Tax season is here again and Uncle Sam is calling to collect. Are you a novice and wondering how to file taxes for the first time?
The good news is that Congress passed the Tax Cuts and Job Act (TCJA), which greatly simplifies the filing process. Thanks to the TCJA, the time required to submit taxes is expected to decline by up to 7 percent.
In the past, many tax filers itemized deductions. This is a more complicated process that involves detailed Internal Revenue Service (IRS) rules and regulations. Now, due to the TCJA, nearly 90 percent of all tax filers will use the standard deduction.
Read on for a comprehensive guide on how to file taxes for the first time. Learn what information and documents you need in order to file.
When Can You Start Preparing for Tax Season?
The IRS officially starts accepting tax filings on January 29th, 2019. To avoid a penalty, the deadline for tax filings is April 17th, 2019.
However, you should prepare for tax season throughout the calendar year. This means estimating the net tax you will owe and making sure sufficient taxes are deducted from your paycheck every 2 weeks.
The amount of taxes deducted from each paycheck is driven by the W-4 form. Typically, this form is issued by your employer and submitted to the IRS by the Payroll department. The more allowances that you claim on the W-4 form, the fewer taxes are deducted each paycheck.
Independent contractors and freelancers do not have the luxury of an employer deducting taxes each paycheck. For these workers, it is recommended to make quarterly tax payments.
What Tax Documents Do You Need?
Everyone’s tax situation is different and there are scores of deductions to claim. All income and itemized deductions require substantiating documentation in the event of an IRS audit. Read more about these various documents below.
Income Documents
In January, you start to receive tax documents from various sources. Perhaps the most important document to collect is the W-2 form from your employer.
The W-2 form is called a Wage and Tax Statement. In addition to your copy, your employer sends a copy to the IRS as well.
Independent contractors do not get a W-2 form. Instead, they may receive a 1099-C that details income earned during the calendar year.
If you earned any interest income from a savings account, the bank will send a 1099-INT form. There are many other forms to capture income, but this is a good starter’s list for learning how to file taxes for the first time.
Deductions Documents
As mentioned in the intro, the vast majority of tax filers will use the standard deduction now due to the TCJA. However, some filers still have enough deductions to itemize.
One of the most common tax deductions is mortgage interest and state property taxes. You will find these documents on a 1098 form issued by your mortgage lender.
Another popular deduction is charitable donations. IRS does not have a standard form for charitable donations. However, you should receive a written acknowledgment of the donation from the charity.
If your medical expenses exceed 7.5 percent of adjusted gross income, they can be deducted as well. This is another example in which you will not receive an official IRS form. Instead, for medical expenses, you need to save all receipts to substantiate the deduction.
There are many other deductions including vehicle depreciation and theft losses to name a few. The rule of thumb is to save all receipts and any other financial documents you receive.
Adjustment Documents
Adjustments are similar to deductions in that they reduce your taxable income. The accounting is slightly different, yet the concept is nearly the same.
Many young people adjust their income by subtracting student loan interest. Student loan lenders mail out a 1098-E form to substantiate the adjustment. Other examples of adjustments are job expenses, alimony, and IRA contributions.
What Are Credits?
Credits are more impactful than deductions and adjustments. The reason for this is that deductions and adjustments reduce your taxable income. This value is then multiplied by a particular tax rate
On the other hand, credits are a dollar-for-dollar tax reduction. For example, each dependent child under the TCJA amounts to a $2,000 tax credit.
Consider a situation in which you have 2 dependent children and owe Uncle Sam $4,000. After the tax credit kicks in, you will owe $0.
There are a few other popular tax credits. They include education credits if you or a dependent child is paying tuition at an accredited college.
Another popular credit is for child or dependent care. There are also tax credits for adoption or purchasing green-energy appliances and vehicles.
How Do I Prepare a Tax Filing?
There are many different avenues to submit your taxes to the IRS. For starters, the IRS has a program called Free File for households earning less than $66,000 per year.
There is also a Volunteer Income Tax Assistance program. If your income is $54,000 or less, you can receive free, in-person support for tax preparation.
Tax filings are pretty straightforward if you are using the standard deduction or have simple adjustments and credits. If this is the case, there are over-the-counter tax preparation programs like TurboTax or H&R Block. These programs are comprehensive and easy to use.
Taxes get more complicated if you own a business or receive income from many different sources. This includes tax filers that earn significant income from stocks or bonds.
There is tax preparation software available for these circumstances as well. However, if you are uneasy about filing, it is probably a safer bet to hire a tax professional.
A Recap of How to File Taxes for the First Time
The first time is always the hardest and most confusing. However, once you learn how to file taxes for the first time, it gets easier each time.
The key is collecting all of your tax documents. Next, you must accurately record this information on an IRS form or in tax preparation software. If you enjoyed this article about how to file taxes for the first time, check out our money saving blog for other great content.