Filling Out a Tax Return for the First Time
Filing your taxes for the first time involves getting a lot of rules just right, and they're rules that you might not be familiar with. It takes patience and attention to detail, but it really isn't all that difficult when you get a basic understanding of the process, including what you'll need to get started and what all the terms mean.
The U.S. tax system boils down to this: You owe the government a portion of your income and earnings. Income tax is usually withheld from each of your paychecks by your employer throughout the year, based on what you'll probably owe. Certain factors can affect how much you'll owe, such as your marital status, the number of dependents you have, and tax breaks that you're entitled to claim.
You won't know for sure if you've overpaid or underpaid through withholding until you prepare your return. You'll receive a refund if you overpaid. You must pay the difference by the filing date, usually April 15, if you underpaid.
How to Start
Using tax software is one of the easiest ways to prepare your tax return. These programs ask you some questions, then they'll fill out the appropriate forms for you based on your answers.
The Free File Alliance is another option. The IRS has partnered with select tax software providers, including H&R Block, TaxSlayer, and TurboTax, to provide free preparation of returns for taxpayers who earned $72,000 or less in 2020.
Some of these providers have lower income limits and other qualifying rules, but you can choose the one that best suits you.
Some software also offers free versions, such as TurboTax Free Edition and Credit Karma Tax, but only if you have a very simple tax situation and income limits might apply as well.
You can download the necessary forms from the IRS website if you prefer to fill them out yourself and if you feel confident enough to do so. They're free at Free File, too, for those who earn above the income limit so they don't qualify for free software preparation.
Review Your Tax Documents
Gather your W-2 forms and any other tax documents you might have received after the beginning of the new year, such as 1099 forms.
You'll have just one W-2 if you work one job. You might have multiple 1099s if you have any interest or dividend income, or if you work as an independent contractor. Each financial institution should send you a 1099, as should any business or entity who paid you more than $600 over the year for non-employee services.
Read all the boxes on your W-2s. Each is labeled. They'll tell you how much you earned overall and how much you paid in taxes over the year through wage withholding.
These documents are the starting point of your return, whether you file on paper or use software to file your return electronically.
Effect of Deductions and Credits
You won't have to pay tax on all the earnings that appear in box 1 of your W-2 form because you're entitled to claim at least one tax break. Tax deductions reduce the portion of your overall income that you must pay taxes on, while tax credits subtract directly from what you owe the IRS.
The most important tax reductions for young people are those for student loan interest, for college education expenses, and credits that can help you save for retirement. Other common credits include the Child Tax Credit, the Credit for Other Dependents, the Earned Income Tax Credit, and the American Opportunity Credit, which is an educational credit.
You could subtract personal exemptions from your taxable income for yourself, your spouse, and each of your dependents through 2017, but they were eliminated by the Tax Cuts and Jobs Act when it went into effect in 2018.
The Standard Deduction
The standard deduction is a specified amount that the IRS lets you subtract from your income, and it varies according to your filing status. It's $12,400 for the 2020 tax year—the return you'd file in 2021—if you're single, or $24,800 if you're married and file a joint return with your spouse. It's $18,650 if you qualify to file as head of household.
These deductions are indexed for inflation, so they tend to increase a little each year. They're set at $12,550, $25,100, and $18,800 respectively for the 2021 tax year.
Itemizing Your Deductions
You can claim the lump-sum standard deduction, or you can itemize your deductions. Itemizing involves listing every qualifying expense you paid all year and entering the information on a separate form—Schedule A—that must accompany your tax return when you submit it. It's an either/or choice. You can't claim the standard deduction and itemize expenses, too.
It only makes sense to itemize if the total of all your paid, qualifying expenses exceeds the amount of the standard deduction for your filing status. Otherwise, you'd be paying taxes on more income than you'd have to.
Some taxpayers are prohibited from claiming the standard deduction, so they must itemize. This would be the case if you're married and you and your spouse are filing separate returns, and your spouse has already filed and itemized their deductions. You must then do the same on your own return.
You must also itemize if you're a nonresident or dual-status alien at any time during the tax year, with some exceptions.
How Tax Credits Work
Credits can be either refundable or nonrefundable. Both are applied first to any tax you owe. A nonrefundable credit can either reduce or erase that amount. You might owe the IRS $800, then you realize you can claim a $1,000 nonrefundable credit. This would eliminate your tax debt—you wouldn't owe the IRS anything—but the IRS would keep the $200 remaining balance.
The IRS would send you $200 if the credit you were able to claim was refundable.
Know Your Filing Status
The IRS offers five filing statuses, and choosing the correct one is important because it determines your standard deduction and it affects other rules.
- Married filing jointly: You're married, and you and your spouse file a single, joint return together.
- Married filing separately: You're married, but you and your spouse elect to file separate returns.
- Qualifying widow(er): You were married, but your spouse died during the last two years. You must have a dependent child to qualify for this status, and you can only use it for two years after the year in which your spouse died.
- Head of household: You're "considered unmarried." You might still be legally married to your spouse, but you didn't live together at any time during the last six months of the year. You must additionally have a qualifying dependent who lives with you, and you must pay for more than half the cost of maintaining your home during the tax year. Other rules apply as well.
- Single: You've never married, or you're legally divorced or separated by court order.
The rules for the head of household and qualifying widow(er) filing statuses can be particularly complex, so you might want to check with a tax professional to make sure you qualify before you claim either of them.
Understanding Tax Brackets
Your filing status affects your tax rate. There are seven rates or brackets as of 2020, each spanning a different portion of your income, and the income spans vary depending on your filing status. The more you earn, the higher the percentage tax rate becomes on your top dollar.
For example, a single filer with income between $9,875 and $40,125 would pay 10% or $987 of the first $9,875 they earned as of 2020. They would then pay 12% on income over this amount, up to $40,125.
These figures increase to $14,100 and $53,700 respectively if you qualify for head of household filing status. You'd pay 10% on the first $14,100 you earned, then 12% on the balance up to $53,700. Then 22% bracket kicks in for incomes over these top thresholds, all the way up to 37% for the highest earners.
Tips for Preparing Your Tax Return
You might want to try completing your return on paper, too, even if you elect to use tax preparation software. This will let you see if your calculations on paper match up with the calculations in the software, and it can be a learning experience. The IRS provides a list of forms you can use, and they're free.
Consider visiting a tax professional and have them look over your forms when you've finished filling out your return. Make an appointment in advance, especially if it's getting close to the tax filing deadline. Let the office know that you just want someone to review your return prior to the IRS receiving it. Many tax offices will do this for free or for a nominal charge.