Once you enter the working world, the liability of paying taxes comes along with those sweet paychecks. Tax filing season is just getting started and it can get overwhelming especially for the first time taxpayers. What is an exemption? How to complete a Form W-4? Can you file your income tax online or do you need a consultant? We are here to answer all of your questions as a first time taxpayer and show you that it is not as difficult as you may think. With the correct guidance and some confidence, you can file your taxes easily on your own.
Thus to make your life easier, this article aims to not only guide first time taxpayers through the federal tax filing process but also provide tips to get a bigger refund.
Understand the tax structure
Before you begin, understanding how federal income tax works is critical. The US has progressive income tax rates. There are seven tax rates for seven salary ranges, rising from 10% to 37% with the increase in annual income. An online tax calculator can be a powerful tool for the first time taxpayers to calculate the taxed amount on your income in advance and how those funds are being allocated. It also will help you understand the deductions and plan to apply for a refund.
Gather your tax documents
Keeping all your documents organized is a good way to start preparing to file your IT return. Some of the documents that are needed for the process include W-2s, 1099s, or any other tax forms that report other types of income, tax deductions, and receipts. Pro tip – keep a record of all the jobs that you worked last year, times that you bought or sold stocks, paid for college tuition, or applied for a student loan, etc. so you do not have to search your memory for this information as tax season approaches.
Learn about relevant tax credits and deductions
Deductions and tax credits can make a significant difference in your tax computation so one should be careful about not missing the deductions they are eligible for. It can even help you increase the refund amount. The rules for claiming these tax credits and their eligibility requirements are easily available online making them easy to claim if you do your research.
A few common tax deductions that apply for first time taxpayers are –
- Standard/itemized deductions
- Education credits
- Student loan interest deduction
- Home office deduction
- Earned Income Tax Credit
Count your gig work income
It is not unusual for Millennials and Gen Z to have a side hustle for some extra income in the gig economy. Your freelancing income cannot be treated the same as your salary for the purpose of tax filing, however. Gig work income should be reported in Schedule C: Profit or Loss from Business and it is important any income earned should be reported to the IRS.
Mind your deadlines
Experts suggest filing your taxes earlier rather than later. There are chances of being a victim of identity theft due to delay in tax filing, a crime that is on the rise nowadays. Plus, it also helps in planning for an extension in advance if you need one and you can receive your refund sooner if you are eligible.
While you may know the basics of doing taxes, it is important to stay on top of changes in the tax code. Remember that the tax code changes on a yearly basis, which means the opportunities for savings may change as well. Here are some tips that may come in handy to be able to get big refunds while filing taxes this year -
- Account for dependent care expenses - If you claim children on your tax return, you may receive a credit up to $2,000 child tax credit for each one younger than age 17. If your adjusted gross income totaled $43,000 or less last year and pay for childcare services, you could also get a dependent care credit for up to $3,000 you spent on child care.
- Credit for Energy-Efficient Home Improvements - The Inflation Reduction Act of 2022 may entitle you to a tax break for improvements that increase your home’s energy efficiency, including solar water heating and small wind energy property expenditures.
- Maximize your healthcare account - Health savings accounts allow people to put aside money for medical expenses. The money in this account grows tax-free and withdrawals are tax-exempt when used for qualifying expenses such as health care, dental, and vision expenses for yourself, your spouse, or eligible dependents.
- Invest in Individual Retirement Account (IRA) - Retirement funds are a prime way to save money on taxes. Also, you can fund an IRA up to the tax filing deadline
No matter if you choose to file taxes on your own or with the help of a consultant, it is always advisable to plan ahead to be able to file an accurate return. However, if you need more time to complete these tasks, you can request an extension to October 15th, however you still will have to estimate the amount of tax owed and pay that amount by the regular April deadline to avoid penalties and delay in your refund.
There are many tax preparation platforms available online that can allow you to file your return conveniently through a guided process. In fact, if your adjusted gross income is $73,000 or less, IRS may allow you to file your federal individual income tax return for free.
Now that you have all this information at your disposal, doing your taxes for the first time won’t seem like a daunting task and it will only get easier every year!