18 Things Total Amateurs Should Know About Tax Season
Taxes. They’re one of the most universally despised chores of adulthood, and for good reason. What with all the numbers, stacks of nearly-forgotten paperwork, and looming threat of lost money, doing your taxes can feel like the least appealing activity in the world. To give you confidence as you head into tax season, we’ve broken down the basics every beginner needs to know.
• Withholding Allowances. Newsflash: You don’t actually get all the money you earned each paycheck. Instead, your employer subtracts, or withholds, taxes from your paycheck and pays the IRS the taxes you owe on your income. Your W-4 form dictates this.
• Tax bracket. In our graduated income tax system, the amount you pay in income taxes increases as you earn more money. Tax rates are assigned to each bracket.
• Tax Exemptions. This is the specific amount you get to subtract from your taxable income automatically. The two types of exemptions, personal and dependent, depend on your individual situation. If you are not claimed as a dependent on another taxpayer's return, then you can claim one personal tax exemption. A dependent exemption is an exemption you can claim for each person you support financially. State governments also provide tax exemptions to small businesses to stimulate local growth.
• Tax Deductions. This is what reduces your taxable income every paycheck! If you have $10,000 in taxable income and $500 in tax deductions (for expenses like medical and dental, moving expenses to take a job, out-of-pocket charitable contributions, and more), then your taxable income would be $9,500. You then pay taxes on the $9,500, based on your tax bracket. The amount of your tax deduction, to some extent, depends on your tax bracket.
• Tax Credits. Tax credits exist to help taxpayers—primarily those in middle-income and low-income households—retain more of their earnings. The five most common tax credits include Earned Income Tax Credit, American Opportunity Tax Credit, Lifetime Learning Credit, Child and Dependent Care Credit, and Savers Tax Credit. Read more on these credits here.
• Tax Refund. Because money is withheld from your paycheck throughout the year, it’s possible you’ve been ‘paying’ the IRS more than what you owe in taxes. In this case, you’re entitled to a tax refund.
• The more complicated your financial life gets, the more complicated your taxes become. If this is your first time filing taxes and you have few investments or dependents, things should be relatively simple and straightforward for you (hooray!).
• When you have one employer, the only tax document you’ll need to keep track of is your W-2, which is the form that shows the amount of taxes withheld from your paycheck for the year and is used to file your federal and state taxes. If you have student loans, you’ll also need to review your 1098-E form, which shows interest paid on them. If you’re an independent contractor (or self-employed), you’ll need to collect a 1099 form from anyone who’s paid you over the year.
• A large refund should not be your goal. Though extra, unexpected money is always a treat (duh!), a tax refund means that you paid the government too much money over the course of the last year. If you make the right adjustments on your W4 going forward, you could hold onto more of your own money throughout the year.
• If you have more-complex tax factors such as self-employment, substantial freelance work, or investment income, or if tax time makes you particularly jumpy, it might be worth it to get assistance. A good accountant can be expensive, but the investment can also save you money, time, and stress.
• Since so many of us do freelance these days, head here for more in-depth guidelines on getting it right. This handy guide to tax deductions for freelancers may also help you.
• There are three different kinds of personal tax forms to choose from: 1040EZ, 1040A, and 1040. Your goal is to pick the simplest form that fits your situation. If you're doing your taxes on the computer, the information and answers you provide will determine which form you use. When you do your taxes by hand, you have to figure out which form to fill out yourself. If you're going analog, this outline breaks down which you should choose!
• Tax deductions come in two forms: standard or itemized. The standard deduction is a fixed amount; itemized deductions are tedious, but could reduce your tax bill significantly. Most tax beginners don’t have enough tax-deductible expenses to warrant itemizing deductions, so if this is the case, stick with the standard deduction.
• Being the tax beginner that you are, if you qualify for the 1040-EZ, you can fill it out for free at TurboTax.com or H&R Block, and you’ll be guided through you entire process.
• Make certain that you file your taxes on time. Don’t wait until the last minute, and don’t let tax fear force you to ignore the inevitable.
• If you’re feeling crunched, you can file an extension, which will push the deadline on paperwork only back six months. You can file an extension and pay any income tax due by April 15 using TurboTax’s Easy Extension web service, or by printing the IRS extension form, filling it out, and mailing it in.
• If you live outside the United States, you may be able to get an extension by filing IRS Form 2350: Application for Extension of Time to File U.S. Income Tax Return if you believe you will qualify for special tax treatment.
Are you ready for tax season? Share your insider tips below!