have to file a return, the IRS recently launched the “Do I Need to File a Return?” tool. It’s a questionnaire that takes about 10 minutes to complete. Once you’re done, the IRS will give you a recommendation on filing a return.
You were probably always taught that the tax filing deadline is April 15. Though that’s normally true, this year is an exception. In 2017, you have three extra days to complete your taxes because tax deadline is April 18.
This year, April 15 is a Saturday, and the IRS doesn’t allow the tax deadline to fall on a weekend. The following Monday is Emancipation Day, a legal holiday in the District of Columbia. The IRS closes their offices that day, so the whole nation gets an extra day.
When learning how to do taxes, remember that if you’re going through a hardship or will be unable to file your return by April 18, you can get an extension. By filing a tax extension request, you can get up to six extra months to complete your return.
An extension can give you a reprieve in filing your return, but if you owe any money to the IRS it’s still due by April 18. If you miss that deadline, you could owe late fees and penalties. (Unpaid taxes can also damage your credit report.)
When you’re preparing to do your taxes, collect the necessary documents ahead of time. It’s common for forms to trickle in slowly, so keeping a folder specifically for tax documents can help you track everything you need.
Here are some common documents that you may need to file your taxes:
W-2: A W-2 is a form your part-time or full-time employer sends you. It shows how much money you made in the past year and how much you paid toward taxes, Social Security and Medicare.
1099: If you earned more than $600 by freelancing or working a side-gig such as driving for Uber, your client will send you a 1099 form. The form shows how much you made last year, but unlike W-2s, no money was taken out for taxes.
Other income records: If you worked a side hustle but made less than $600 for a client, you won’t get a 1099 but you still have to report that income. Keeping a spreadsheet of your earnings or having a separate business bank account can help simplify tax time.
1098: If you made interest payments on your student loans, your lender will send you a 1098 form saying how much interest you paid last year.
1095-A: If you got health insurance through Healthcare.gov, the government will send you a 1095-A form. This says you had qualifying coverage for the year.
Interest earned: If you earned interest from any savings accounts over the year, your bank will send you a form. This will show how much interest you gained.
Bank account routing number: To get your tax refund as quickly as possible, it’s a good idea to sign up for direct deposit when you file your return. To do so, you’ll need your bank account number and your routing number.
Expenses and receipts: If you landed a new job, moved to advance your career or attended business conferences, you can deduct associated costs. Make sure you keep receipts to use when you do your taxes.
While you can certainly do your taxes the old-fashioned way, using the paper forms can lead to errors. There are many options that can help you file your taxes more accurately:
Tax software: You can file your taxes electronically using available programs such as TurboTax or Credit Karma’s free filing tool. Some options are free but others have a fee, so choose a program based on your preference. If you make less than $64,000, you can use the IRS’ free filing tool.
VITA sites: If you need more hands-on aid and make under $54,000, you can get free in-person help. Try using an IRS-trained volunteer at a Volunteer Income Tax Assistance (VITA) site.
Hire a tax professional: When doing your own taxes is too confusing or complicated, hire a tax professional. They can handle your taxes for you and ensure you get the maximum refund available.
When choosing which option is best for you, consider how complex your taxes are. If you’re employed and have a side-hustle, but don’t have a business partnership or many investments, using software may be more than enough.
But if you run your own business, own a rental property or have investments, your taxes may be complex enough to warrant professional assistance.
In the early stages of your career, you are unlikely to have enough deductions to make it worthwhile to itemize. Instead, you can claim the standard deduction of $6,300 and reduce how much of your income is taxable.
But you may be eligible for certain credits or deductions, even if you don’t itemize. Credits reduce what you owe in taxes, while tax deductions lower your taxable income. Both are valuable items to consider when doing your taxes and can help you get your maximum refund.
Here are some of the most common credits and deductions:
American Opportunity Tax Credit (AOTC): The AOTC is worth up to $2,500 per year and includes money paid for tuition and other related expenses.
Charitable Donation Deduction: If you donated money or items to a nonprofit organization, you may be able to deduct the value on your taxes.
Earned Income Tax Credit (EITC): The EITC is a valuable credit that 20% of eligible people miss out on because they don’t claim it on their taxes. The average EITC recipient gets an average of $2,482 by claiming the credit — you could be eligible if are a low-income earner.
Home Office Deduction: If you work from home or run a business from where you live, you may be able to deduct up to $1,500 on your taxes.
Lifetime Learning Credit: With the Lifetime Learning Credit, you can deduct up to $2,000 in qualifying education expenses.
Student Loan Interest Deduction: If you made payments on your student loans, you can deduct up to $2,500 that you paid towards interest on your taxes.
Tuition Fee Deduction: With the tuition fee deduction, you can deduct up to $4,000 in college tuition and other fees.
There are also ways to cut down your property taxes.
When it comes to filing your taxes, you must file both a federal and state return. If you lived in multiple states last year, you need to file a return for each state you resided in.
The only time you do not need to file a state return is if you live in a state that does not charge income tax. There are seven states that fit in this category:
You can submit your federal and state returns using tax software or you can mail in the tax forms. Depending on where you live, where you need to send the forms may change, so check the IRS website before putting them in the mail.
If you’re eligible for a tax refund, you can track your return’s status and find out when to expect your money by using the IRS’ “Where’s My Refund?” tool. If you opt for direct deposit, you can expect your refund in as little as 10 days after filing.
If instead of a refund, you owe money to the IRS, you have different payment options. If you use software to prepare your taxes, you can usually pay the money owed electronically through the program.
If you did your taxes on your own or didn’t pay electronically, you can use the IRS payment tool. Just make a payment through your checking account on the IRS website.
If you owe more than you can pay upfront, you can contact the IRS to set up a payment agreement and make monthly installments.
Figuring out how to file taxes for the first time can be confusing, overwhelming and stressful. Managing the process on your own can be difficult.
Using this guide — and the help of tax software or a professional — can help streamline the process and ensure you handle your taxes correctly.
For more information on how to file taxes and why it’s so important to be accurate, here are four reasons you should never lie on your taxes. You can read up on how to file your taxes for free here.