Congratulations! You’ve got yourself a job! You’re rocking the Company T-shirt and got yourself a shiny new name badge. On the first day they sit you down and have you sign dozens of waivers, letters of intent, and last but not least, the W-4. After skimming through its contents, checking off boxes, and finishing up with your John Hancock, the entirety of its existence slipped from your mind as it was lost amidst the seemingly endless catacombs of your employers filing cabinets, until today. With the end of the year fast approaching, the shadow of tax season looms menacingly and you realize you really don’t know how this works. No worries! This article can serve as a basic outline of do’s and don’ts when it comes to filing your taxes – from doing it yourself to hiring a professional – so you can make it through your first tax season worry free!
Step 1: The Terminology
Tax forms use their own language, without it it’s difficult if not impossible to understand exactly what’s going on. Here are some of the most common terms you need to know.
- Withholding Allowances
- Adjusted Gross Income
- Tax Deductions
- Tax Credits
- Standard Deductions
- Itemized Deductions
Withholdings are the amount of money that you’ve earned but your employer pulls out of your paycheck in order to pay your taxes. The amount withheld is determined by the number of allowances you claim on the W-4. The more allowances you claim, the less your employer withholds.
Adjusted Gross Income is the income you are actually taxed on. This is not the same as your total income! Adjusted gross income is reached by subtracting certain specified deductions such as payment on student loans.
Tax deductions are those expenses encountered throughout the year that are allowed to be subtracted from your total income to reach your adjusted gross income.
Tax credits are similar to deductions in that they reduce the amount of taxes owed, but instead of being subtracted from your total income they are subtracted from the amount of taxes you owe.
Standard Deductions are predetermined amounts of money you may remove from your Adjusted Gross Income as set by Congress but come at the cost of the chance to apply itemized deductions.
Itemized deductions are tax deductions that are applied individually based on each separate tax deductible expenditure or occurrence in place of the standard deductions set by congress.
Step 2: Gathering Info
There is all kinds of information you will need to complete the tax forms, or even submit it for someone else to do it for you. But to keep things simple we’ll limit it to this list of forms put together by the folks over at nerdwallet.
- Social Security numbers for yourself, as well as for your spouse and dependents if any
- W-2 form, which tells how much you earned in the past year and how much you already paid in taxes on those earnings (if you had more than one job, you might have more than one W-2)
- 1099 forms, which are a record that some entity or person — not your employer — gave or paid you money
- Retirement account contributions
- Educational expenses
- Unreimbursed medical bills
- Property taxes and mortgage interest
- Charitable donations
- Classroom expenses
- State and local taxes you paid
- Last year’s federal and state tax returns (if this isn’t your first time filing and you’re just refreshing yourself here)
Step 3: Finding the Right Form
Depending on your station and standing in life there are different tax forms that can be chosen from; the 1040EZ, 1040A, and 1040 are the forms we will focus on. If you’re interested in a more complete list of your options feel free to look here.
The 1040EZ is the simplest of the 3 designed for first timers filing alone with relatively little income. You qualify to use this form if:
- Your total income is under $100,000
- Your interest income is under $1,500
- You have income only from wages, interest, unemployment compensation
- Your filing status is single or married filing jointly
- You do not have any adjustments to income
- You are claiming only the standard deduction
- You may claim the Earned Income Credit
- You are not claiming any other tax credits
The 1040A is more commonly used allowing for income from the stock market and other investments, and many other sources of interest. You qualify to use this form if:
- Your total income is under $100,000
- Any age, any filing status
- You have income from wages, interest, dividends, capital gain distributions, IRA or pension distributions, unemployment compensation, or Social Security benefits
- You can claim the following adjustments to income: penalty for early withdrawal of savings, IRA contributions, student loan interest, and jury duty pay given to your employer
- You can claim the following tax credits: child and dependent care credit, credit for the elderly and disabled, education credits, retirement savings contributions credit, child tax credit, and earned income credit
- You are only claiming the standard deduction
Last but not least comes the 1040. Being the most common of the 3 this form is used mostly by those who have finished college and have multiple sources of income. The qualifications for this form are as follows:
- You have income of $100,000 or more
- You are itemizing your deductions (such as mortgage interest or charity)
- You have income from a rental, business, farm, S-corporation, partnership, or trust
- You have foreign wages, paid foreign taxes, or are claiming tax treaty benefits
- You sold stocks, bonds, mutual funds, or property
- You are claiming adjustments to income for educator expenses, tuition and fees, moving expenses, or health savings accounts
Step 4: Fill it Out or Hire Help
Finally you’re ready to get cracking. You have all you need to get it done but, who’s going to do it? If your financial life isn’t too complicated, you don’t mind taking the time, and want the practice, you might as well give it a go! But if you struggle understanding the legal wording, don’t have the time, never were very good at math, or just plain can’t make yourself do it then you might want to consider hiring some help. There are many options available both free and paid. This page provided by Poston Denny and Killpack is a wonderful resource on how to best prepare your finances to make tax season as painless as possible, and this is a valuable article from U.S. News on some often overlooked tax write offs.
Whether you tackle it by yourself, or pay someone else, just make sure to save a copy! It’ll make next year’s taxes far easier to tackle, and come in handy if the IRS comes calling. All in all, do your best and you’ll get the hang of it in no time!