No, not that first time…get your mind out of the gutter. I’m here to talk about a much less sexy topic: Taxes. April 15th is right around the corner and if you haven’t filed your taxes yet, it’s time to hop to it. Losing your tax-return-virginity can feel overwhelming, but it can be empowering and rewarding. What’s more, filing your taxes isn’t hard. It just takes patience to make sure you’ve followed all the instructions.
1. Just Dig in and Do It
This is the best advice I can offer…just start. When you put it off, it only seems worse in your head. Gather your W-2s (what you got from your employer) and any other financial statements you may have (investments, mortgage info, bank statements, etc.) and let’s begin.
Start with the 1040EZ form and work from there. Form 1040EZ really is easy to fill out. Unfortunately, only single or married people with no dependents can use this form. You can also find out which tax form is right for you, and begin there.
Get smart about your W-2 form and other tax documents. Read what’s in all those boxes, and the labels, and read the back of the W-2 as well. The more you know, the more savvy you will be as a taxpayer. Also, tax documents are the starting point of your tax return, whether you file on paper or use tax software to file your return electronically.
2. The Big Picture
There are some very basic principles of the US tax system. In a nutshell, I would say that the tax law boils down to this: you owe the government a portion of your income. This tax is usually withheld from your income throughout the year. No one knows if you’ve overpaid or underpaid your tax until you file a tax return. If you’ve overpaid your tax, you get a refund. If you’ve underpaid your tax, you have to pay your balance by April 15th.
That’s it, the rest are just details.
It’s the details, however, that consume most of our time in the tax world.
You will hear lots of people talk about creatures with strange names, such as “deductions,” “credits,” and “exemptions.” Don’t be afraid. Despite differences in their names, these things can reduce the amount of tax that people pay. In fact, there’s basically two ways to reduce your income tax. You can reduce your income. Or you can take advantage of these various tax preferences.
Nearly everyone is entitled to a minimum level of tax preferences. These are called the “standard deduction” and the “personal exemption.” The amount of income you will be taxed on will be reduced by these tax preferences. See, you’re already taking advantage of the system!
For young people, the most important tax preferences are the tax deduction for student loan interest, tax credits for college education, and tax credits to help you save for retirement. (Someday you will retire, and it will be easier if you start now.)
3. Practical Tips for Preparing Your First Return
Finally, here are some practical tips for making the most of your first tax return.
First, prepare your tax return on paper. Use Form 1040EZ or Form 1040A. Those are the easiest tax forms to fill out and provide complete line-by-line instructions.
Second, prepare your tax return using free or low-cost tax software. This will give you some experience using a tax preparation program, and you’ll be able to see if your tax calculations on paper match up with the calculations in the software.
Third, visit a tax preparer, and take a copy of your tax return with you. Yes, it’s the busy season. You should make an appointment in advance. And let the office know that you’d like them to review your tax return. Many tax offices will review your tax return for free, or for a nominal charge. If the tax office is particularly busy, ask for an appointment during the slow time of day. Ask the tax preparer if you filled out your tax return correctly, or any suggestions they have. They should be able to tell you pretty quickly if you’re in the right ballpark, or if you made a mistake on your return. Reviewing your tax return should take about 15 to 30 minutes, depending on how long you chat.
4. Some Caveats
If your parents are still claiming you, then you probably won’t be filing and claiming deductions, but it would still be good for you to start learning how to prepare your tax returns for once you do start to claim yourself.
If you began a business this year or worked as a 1099 employee then you will definitely need the help of a professional tax preparer to make sure that you get all of the deductions you are entitled to. Many tax prep software programs will pull in all of your information from the previous year and guides you step by step through all of the deductions and credits you are entitled to. Even if you only worked as a pizza delivery girl, you may be able to deduct the cost of maintaining your car.
For next tax year, begin saving all of your receipts and writing down your mileage and where you were going. You would be surprised at how many deductions apply to small businesses and 1099 independent contractors.
So see, that’s not so bad! Preparing your taxes yourself can save you lots of money for just an hour or two of your time.
How do you do your taxes? Do you have any tips to share?