Don't Mess With Taxes

Photo by Michael Burrows

Millions of Americans send tax return to the Internal Revenue Service every year. It's a good bet that a lot of them are first-time filers.

Dealing with the IRS, even in a routine manner like sending in a completed Form 1040, can be intimidating, even for veteran taxpayers. For newbies, the task also can be overwhelming.

But it doesn't have to be. These eight steps can help a novice taxpayer successfully make it through their first filing season, and maybe even get a bit of money back.

1. Get organized. This is a habit that will serve you well not only for your first-ever filing, but for the rest of your tax life. You'll be glad you established a good organizational habit from the get-go. By now, you should have received all the tax documents you need to file. This checklist also can help you see what other information you might need to file, such as charitable donations, work-related expenses, college expenses, and medical coverage costs. The bottom line is that you definitely can't file until you get a W-2 form if you were a salaried employee. If all or some of your income came from contract work and gig jobs, you'll also want to make sure your records reflect what's on 1099 forms issued by those payers. The Internal Revenue Service gets copies of these forms, too, and the first thing it will do when it gets your return is compare the amounts.

2. Talk with your parents. If you're a young person, but made enough money to require that you file your first tax return, don't touch a 1040 until you talk with parents first. Even if you recently graduated, if mom and dad are still helping out while you're looking to totally establish your independence, you might qualify as a dependent on the folks' return. That will affect your taxes. You and your parents need to sort out any dependency issues, as well as who would benefit more from claiming, for example, education tax breaks for school costs they helped pay.

3. Decide how to file. Electronic filing is the way to go, regardless of whether you're a tax filing newbie or have been sending returns to the IRS for decades. But do you do your taxes yourself using tax software or let a tax pro prepare and e-file them? Many first-time filers don't have very complicated returns, so the software do-it-yourself route is worth checking into, including Free File options. This filing season, seven tax software companies are offering industry partnership offers 9 Free File programs to taxpayers, regardless of filing status, whose adjusted gross income is $73,000 or less.

If, however, you want personal help filling out your first-ever return, then of course turn to a tax professional. Just make sure you choose a tax professional who best meets your tax needs. And be sure to thoroughly check out that person before turning over your tax details.

4. Don't leave money on the table. This is something even veteran taxpayers need to heed. But for 1040 first-timers, especially those whose taxable income isn't that much, making sure you don't overlook any tax breaks is especially important. You don't want to hand Uncle Sam more of your money than legally required.

Both deductions and credits help cut your tax bill, but a key tax lesson to learn early is that tax credits are better. Deductions reduce your taxable income amount, but tax credits reduce any tax you owe dollar-for-dollar. Some, known as refundable tax credits, can even get you a refund after they eliminate any tax you owe.

Here are a few, and too often overlooked, tax breaks first-time filers should explore: 

• Earned Income Tax Credit, or EITC, which helps lower- and middle-income taxpayers. It's one of those refundable tax credits.
• Student loan interest deduction. This deduction is worth up to $2,500 in interest payments on your higher education debt. Your eligibility for this deduction depends on your income. If you can claim it, it's one of the above-the-line deductions that you can take without having to itemize.
• Saver's Credit. This tax credit could be worth up to $1,000 off your tax bill if you put money into a qualifying retirement plan. It also has income limits, but it's worth checking into.
• Add to or open an IRA. If you qualify for the Saver's Credit, make sure you get it by putting money into an IRA, either traditional or Roth. You have until Tax Day, again that's April 18 this year, to open or add to the account. Also consider which type of IRA to open. Roth accounts usually are the recommended retirement account for younger individuals, since the earnings eventually are tax-free. But if you're looking for an immediate tax break, you might be able to deduct, again as another above-the-line deduction, what you contribute to a traditional IRA.

Your tax software or tax preparer should help you determine which of these tax breaks, and more, you might qualify for this filing season.

5. Don't forget about state taxes. Only eight states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — don't impose any individual income tax. The others will want their share of your earnings. If you use a tax pro or software, they'll remind you of this added responsibility. You can get a preview by checking with your state's tax department.

6. Don't be in such a hurry. If you're expecting a refund, you've been ready to file for weeks. But if you get in too big a hurry to finish your taxes, you could make costly mistakes that could cut into that tax cash. The key, like much of life, is balance. Give yourself enough time to do your taxes accurately, but don't feel rushed. It's OK to start your return, then step back for a bit. Coming back to your taxes with fresh eyes can be a good move.

7. Don't procrastinate. On the other hand, facing your taxes right now might just be too much. I understand. Putting off potentially difficult tasks like tax filing is normal, especially if you're facing it for the very first time. But delaying your filing until the last minute, which is April 18 this year, can make things worse if you run into problems when you finally do start filling out your 1040. You want to make sure you have ample time before the deadline to find answers to your tax questions or have trouble getting an appointment with a tax preparer.

8. Get more time if you need it. Finally, don't freak out. Yes, taxes are confusing and important and the thought of having to answer an IRS auditor's questions is scary. So make sure you get your filing right. If you need more time to do that, take it. You can push the April 18 deadline to Oct. 16 by getting a filing extension. Just submit Form 4868, and yes that can be done electronically, too. However, if owe any tax, be sure you pay that amount, or as much as you can, when you request your extension or by April 18 at the latest. If you don't, you'll end up owing more in penalties and interest.

Welcome to the tax filing world. I hope these tips (and the others that start with the January Tax Tips page) help, or at least ease your mind a bit as you tackle your first Form 1040.

We long-time taxpayers (and Uncle Sam) are thrilled you've joined our club, where the motto is tax misery loves company!

You also might find these items of interest:

• 7 reasons to file your tax return early
• 6 reasons why you should wait to file your tax return
• Tax breaks that can help minimum wage workers
• Millennials depend on mom and dad for tax filing help

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