A Beginner’s Guide to Filing Your Taxes
One of the more daunting tasks of adulthood is dealing with taxes. After all, we pay a lot of taxes. There’s sales tax collected on most of our purchases, people in some states have to pay taxes on their personal property (like cars), and everyone who owns any real estate must pay property taxes. Yet when people talk about the complexity of taxes, most are talking (or complaining!) about filing their personal income tax returns, which are usually required to be submitted by April 15. Each year, the Internal Revenue Service (IRS) processes about 250 million tax returns, which results in them collecting more than $3 trillion in tax revenue. They also issue around $440 billion in tax refunds each year. The refunds mainly result from the fact that the majority of people pay a little bit toward their federal income tax load with every paycheck. Refunds can also result from tax deductions and credits. Does this all sound overwhelming? It shouldn’t be. After all, millions of your fellow Americans manage to file their taxes each year. With a little preparation and organization, you can ace tax season.
What You Need to File
The first step toward ensuring a successful tax season is organizing your needed documents before you start working on your return. The primary materials you’ll need to gather are your W-2s and your 1099s. What’s the difference? Form W-2 is the Wage and Tax Statement. Employers are required to record each employee’s annual wages and the amount of taxes withheld from the employee’s pay and send a copy of this statement to both the employee and the IRS. The forms must be mailed out by Jan. 31. Who receives 1099 forms? Technically called a 1099-MISC, this document records payments made to non-employees during the calendar year and is sent to individuals and the IRS. Independent contractors and freelancers who have not had taxes withheld will receive a 1099 from any company from which they earned $600 or more. These forms are also required to be mailed by Jan. 31. Also, make sure you have the Social Security numbers and dates of birth for you, your spouse, and any dependents you’ll claim on your taxes.
People who have dealt with other financial circumstances may need documentation that chronicles these circumstances. For example, if you have to pay for child care, you’ll need a record of what you paid with the care provider’s tax ID number. If you are a noncustodial parent claiming a child on your taxes, you’ll need to complete Form 8332 and have it signed by the custodial parent. People who collected unemployment will need to make sure they receive a Form 1099-G. Did you have gambling winnings? You’ll receive a W-2G. Did you make donations to qualified nonprofits? You’ll need receipts showing the contributions. If you’ve paid interest on a mortgage or student loan, you’ll receive a 1098 form.
Tax Deductions and Tax Credits
There are two ways to reduce your income tax bill. The first is tax deductions, and the second is tax credits. What’s the difference? A tax deduction lowers your taxable income amount, which reduces the amount you’ll owe in taxes. A tax credit reduces your actual tax bill. Some credits are refundable, which means if your tax bill is $500 but you qualify for a $1,000 refundable tax credit, you would receive a $500 refund.
You have choices about how you claim your tax deductions. Most people choose to take the standard deduction. The standard deduction requires no extra documentation; it’s set by how you file your taxes. For the 2020 tax-filing season, people filing single and people married but filing separately can take a $12,200 deduction; married couples filing jointly can receive a $24,400 deduction; and people filing as head of household can claim an $18,350 deduction. If you think itemizing your deductions would lead to a larger overall deduction, you’ll need to provide documentation to back them up.
There are many tax credits available for the 2020 tax season. Here are some of the most popular credits:
- Child Tax Credit: If you have a qualifying child under the age of 17, you can claim a $2,000 credit. Up to $1,400 of that amount is refundable. Each child must have a valid Social Security number. People with a modified adjusted gross income of $200,000 ($400,000 for couples filing jointly) will receive a reduced credit.
- Credit For Other Dependents: If you support dependents who don’t qualify for the Child Tax Credit, they might be eligible for a credit of up to $500. The IRS offers an interactive tool to help you determine if you qualify for this and other credits.
- Earned Income Tax Credit (EITC): Working people with low to moderate incomes might qualify for this refundable income tax credit. The credit ranges from $529 to $6,557. The requirements state that you must have at least $1 of earned income, your investment income must be under $3,600, you can’t claim if you file as married filing separately, and you can’t claim the credit if you file Form 2555 or 2555-EZ (which deal with foreign earned income).
- Education Credits: There are two credits available, and they apply to the filer, their spouse, and any dependents. The American Opportunity Tax Credit is partially refundable. The Lifetime Learning Credit is not. Form 8863 is used for both credits, and the student must have received a 1098-T from their school.
How to File
Once you’ve organized your documents and gotten an idea of the deductions and credits available to you, now, you need to actually file your taxes. There are three main ways to do this. You can do it manually. The IRS website has the 1040 form, filing instructions, and all associated forms available to print on their website. And libraries typically have paper copies of all forms you might need and associated instructions available, as well as information on where to mail your form (it depends on where you live and what form you use). The second option is to use software or a website to fill out your tax forms. These services typically work by asking you a series of questions and letting you input the needed information. The software then calculates your tax (or refund!), and you can then either file your return electronically or manually (the software should direct you where to mail the forms). If you make less than $69,000 a year, you can also use the IRS’s Free File Program. Free File is an alliance of for-profit online tax preparing services and the IRS that offers free tax preparation for the 70% of Americans who qualify for the service. The third (and most costly) option is to hire someone to complete your tax return for you. Your options here range from storefront tax preparation services to certified public accountants. These people will complete the forms for you and attempt to minimize your tax burden and maximize any refund you might get.
Getting Your Refund or Paying Your Bill
If you owe taxes, the IRS offers several ways for you to pay your bill. First, there’s an app. If you are paying from a bank account, you can also use the IRS’s Direct Pay service. Wish to pay with a credit card? The IRS partners with three processors, all of which charge a service fee. Want to mail a check or money order? The address you’ll send the payment to depends on your state and what form you are using to file your taxes. If you can’t pay the entirety of your tax bill, you’ll need to apply for a payment plan, which will allow you to pay off your tax debt in installments.
Want your refund fast? File quickly! Most people wait until close to the April 15 deadline, so tax returns filed around that time take longer to process. Also, file online. The turnaround time for online tax returns is much, much faster than for paper returns. Filing online also means you can track your refund online. In addition, keep in mind that you can get your refund faster by having the IRS send you the money via direct deposit instead of a paper check.