Filling Out a Tax Return for the First Time

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Doing your taxes for the first time can be intimidating. It involves getting a lot of rules just right (or else!), but it isn't really all that hard. It just takes patience and attention to detail. It can also help considerably to have a basic understanding of the process including what you'll need to get started, and what all the terms mean.

Tax Basics

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 your pay by your employer throughout the year. It's based on what you'll probably owe, given certain factors such as your marital status, the number of dependents you have, and tax breaks that you're likely entitled to claim.

You won't know for sure if you've overpaid or underpaid through withholding until you prepare and file your return. You'll receive a refund if you overpaid. If you've underpaid, you must pay the difference by the filing date, usually April 15.

How to Start

One of the easiest ways to file your taxes is with tax software. These programs will ask you some questions, and they'll fill out the appropriate forms for you based on your answers.

The Free File Alliance is another nice 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 earn $69,000 or less as of 2020. Some have lower income limits and other qualifying rules, but you can choose from 10 providers for the one that best suits you.

Some software is even free to use, such as TurboTax Free Edition and Credit Karma Tax.

You can download the necessary forms from the IRS website if you prefer to fill them out yourself and you feel confident enough to do so. They're free at Free File, too, for those who earn above the income limits so they don't qualify for free preparation.

Review Your Tax Documents

Gather your W-2 forms and any other tax documents you might have received, such as 1099 forms. You'll have just one W-2 if you only work one job, but you might have multiple 1099s if you have any interest or dividend income, or if you freelance or work as an independent contractor. Each financial institution should send you one, as should any entity who paid you more than $600 for non-employee services.

Read all those boxes on your W-2s. Each is labeled. They 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.

The Effect of Deductions and Credits

You won't have to pay tax on all those earnings that appear in box 1 of your W-2 form because you're entitled to claim at least one deduction, and deductions reduce the portion of your overall income that you must pay taxes on. 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.

Personal exemptions were a sum you could subtract from your taxable income for yourself, your spouse, and each of your dependents, but they were eliminated by the Tax Cuts and Jobs Act, which went into effect in 2018.

How Tax Credits Work

Credits can be either refundable or nonrefundable. Both are applied first to the tax you owe. A nonrefundable credit can either reduce or erase that amount. For example, you might owe the IRS $800, and 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 difference.

The IRS would send you $200 under the same circumstances if the credit you were able to claim is a refundable credit.

The Standard Deduction

The standard deduction is a specified amount that the Internal Revenue Service lets you subtract from your income, and it varies according to your filing status. For example, it's $12,200 for the 2019 tax year if you're single, $24,400 if you're married and file a joint return with your spouse, and $18,350 if you qualify to file as head of household.

These deductions are indexed for inflation, so they increase a little each year. They're $12,400, $24,800, and $18,650 respectively in the 2020 tax year.

Itemizing Your Deductions

You can claim the lump-sum standard deduction, or you can itemize your deductions. This involves listing every qualifying expense you paid all year and entering the information on a separate form—Schedule A—that must accompany your return when you submit it. It's an either/or choice. You can't claim the standard deduction and itemize expenses as well.

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, however, so they must itemize. This would be the case if you're married and filing separate returns, and your spouse has already filed and itemized. You must then do the same on your return.

You must also itemize if you're a nonresident or dual-status alien at any time during the tax year, with some exceptions.

Know Your Filing Status

The IRS offers five filing statuses, and choosing the correct one is important because it determines your standard deduction and 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 never lived together 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.

Understand 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, but 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, then 12% on income over this amount, up to $40,125 when the 22% tax bracket kicks in.

These numbers 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% on income over this amount up to $85,500.

Head of household filers get to enjoy the 10% tax bracket on an additional $4,225 of income—the difference between $9,875 for single filers and $14,100.

Practical Tips for Preparing Your First Return

You might want to try completing your return on paper, too, even if you elect to use software. This will let you see if your calculations on paper match up with the calculations in the software. The IRS provides a list of forms you can use, and they're free.

Consider visiting a professional tax preparer and have them look over the forms when you've finished filling out your return. Make an appointment in advance, especially if it's getting close to the 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.

Article Sources

  1. IRS. "Free File: File Your Taxes Online for Free." Accessed May 25, 2020.

  2. Tax Policy Center.org. "What Is the Difference Between Refundable and Nonrefundable Credits?" Accessed May 23, 2020.

  3. IRS. "IRS Provides Tax Inflation Adjustments for Tax Year 2019." Accessed May 23, 2020.

     

  4. IRS. "IRS Provides Tax Inflation Adjustments for Tax Year 2020." Accessed May 23, 2020.

  5. IRS. "Topic No. 501 Should I Itemize?" Accessed May 23, 2020.

  6. IRS. "Choosing the Correct Filing Status." Accessed May 23, 2020.

  7. Tax Foundation.org. "2020 Tax Brackets." Accessed May 23, 2020.