5 tips for first-time tax return filing
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Now that tax time is here, filing paperwork for Uncle Sam for the first time can trigger dreaded thoughts of drowning in confusing paperwork, mixing up forms and, as you feverishly scramble to meet the deadline, messing up the entire outcome with one misplaced decimal point. Now, you owe the IRS every cent to your name, leading you down a spiral of debt from which you can never recover.
If this sounds like something out of some crazy tax nightmare, that's because it is. Not only is this type of worst case scenario next to impossible, in reality, filing your taxes is easier than you might think. All it takes is some prep work and gathering up the right basic information so you don’t miss out on money you could be saving, not paying.Here's what you need to know:
There are dozens of IRS tax forms, but to file your income taxes for the first, you’ll only need these main documents:
If you’ve been on the payroll of one or more employers this last year, you should be receiving a W-2 from each one. It will list all of your wages and earnings for 2016, plus any state and federal taxes paid from that particular employer. Your W-2 isn’t a form you need to fill out; it’s an informational form that you’ll need to refer to when filling out your income tax return.
If you’re a freelancer or independent, non-salaried contractor, you will receive a 1099 form from each client or employer you’ve been paid more than $600 in wages during the calendar year. Your 1099 form will list all of your annual gross earnings, but won’t list any taxes deducted. Like the W-2, there’s nothing to fill out or submit on your 1099; the information on it is provided for you for filing purposes.
Mortgage and student loan borrowers will need form 1098 to declare interest deductions on their payments. For home loan holders, you’ll receive a standard 1098; for student loan holders (federal and private), the 1098-E is what you’ll need.
Your 1040 is the form you’ll use to file your tax return, where you’ll list the income you’ve earned over the last year. This information is used to determine if you’ll owe taxes or receive a tax return. In some circumstances, filers with zero dependents, single/married people filing jointly, or people who earn less than $100,000 can submit a simpler 1040EZ to the IRS. If you plan on claiming any deductions (more on that below), you’ll need to complete a 4506T-EZ, a request form to obtain your 1040. You can get a copy direct from the IRS.
Your tax forms -- namely, W-2s or 1099s from employers -- have a due date of January 31 and should be postmarked and mailed to you before that date. However, if you haven’t received yours by that time, don’t assume it wasn’t sent. It could be mixed up with other pieces of mail, or you may have at some point inadvertently specified paperless statements from the IRS, and your W-2 has been sitting in your email inbox the entire time. If for any reason you haven’t received your W-2s, 1099s, or 1098s by the due date (or if there’s erroneous or incorrect information on them), this guide will take you through the steps of following up with your employer(s) and the IRS, is necessary.
Tax deductions are one way to reduce your taxable income. By reducing or adjusting your gross income, your net income is lowered, meaning you’ll have fewer taxes to pay. In general, you can choose to file your deductions as standard or itemized.
Standard deductions are at a fixed dollar amount that help reduce the amount of taxes you’ll pay. It’s a way of bundling together you deductions together. Going the standard deduction route won’t save you the most money on your taxes, but will save you time as you file. For 2016, tax filers under 65 can claim these standard deduction amounts:
Single/married filing separately: $6,300
Married filing jointly or widowed: $12,600
Head of household: $9,300
You can also itemize your deductions line by line if they total more than going the standard deduction route, but you’ll need to calculate each deduction individually. More than one-third of filers itemize their deductions. Tax deductions, both standard and itemized, range from the obvious to the obscure, but here are some common ones to start off with:
Mortgage interest: This is where your 1098 form comes in handy. If you have a home loan, you can deduct the interest you make on your loan repayments, significantly reducing the amount of income taxes you’ll owe this year.
Medical/dental expenses: If doctor’s or dentist’s expenses have exceeded 10 percent of your adjusted gross income, you can claim them as a tax deductions. These deductions can include everything from travel expenses to and from the doctor’s office, medical equipment and supplies, and select uninsured, out-of-pocket expenses.
Charitable donations: Contributions and donations to nonprofit organizations and charities are eligible for tax deductions. When preparing your tax return, gather up receipts of cash and check donations you’ve made throughout the year. You may also be able to make a charitable deduction for the fair market value of goods donated.
College loan interest: Paying down your student loan interest while you’re still in school is a way to reduce your debt in advance, but whether you’re paying off your loans before or after graduation, you can file for a tax deduction on your interest, as well as the cost of your tuition and associated fees. (Learn how to claim the student loan interest deduction.)
Handling your taxes on your own for the first time takes time and patience. It’s estimated that you’ll need to set aside 16 hours to complete your tax returns from start to finish, roughly two full days of full-time work. Some people may prefer having a hand in every aspect of their tax filing process, and today, it’s become easier with downloadable tax forms from the IRS and e-filing software to get the job done.
Hiring a professional ensures that your taxes will be filed in good hands, taking any of the guesswork (and legwork) out of going the DIY route. Plus, a tax professional can give you advice on deductions to make and other money-saving income tax filing hacks that you might not have thought of yourself. However, this won’t come cheap; the average cost to hire a tax preparer is $273, and a slightly reduced $159 without itemized deductions, according to the National Society of Accountants. What you pay for convenience and expertise can cut into your tax refund, so weigh your options.
Filing your taxes is free, but some tax prep software will cost you a bit if you decide to e-file on your own. Our favorites are Intuit’s TurboTax ($54.99 retail); H&R; Block’s e-filing software ($26.24 with 25 percent discount at checkout); TaxAct ($14.99); and TaxSlayer ($12.99). You can’t go wrong with any of these user friendly services to guide you through the often labyrinthian maze of filing your taxes.
Or you could seek out tax professionals who are officially certified or accredited. A Certified Public Accountant with a Personal Financial Specialist, or PFS, designation and current licensure are titles to look for, as well as accredited tax advisers and preparers. Searching through the National Association of Tax Professionals database or the IRS’ Directory of Federal Tax Return Preparers with Credentials and Select Qualifications are good places to start.
Tax filers will also want to interview candidates before hiring a professional to see what level of service or specialty they can provide; a full-service tax preparer will be able to calculate your taxes, fill out the forms and file the entire return in one (seemingly) fell swoop, though you may only need assistance with a portion of it. How much will they charge? Always check their credentials against resources like the American Institute of CPAs or other professional tax associations -- or even a simple Google search -- to see if customer complaints or past negative history with the IRS steers you clear of working with them or avoiding a tax scam in the making.
Get to know the unique tax climate where you live. Your home state may have exemptions or exceptions that other states don’t -- and if you’re unaware of them, you might end up paying more in taxes than you’d hoped or projected.
For instance, did you know that New York City residents pay city and state income taxes? Or that states like Alaska, Nevada and Texas don’t charge individual income taxes? Florida has no state property taxes, but homeowners in the Sunshine State will need to remember that high local property taxes are still levied. Several other states, as well as Washington, D.C. also charge estate taxes. If you’ve inherited property or assets from a deceased family member or loved one, you may owe the government taxes on the property’s value.
While filing your own taxes for the first time may seem daunting, it’s a prospect that comes down to a matter of perspective. By doing some research in advance of the forms and information you’ll need, the resources you can tap into, and the tax professional help at your disposal, tax filing doesn’t need to be a taxing experience.
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