Don't Mess With Taxes

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Throughout life, we all encounter momentous firsts. First day of school. First time at a paying job. First time holding your child.

First time you file a tax return.

OK, that last one is probably not an event you celebrate, even if it produced a tax refund. In fact, if you remember filing your first Form 1040 it at all, it's probably because it was not a good experience.

There's no way to replace that bad tax memory. But there are steps that first-time tax filers can take to make sure their initiation into the taxpayer club goes smoothly. Here are eight.

1. Get organized. This is a habit that will serve you well beyond tax season. For this particular task, you definitely need to have all the documents you need to file at hand. The key documents here are your wage and other income statements, such as your Form W-2 (or multiple ones if you had several salary paying jobs last year), and any 1099 forms reporting things as gig earnings.

Most first-time filers are young, which means their lives are relatively simple. (Enjoy it while you can!) But everyone and their tax situations are different, so tax newbies also might get investment tax statements, receipts for charitable donations, details on medical costs. You might not need all the info to file, but it's always better to have more info than you need, just in case. This list of tax filing questions elaborates on tax situations that might (or might not) apply and the statements you'll need to complete your 1040.

And remember that when it comes to those official statements you do get, the Internal Revenue Service gets a copy, too. If you don't report the amounts, the IRS definitely will get back to you about the oversight.

2. Talk with your parents. If you are a young person looking to file your first tax return, don't touch that 1040 until you talk with parents first. Even if you recently graduated, help you get from mom and dad while you're working on totally establishing your independence could affect your — and their — tax return. You and your parents need to sort out myriad issues, such as whether they can still claim you as a tax dependent, as well as who can and/or would benefit more from claiming various education tax breaks related to school costs they helped pay.

3. Decide how to file. Most young first-time filers won't need any convincing to electronically prepare and e-file their returns. The key decision here, though, is whether you want to do your taxes yourself using tax software or let a tax pro take care of the electronic tax tasks.

Many first-time filers don't have very complicated returns, so the software do-it-yourself route is worth checking into, especially if you qualify to use IRS Free File. This filing season, you can choose from eight tax software company offerings if your adjusted gross income last year was $79,000 or less.

IRS Direct File is another free tax preparation and e-filing option if you live in one of the 12 states where the tax agency is phasing in its pilot program. It will be available in Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington, and Wyoming for taxpayers with relatively simple tax returns. But it's still being rolled out, so if you're in a hurry, Direct File might not work for you.

If you'd feel better having a tax professional handle your first-ever IRS filing, then of course go that route. Just make sure you choose a tax preparer who best meets your tax needs. And be sure to thoroughly check out that person before turning over your tax details.

Also be patient. Most reputable tax pros already have a full slate of clients by now, meaning you'll go to the end of the line.

4. Don't leave money on the table. This is something even veteran taxpayers need to heed. But it's especially true for first-time filers, who aren't that familiar with the tax code.

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 (that's April 15 (for most of us) 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. If can claim them, definitely do so. You don't want to hand Uncle Sam more of your money than legally required.

5. Don't forget about state taxes. If you're required to file a federal tax return, you likely will have to file one with your state tax department. Only eight states don't tax any individual earned income. They are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.

New Hampshire will soon join that group. The Granite State is phasing out its tax on interest and dividend payments, with full repeal scheduled for Jan. 1, 2025.

And while Washington doesn't tax earned income, some argue it should be bumped from the no-tax list since the Evergreen State does collect a 7 percent capital gains tax on certain high-income earners.

If you use a tax pro or software, they'll remind you of this added responsibility, notably if you're a resident of the other 40 states and District of Columbia that have full individual income tax systems in place. You can get a preview of your potential state tax liability by checking with your state's tax department. Most of those state tax offices also offer no-cost tax filing for their residents, just in case your tax software doesn't offer it or charges more than you want to pay. 

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 wait too long. On the other hand, facing your taxes right now might just be too much. I totally 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 (again, that's April 15 for most of us) 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 even more time. 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 Tax Day to Oct. 15 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 15 at the latest. If you don't, you'll end up owing more in penalties and interest.

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

But these tips should help, or at least ease that misery a bit as you tackle your first Form 1040.

You also might find these items of interest:

• 9 ways to make tax filing easier
• 8 reasons to file your tax return early
• 7 reasons to wait to file your tax return

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