How To File Taxes in Your 20s

Filing for the first time? This is what you need to know

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There's no getting around it—you usually have to pay federal and sometimes state taxes on a portion of your income. But "usually" is the pivotal word here. There are exceptions if your annual salary falls within the minimum amount. Otherwise, Uncle Sam expects you to share.

Once you enter the workforce, you have to know how to file and pay and whether you have to file and pay. From choosing your filing status to tax breaks, learn everything you need to know about filing taxes in your 20s.

Key Takeaways

  • If you are new to filing taxes, many resources are available to help, both from the IRS and online tax prep services.
  • Your income and filing status will determine the tax bracket you fall in, which will, in turn, determine your tax rate.
  • It is important to use the most recent tax forms and guidance, as the tax code is likely to change from year to year, notably in recent years due to the coronavirus pandemic.
  • Self-employed individuals and independent contractors have separate forms to file than regular employees.
  • Many credits and deductions are available that pertain especially to young people, to lower-income individuals, or to families.

What You'll Need To File Taxes

Taxes are all about paperwork, digital records, and information, which you should receive from your employer early in the year—usually in January of the year you'll be filing a tax return. For example, you should receive information statements or forms in January 2022 for the 2021 tax return you'll file in the spring of 2022. Some forms are more common than others, including:

  • Form W-2 detailing how much you earned as an employee.
  • Form 1099-DIV for investment dividends and distributions.
  • Form 1099-INT showing interest income.
  • Form 1099-MISC showing miscellaneous income.
  • Form 1099-NEC showing any income you might have received as an independent contractor—you had a side gig in addition to or in lieu of your regular employment that paid you more than $600.
  • Form 1099-G for government payments, such as unemployment compensation.

These are the common forms you can expect to receive. The list of 1099 forms is by no means all-inclusive, and you probably won't receive all of these.

The forms mentioned above should contain all the information you'll need to file your tax return, displayed in various labeled boxes. They'll tell you how much money you received and any taxes that were withheld from your payments each year and forwarded to the government on your behalf. This isn't just income taxes, but Social Security and Medicare taxes as well. As the IRS receives copies too, it will know how much income you had.

You'll also need bank records, credit card statements, and receipts if you're planning to claim any tax credits or itemized deductions, such as charitable donations and medical expenses. If you're filing as an independent contractor, you'll need records of business expenses.

About That 1099-G Form

You'll receive Form 1099-G from your state government if you were one of those who found themselves out of work in 2021 due to the pandemic, or for any other reason, and received unemployment compensation. Normally, and in 2021, this is taxable income.

This may be unexpected if you received unemployment compensation and filed taxes in 2021. Tax rules aren't stagnant. The federal government can and does update them occasionally to accommodate circumstances that arise beyond everyone's control. Under the American Rescue Plan Act (ARPA) of 2021, a short-term measure prevented you from paying taxes on this money.

The ARPA ensured you didn't have to pay taxes on up to $10,200 received in unemployment benefits in 2020, provided that your adjusted gross income (your overall income minus certain deductions) was less than $150,000. Benefits received in excess of $10,200 were still considered taxable income. However, this doesn't mean that you didn't have to report that first $10,200. You still had to complete the Unemployment Compensation Exclusion Worksheet and file Schedule 1 with your tax return to claim the exclusion, as you must in 2022 for the 2021 tax year.

The three government-sponsored Covid-relief economic stimulus payments during 2020 and 2021 are treated slightly differently than regular government benefits. You may be eligible for the recovery rebate credit if you didn't receive the full amounts.

If You're Filing for the First Time

If you're filing a tax return for the first time, you'll have to determine some important information in addition to gathering forms. You must know your filing status among the following five options: single, head of household, married filing separately, married filing jointly, and qualifying widow(er).

The differences between the five statuses can be significant. They determine not only your tax brackets and tax rates but the amount of your standard deduction as well. Your standard deduction—a dollar amount some taxpayers may subtract from their income before income tax is applied—more or less determines if you even have to file a tax return in the first place.

