Filing taxes for the first time can be overwhelming. But if you have the right tools and advice before you start, it won’t be. Here are a few critical things to know before you begin, which will make the seemingly daunting process much easier.
(1) Start Prepping Early
Even though the deadline to file a tax return is April 15, you’ll want to start as soon as you can. You’ll need time to gather all of your important documents like a W-2 from each employer and if you’re a contractor, your 1099 forms. If you have a full-time job and worked freelance on the side, you’ll need both. The good news is that the forms show how much you made in the past year and how much tax was withheld. According to Kathy Pickering, executive director of The Tax Institute at H&R Block, you should gather any additional forms that show big expenditures, such as paying for education or charitable giving. Finally, proofread your form. Karen M. Reed, director of communications for Citrus Heights, California-based TaxResources Inc., said that a mistake in just one digit can lead to disastrous results.
(2) Learn Key Terms
If you have a basic understanding of key terms, the entire process will be much more manageable, according to CPA Tim Wolfe. Wolfe recommends that you understand the meaning of things like effective tax rates, the average rate at which someone is taxed, and tax-deferred, which refers to investments on which applicable taxes – typically income taxes and capital gains taxes – are paid at a future date instead of during the period in which they are incurred. Other important terms to know are the difference between a tax deduction and tax credit – a deduction lowers taxable income, while a credit reduces the amount of taxes you owe.
(3) Consider Educational Expenses
If you’re a student and paying for your education, you just might be in luck. Deductions for your education are key. Arthur Agulnek, an accounting professor at the University of Texas at Dallas, said that new taxpayers should make sure they don’t leave money on the table by looking into the education tax credit and earned income tax credit. In fact, Agulnek said that education deductions can save a student as much as $4,000.
(4) Get Familiar with New Tax Laws
You don’t have to be an expert the first time around, but there have been a few changes you’ll want to be aware of. First, there are new tax brackets. Second, the standard deduction has increased to $12,000 for single filers, up from $6,500 for the 2017 tax year. Third, the personal exemption of $4,050 has been eliminated this year. With all the changes to tax laws, you’ll want to keep up-to-date about the latest information.
(5) Ask the Professionals
If you have a question on your return, don’t guess. Ask a tax professional. If you’re a student, consult your advisor or parents. Remember, there is no such thing as a dumb question. It’s only dumb if you don’t ask it!
Taxes are an inevitable part of living in the United States and something you will learn to harness. The good news is that the process and terminology will get easier each year you file your return. Having informative resources at your fingertips is all you need to be a success.