Tips for First-Time Tax Filers

Filing taxes for the first time can be a difficult task. With numerous forms, regulations, and potential deductions, it’s easy to feel overwhelmed. However, understanding the process can make it much less intimidating. Here are some essential tips for first-time tax filers.

Understanding Your Filing Status

Your filing status is a fundamental aspect of your tax return. It affects the amount of your standard deduction, the tax rates applied to your taxable income, and your eligibility for certain deductions and credits. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) with Dependent Child. Your status is determined by your marital status and other factors such as dependents. Understanding your filing status is the first step in preparing your tax return.

Organizing Your Tax Documents

One of the most crucial steps in preparing your tax return is gathering and organizing your tax documents. These include W-2s from employers, 1099 forms for other income such as self-employment, dividends, and interest, and receipts for expenses that might be deductible. Having all necessary documents in one place will make the process smoother and reduce the risk of errors. It’s also a good idea to keep these documents for at least three years in case of an audit.

Deciding Whether to Itemize

The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction, making it more beneficial for many taxpayers. However, itemizing deductions can sometimes lead to a bigger refund. Itemized deductions include expenses such as mortgage interest, state and local taxes, medical expenses, and charitable contributions. To determine whether to itemize, you’ll need to calculate your potential itemized deductions and compare them to your standard deduction. If your itemized deductions are greater, you’ll save more by itemizing.

Don’t Forget About State Taxes

In addition to your federal tax return, you may also need to file a state tax return. The requirements for state taxes vary, so it’s essential to understand the rules in your state. Typically, you’ll need the information from your federal return to complete your state return. Some states have their own deductions and credits, so it’s worth taking the time to understand these to minimize your state tax liability.

Claiming Deductions Without Receipts

There are several deductions you can claim without receipts. These include home office expenses if you’re self-employed and use part of your home exclusively for your business, cell phone expenses if you use your phone for business, and vehicle expenses if you use your car for business purposes. Other deductions include self-employment taxes, self-employment retirement plan contributions, self-employed health insurance premiums, educator expenses if you’re a teacher and buy supplies for your classroom, student loan interest, and certain charitable contributions. However, while you may not need receipts to claim these deductions, it’s essential to keep records in case of an audit.

Start Early to Avoid Delays

The IRS is a massive organization that processes millions of tax returns each year. Even with additional IRS employees working to help taxpayers, the filing season can be a challenging one. If your return is flagged for review, your refund will almost certainly be delayed. To avoid potential delays, start preparing your tax return as soon as you have all your tax documents. If your tax situation is simple, you can complete your return early and avoid the rush. If your tax situation is more complex, starting early gives you more time to gather your information, resolve discrepancies, and seek help if needed.

Reporting All Income

One common mistake first-time filers make is not reporting all their income. This includes not only wages reported on a W-2 but also self-employment income, income from gig work, and income from sales of goods or other business transactions. If you earned money in the gig economy, such as driving for a delivery app, you must report your income and pay taxes on it. Depending on whether you’ve worked as an employee or a contractor, you may need to file Schedule C: Profit or Loss from Business. Remember, even if you don’t receive a 1099 form, you’re still required to report the income.

Understanding New Rules on Credits and Deductions

Tax credits and deductions can significantly reduce your tax bill or increase your refund. However, the rules for these credits and deductions can change from year to year. For example, the American Rescue Plan Act temporarily increased certain tax credits and added a special rule for charity deductions. As these programs end, it’s important to check the current eligibility rules and deduction amounts. Some credits and deductions to consider include the Child Tax Credit, the Child and Dependent Care Credit, the Earned Income Tax Credit, the Premium Tax Credit for health insurance purchased through the marketplace, and the Clean Energy Vehicle Credit.

Reporting Profits and Deducting Losses on Investments

If you sold stocks, mutual funds, real estate, cryptocurrency, or another investment for a profit, you must report the gain on your tax return and pay applicable capital gains taxes. Capital gains taxes are based on the profits you realize when you sell an investment for more than you paid, not on the value of your investments. If you sold investments for a capital loss, you can use your loss to offset your capital gains for the year. You may also deduct up to $3,000 in capital loss against your ordinary income and carry over any remaining loss to future years.

Seeking Help If Needed

Filing taxes can be complex, especially if you’re doing it for the first time. Don’t be afraid to seek help if you need it. This could be a tax professional, a knowledgeable family member or friend, or an IRS representative. The IRS offers several resources to help taxpayers, including the Interactive Tax Assistant, the IRS Tax Map, and the IRS’s Free File program for eligible taxpayers.

In conclusion, filing taxes for the first time can be a challenging task, but with the right preparation and understanding, it can be a manageable one. By understanding your filing status, organizing your tax documents, deciding whether to itemize, remembering to file state taxes, claiming all eligible deductions, starting early, reporting all income, understanding new rules on credits and deductions, reporting investment profits and losses, and seeking help if needed, you can successfully navigate your first tax filing season. Remember, the goal is not just to get through tax season, but to maximize your refund or minimize your tax liability.

In the process of filing taxes, especially for first-time filers, tax software can be a valuable tool. H&R Block, for instance, offers a user-friendly interface and comprehensive features that guide users through the tax filing process, making it less daunting for beginners. TurboTax, another popular choice, is known for its intuitive design and robust functionality, providing step-by-step guidance and automatic checks for common errors. Lastly, TaxSlayer stands out for its affordability and simplicity, offering a range of tax solutions that cater to different user needs, from freelancers to investors, making it a versatile choice for first-time filers.