For most individuals filing for the first time, your parents have been adding you as a dependent since you were born. Be sure to check if anyone else is claiming you as a dependent, as this will change the rules and income limits. It's generally necessary to file a return if your gross or total income exceeds the amount of the standard deduction for your filing status.

The limits for 2021, the tax return you'll file in 2022, are:

  • $12,550 if you're single.
  • $18,800 if you qualify as head of household.
  • $25,100 if you're married and you and your spouse are filing a joint tax return.
  • $5 if you're married and you and your spouse are filing your taxes separately.

The IRS publishes a handy online tool where you can input your information and it will tell you if you have to file a return. It takes less than 15 minutes.

Even if you don't have to file a return, you'll want to do so if you received a W-2 form from an employer because that's the only way you can get back any taxes that were withheld from your pay. After filing your tax return, it's possible to receive a refund, should your deductions earn you money back from the IRS. You might additionally be eligible for one or more refundable tax credits, meaning you'll get money back. But you'll never see that money if you don't file a tax return to claim it.

How To File Taxes as a College Student or Young Professional

You won't need a master's degree in taxation to prepare your tax return. While the task has had a negative reputation in the past, it has become much easier because the tax-filing process has adapted to modern times. It's not necessary to print out a paper return and tackle it with a pencil or pen and your phone's calculator app at your side. You have numerous resources available to you.

Use Free File

The IRS will assist you in preparing and e-filing your tax return for free—or, technically, one of its Free File Alliance software providers will—if your income was $73,000 or less in 2021, to be filed in 2022. You can access available software providers, take part in guided preparation, and choose the one that best fits your needs on the Free File website.

Reach Out to VITA

The Volunteer Income Tax Assistance Program (VITA), managed by the IRS, will also help you prepare your tax return for free, but you'll have to show up at a site in person, and the income requirement is a bit stricter: $58,000 or less in 2021. You'll also qualify if you're disabled or English is your second language.

Not all VITA locations are open or working at full capacity during the pandemic, but the IRS provides a locator tool online that can determine availability in your area. They're usually located in malls, shopping centers, libraries, and community centers.

Use Tax Preparation Software

The IRS recommends using tax prep software because it pretty much guarantees an easy and accurate tax return if you don't qualify for one of the free programs. It may cost you a little, but it most likely won't deplete your savings. The cost depends on your tax situation. It may cost you anywhere from a $40 service fee to $400 or more for full-service assistance and advanced features like audit protection.

Some companies offer to prepare your tax return for free, but in most cases, features will be left out. In the case of H&R Block's free offering, for example, an upgrade is required for self-employment or small business income support.

Hire a Professional

Hiring a tax professional to prepare and file your tax return is most likely your most expensive option. Still, it might be a viable one if you have a particularly complicated tax situation. Maybe what started out as a side gig in 2021 has boomed into a lucrative business, for example. In any case, you might want a pro to file your taxes and guide you through other financial issues if your situation is outside the norm.

Filing Taxes as an Independent Contractor

The IRS says that you're self-employed if you carry on a trade or business, even part-time. Maybe you repair computers in addition to your regular job or babysit on the side, and you're paid directly, or maybe you sell products that you've created rather than work for someone else. All these scenarios make you an independent contractor, also commonly referred to as a "sole proprietor," and this can open you up to a whole host of additional filing and payment requirements.

You must file a tax return if your income as an independent contractor was $400 or more for the year you are filing in.

You Must Pay the Self-Employment Tax

Self-employment tax is the equivalent of the Social Security and Medicare taxes that are deducted from your paychecks when you work for someone else. You pay half, and your employer pays the other half if you're employed. However, you have to foot the entire bill yourself for the income you earn as an independent contractor. This requires filing Schedule SE with your tax return. The form includes step-by-step instructions for calculations.

