By KALI HAWLK
Nothing says "welcome to adulthood" quite like filing your own taxes for the first time. While it's not exactly the most fun annual activity, it's an important responsibility to accept.
By getting prepared ahead of time, you can cut down on stress and confusion and make the best decisions for your financial situation.
Here are six tips that could help make your first time filing taxes a good experience.
1. Know your status.
Your filing status will define the type of tax return form you'll use. Your status is based on your family situation and marital status.
"The first step in determining your filing status is whether you're married or single at year end," explains John McCarthy, CPA and founder of McCarthy Tax Preparation.
"If you have a dependent, you should consider if the 'Head of Household' filing status is beneficial for you. And if you're recently divorced, separated or widowed it's a good idea to refer to IRS Publication 501 due to the complex rules in these situations," McCarthy says.
If this is your first time filing, you may be in a situation where you're still listed as a dependent on someone else's return. You should confirm with your parents or guardians, and check the IRS website for more information on the tests you may need to meet to qualify as a dependent.
If your parents claim you as a dependent, you may not claim your own personal exemption on your own tax return. You may still need to file your own taxes, though.
"First time tax filers should coordinate with their parents to make sure that their exemption isn't being claimed on two returns," McCarthy says. "That could result in delayed refunds or IRS notices."
No one should claim you as a dependent on their return if you want to file (and do file) your own taxes and claim deductions.
You need to know exactly what your filing status is, whatever that may be, because it can affect your taxes -- including how much you'll need to pay. If you're not sure what kind of status you qualify for, the IRS explains how to determine the right one.
2. Know if and when you need to start filing.
Earned an income last year? Then you'll probably need to file taxes. This doesn't necessarily mean you owe taxes, but you do need to report your earnings and submit your documents and appropriate forms to the IRS.
Gross income thresholds can help you determine when you need to start filing. For example, for the 2016 tax year, if you're single and under the age of 65, you need to file if your gross income exceeds $10,350.
Keep in mind that deduction limits and exemptions tend to change from year to year. Always double-check the requirements for the current year before you begin to file.
As far as when in the calendar year you need to file, the deadline is generally April 15 (or the next business day if the 15th falls on a weekend or holiday). Deadlines for the 2016 tax filing season are April 18th, and if you file for an extension, October 16.
3. Keep track of important documents (and get organized).
Filing taxes can involve a lot of forms and documents. When you start earning an income, opening financial accounts and managing your own money, you may want to begin tracking your paperwork.
Some documents you may want to keep include:
- Pay stubs.
- W2 forms.
- Bank and investment statements.
- Proof of payment on loans where you paid interest.
- Invoices and income earned as a freelancer or contractor (or 1099-MISC income).
"Taxpayers should keep all their tax forms and any documents that would be needed to support items claimed on their tax return for at least seven years," McCarthy says. "This is a good rule of thumb that covers taxpayers who file truthful and honest returns."
He suggests keeping copies of W2 statements indefinitely, or at least until you verify that your wages are recorded in your Social Security earnings record.
Make dealing with your taxes easier by keeping everything organized throughout the year (instead of engaging in a last-minute scramble to get your documents together). This way, you'll have the paperwork you need -- and you'll know right away if something is missing.
4. Understand your deductions and credits.
There are a lot of deductions and credits available for taxpayers. Deductions reduce your taxable income. Credits work a little differently, and there are two kinds: refundable and nonrefundable.
"Refundable credits are always more advantageous than nonrefundable credits because they can reduce your tax liability below zero," McCarthy says. "Common refundable credits are the Additional Child Tax Credit and the Earned Income Tax Credit (EITC). These credits generally become refundable for lower income taxpayers."
You can see a full list credits and deductions on the IRS website.
This is where it may be helpful to seek the assistance of a trusted, qualified tax professional to make the most of your return.
If your financial situation is pretty cut and dried (for example, you're single, make an average income or don't own property), you may not qualify for many deductions and credits.
Plus, you need to file in certain ways in order to qualify for many deductions. For example, you may need to itemize your deductions, which is more complicated -- but it's unlikely this will benefit you, as the standard deduction will likely be more than anything you itemize if you're a first-time tax filer.
5. Put money into tax-advantaged retirement accounts if you can.
When you're young, it's easy to put off saving for retirement. You may think you have time to put it off, but there are so many benefits to saving now.
For starters, you'll get a jump-start on building your nest egg. The sooner you start saving, the more time you give your investments to grow -- and the more you can take advantage of compound interest.
And if you put your money in the right accounts, you may pay less in taxes, too. For example, when you contribute to tax-deferred retirement accounts such as traditional 401(k)s and traditional IRAs, those contributions are not taxed in the current year.
McCarthy explains that tax-deferred saving accounts allow you to delay paying tax on your earnings in those vehicle until you withdraw money for retirement.
Just be aware that you are taxed on this money when you withdraw it in retirement.
6. Consider filing your return electronically.
The IRS generally processes electronic filings faster than they process paper ones, so submitting your taxes electronically means you'll likely get your return sooner.
Many times, it's also free to file this way if you do so through tax preparation software or firms. You can use the IRS' free tax filing software yourself if you meet income requirements.
Another way to file for free? Credit Karma Tax is a new resource that can help you file without a fee.
Don't be afraid to ask for help when you need it. Look for a Certified Public Accountant (CPA) with experience working with clients with similar financial situations as your own. You can also reach out to a fee-only financial planner to help you.
While planners aren't tax professionals, they can help answer financial questions and refer you to a trusted CPA. NAPFA is an organization where you can find a fiduciary financial professional to help.
Taxes don't need to be stressful, even if you find them confusing. There are many resources and experts available to help you, so reach out if you get stuck.
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