Filing Your Taxes for the First Time
The Basics of Filing a Tax Return
Preparing your first tax return can be a little intimidating at first. There are a lot of get-it-just-right-or-else rules to understand, but it can also be empowering and rewarding, at least when you've finished and filed. What's more, it isn't really all that hard. It just takes a little patience and attention to detail.
Just Dig in and Do It
The easiest way to begin is, by far, with the 1040EZ form. It's really easy to fill out and you'll probably qualify to use it if you've just begun earning your own living. You must be single or, if you're married, you must file jointly with your spouse. You can't claim any dependents, and you must have earned less than $100,000 for the year. Your income cannot include alimony or dividends.
If your tax situation is more complicated than that, two other tax return forms are available, the 1040 and the 1040A. Form 1040A is the "short form" and it's easier and simpler than Form 1040, the "long form."
Review Your Tax Documents
Now get started with your W-2 forms and other tax documents. Read what's in all those boxes on your W-2s, as well as the labels and the backs. This will give you an idea of the information that's included on there, basically how much you earned and how much you paid in taxes over the year through wage withholding. These tax documents are the starting point of your tax return, whether you file on paper or use tax software to file your return electronically.
The Big Picture
The U.S. tax system is really pretty basic. In a nutshell, tax law boils down to this: You owe the government a portion of your income and earnings. Income tax is usually withheld from your pay by your employer throughout the year based on what you will probably owe given certain factors. No one knows if you've overpaid or underpaid your tax until you prepare and file your return. If you've overpaid your tax, you'll receive a refund. If you've underpaid, you must pay the difference by the tax filing date, usually April 15.
If you pay later than that, you'll owe interest and possibly penalties.
That's it. The rest is just details. But as you've probably heard, that's where the devil can be found and it's the details that take up the most time.
The Standard Deduction and Exemptions
You'll hear a lot of people talk about tax provisions with strange names, such as "deductions," "credits," and "exemptions." These are all good things. They reduce the amount of tax you must pay. There are basically two ways to reduce your income tax. One is to reduce your income. The other involves taking advantage of these tax breaks.
Most taxpayers are entitled to the "standard deduction" and the "personal exemption." Both are certain amounts that the Internal Revenue Service lets you subtract from your income so you must only pay income tax on what's left after you make these deductions. The standard deduction varies according to your filing status, and it's $6,350 as of 2017 if you're single. You can deduct a personal exemption for yourself and each of your dependents—if you don't file the Form 1040EZ return which prohibits you from claiming dependents—and this serves the same purpose of reducing your taxable income.
Personal exemptions are $4,050 each as of 2017.
Right there you've avoided paying taxes on $10,400 of income if you're single with no dependents.
Other Tax Perks
The most important tax deductions for young people are often those for student loan interest, tax credits for college education, and tax credits that can help you save for retirement. You'll retire someday, and those years will be easier if you start saving now. These deductions and credits can all be taken in addition to the standard deduction and your personal exemption, reducing your taxable income even further.
Practical Tips for Preparing Your First Return
Ready to get started? Here are a couple of practical tips:
- Consider preparing your tax return using free or low-cost tax software. These programs ask you a lot of questions then they complete your tax return for you based on your answers. It's simply a matter of inputting data. You might want to try completing your tax return on paper, too, so you can see if your tax calculations on paper match up with the calculations in the software. Consider it a learning experience.
- Now visit a professional tax preparer and take a copy of your tax return with you. 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 tax return. Many tax offices will do this for free or for a nominal charge. Ask the tax preparer if you filled out your return correctly and for any suggestions he might have. He should be able to tell you pretty quickly if you're in the right ballpark or if you've made any mistakes.
So there you have it. Roll up your shirtsleeves and good luck.