You Probably Have To Make Quarterly Tax Payments

You must voluntarily send the IRS your estimated taxes due on this money four times a year because an employer isn't withholding the amounts and sending them in for you. These payments go toward any income tax you would owe, as well as the Self-Employment Tax. The IRS provides Form 1040-ES, Estimated Tax for Individuals, that you should file with the payments. It includes a worksheet to help you figure out what you owe.

You Must File Schedule C With Your Tax Return

These requirements and calculations are based on your net business income—what remains after you've subtracted your legitimate business expenses from the gross, overall income you earned as an independent contractor. But the IRS wants to know how you arrived at this number, so you have to file another form: Schedule C. The total from Schedule C transfers to your Form 1040 tax return as reportable, taxable income, but it should at least be less than your gross earnings.

Common Tax Breaks for People in Their 20s

The IRS recognizes that you need money to live on, and it doesn't want to take every dime you earn, especially when you are first starting out in the workforce. It provides numerous tax credits and tax deductions that you can claim to reduce your tax liability.

Tax deductions come off your taxable income, so you only pay taxes on what's left. On the other hand, credits are dollar-for-dollar subtractions from your tax bill—whatever you would owe the IRS if you hadn't claimed them.

Some common deductions you might be able to claim include:

  • Student loan interest
  • Medical and dental expenses
  • Income taxes or property taxes you paid to your state
  • Gambling losses, up to certain limits
  • Charitable contributions
  • Home mortgage interest
  • Expenses related to a home office if you're an independent contractor

Most of these deductions require that you itemize, which means not claiming the standard deduction for your filing status. The standard deduction often adds up to more than the total of all your itemized deductions. You should only opt for itemizing your deductions if the total of all of them works out to more than the standard deduction you're qualified to claim for your filing status.

Some of the more popular tax credits include:

  • Earned Income Tax Credit for low-income and low-middle income workers
  • American opportunity tax credit for education-related expenses
  • Lifetime learning credit for education-related expenses
  • Child and dependent care credit if you must pay someone to watch your kids while you work or look for work
  • Child tax credit if you have qualifying child dependents

The rules for these deductions, and particularly for the tax credits, can be complicated, so you might want to check with a tax professional to make sure you qualify before you claim them.

Tips for Students and Young Adults Filing Taxes

Taxes most likely seem overwhelming, but remember that you are not alone in this process. The federal government stands by to help if you feel like you're in over your head and you don't want to—or can't afford to—pay a tax professional:

  • There's a "Let Us Help You" page on the IRS website, complete with various tools, resources, and guidance. However, due to the present-day circumstances, you may have a hard time reaching the IRS by phone.
  • You can install the IRS2Go app on your phone so that you can ask questions on the fly.
  • The USA.gov website is set up to put you in contact with a live agent via phone or web chat, should you need guidance in the process.
  • You might have received an economic impact payment in 2021. You can claim the recovery rebate credit if you were entitled to a payment but didn't receive it for some reason.

Frequently Asked Questions (FAQs)

When can I start filing taxes?

The IRS opened filing season for your 2021 taxes on January 24, 2022.

What is the deadline for filing taxes?

In 2021, the deadline to file 2020 taxes was extended to May 17 to accommodate pandemic-related delays. In 2022, the deadline to file your 2021 taxes is April 18 for most taxpayers (April 19 for residents of Maine and Massachusetts).

What is the penalty for filing taxes late?

The failure to file is a 5% charge of the taxes due. Be mindful, as this can increase significantly after 60 days. If you file but fail to pay on time, the failure to pay penalty is 0.5% of any taxes due on the return charged each month the debt remains unpaid.

How much can you make without filing taxes?

It depends on your filing status, but you can typically earn up to the amount of the standard deduction you're entitled to unless someone else can claim you as a dependent. Special rules apply in this case.

At what age can you stop filing taxes?

You can't stop filing a tax return and paying any taxes you owe if you have taxable income.

How long after filing taxes do you get your refund?

The IRS expects that most taxpayers who file electronically, choose direct deposit, and do not have issues with their returns will receive their refund within 21 days. To prevent delays, the IRS encourages taxpayers not to file paper returns.

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