Navigating the tax maze: A guide for filing income taxes for the first time.
Filing your income taxes for the first time can be a daunting task when you’re entering the realm of financial independence — but it doesn’t have to be. As you embark on this journey, it’s essential to understand the basics of the tax system, discover available deductions and credits, and learn how to file accurately to avoid any future headaches. Use this guide to demystify the process and empower you to navigate the tax maze successfully.
The benefits of doing your taxes.
It’s important to evaluate your finances at least annually, and there are many benefits to filing a tax return. According to the Internal Revenue Service (IRS), benefits of filing include:
- Getting money back: In some cases, you may get money back when you file your tax return. For example, if your employer withheld taxes from your paycheck, you may be owed a refund when you file your taxes.
- Avoiding interest and penalties: You may avoid interest and penalties by filing an accurate tax return on time and paying any tax you owe in the right way before the deadline. Even if you can’t pay, you should file on time or request an extension to avoid owing more money.
- Protecting your credit: You may avoid having a lien placed against you when you file an accurate tax return on time and pay any tax you owe in the right way before the deadline. Liens can damage your credit score and make it harder for you to get a loan in the future.
- Applying for financial aid: An accurate tax return can make it easier to apply for help with education expenses.
- Building your Social Security benefit: Claiming your self-employment income on your return ensures that it will be included in your benefit calculation.
- Getting an accurate picture of your income: When you apply for a loan, lenders will look at your tax return to figure your interest rate and decide if you can repay. If you file accurate tax returns, you may get a loan with a lower interest rate and better repayment terms.
- Getting peace of mind: When you file an accurate tax return and pay your taxes on time, you’ll know that you're doing the right thing to follow the law.
Determining if you need to file.
If you make more than a certain amount for the year, chances are you’ll need to file a tax return. You may want to file even if you make less than that amount, because you could get money back if you file. This could apply to you, if you:
- Have had federal income tax withheld from your pay
- Made estimated tax payments
- Qualify to claim tax credits such as the Earned Income Tax Credit and Child Tax Credit
There is extensive information on the IRS website about whether or not you should file your your taxes. Here are some top considerations to determine whether you should file a tax return this year:
- Look at your income to see if you made the minimum required to file a tax return
- Decide which filing status is best for you
- Find out if you qualify to claim certain credits and deductions to lower the amount of tax you owe
- Use the Interactive Tax Assistant to see if you need to file
Understanding the basics of filing your taxes.
Once you’ve determined that you need to file, the first step is determining your filing status; this impacts your tax rates and the deductions you may be eligible for. Are you single, married or the head of a household? While being single or married are both self-explanatory, being a head of household can be more confusing. To qualify for a head of household filing status, you must file a separate individual tax return, be considered unmarried and have a qualifying child or dependent, such as a parent. You also must pay more than one-half of the cost of supporting the qualified person’s primary home.
Next, make sure to identify all of your sources of income, including wages, freelancing, gig work and any side hustles. The gig economy has boomed, especially since the COVID-19 pandemic. It’s commonly understood as digital platforms that allow freelancers to connect with potential clients for short-term jobs, contracted work or asset-sharing. And, according to Statista, the projected gross volume of the gig economy is expected to reach $455.2 billion in 2023 — up from merely $204 billion in 2018. Accurately reporting any of your income is crucial for tax compliance.
Tax forms and deductions.
First, it’s important to understand which tax form you need. Choosing often depends on your income level and the complexity of your financial situation. The IRS Form 1040 is the standard federal income tax form people use to report income, claim tax deductions and credits, and calculate the amount of a potential refund or bill for the year. Schedule A is for itemizing your deductions such as property taxes, charitable contributions, mortgage interest, state taxes, medical expenses or one of many other tax break options.
One common deduction you may qualify for is a student loan interest deduction. This can help you reduce your taxable income. Similarly, if you’re pursuing higher education, you could explore education-related credits such as the American Opportunity Credit or the Lifetime Learning Credit.
If you’re working and contribute to a retirement savings account, such as a 401(k) or an IRA, you may also be eligible for the Saver’s Credit. This credit encourages individuals to save for retirement by offering a tax incentive.
Practical tips for filing your taxes.
First and foremost, organize your documents. Gather all necessary documents, including W-2s, 1099s, and any other income-related statements or information related to any deductions you may think you would be eligible for. Having these in order will simplify the filing process.
IRS Free File lets qualified taxpayers prepare and file federal income tax returns online using guided tax preparation software. It’s safe, easy, and no cost to you. Those who don’t qualify can still use Free File Fillable Forms; and individual tax filers, regardless of income, can use IRS Free File to electronically request an automatic tax-filing extension.
Many choose to use other tax software or online platforms to streamline the filing process. These tools guide users through a series of questions to ensure all relevant information is included.
Before you submit your tax return, it’s important to review all the information to ensure accuracy. Mistakes can lead to delays in processing or even audits. Once you’re ready to file, e-filing your return is not only convenient, but also ensures a quicker refund process compared to traditional paper filing.
Taxes can be intimidating — but you can do this.
By understanding the basics, exploring available deductions and credits, and following practical tips for filing, you can navigate the tax maze with confidence. Taking the time to educate yourself on these financial matters will set a strong foundation for future financial success and responsible money management.
Commerce Bank does not provide tax advice. Consult your tax professional for guidance.
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