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Taxes aren’t as scary as they might appear and managing all the millions of forms that go along with taxes is an important part of growing up. If you’re new to the tax game, don’t fret.
Here’s a quick rundown of everything you need to know onhow to file taxes for the first time.
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What is there to know about taxes? In very simple terms, your taxes are the portion of your earned money that you have to pay the government in exchange for public services and infrastructure maintenance.
Buthow do you know if you need to file taxes? Only people who earn income above a certain threshold in the year are legally required to submit a tax return. For first-timers, if you’re under the age of 65 and single, you would have had to earn more than $12,400 in 2020 to file taxes in 2021.
An estimate of what you will probably need to pay in taxes is already taken off your paycheck each pay cycle. Filing your taxes is a way of comparing the money the IRS has already taken from you withwhat you really owe when deductions and tax credits have been added to the equation.
If your filed tax return indicates you’ve paid too much through income tax, then the IRS will owe you money. If it turns out that you owe the IRS money, you’ll have to pay them the difference by the tax deadline orrisk facing penalty fees.
Now that you have a better understanding of how taxes work, the next step is to select a good tax software that will work for your income level.
These tax programs just require you to fill in your details and will then automatically generate the required tax forms for you. In certain cases, the IRS has teamed up with tax software providers to provide their services for free to lower-income taxpayers. For the 2020 tax year, the income threshold for these free services is $72,000 or less. They form part of theFree File Alliance and include providers like H&R Block, TaxSlayer, and TurboTax. You’ll need your social security number, required income forms, documentation for tax credits and deductions, and bank account information before you start with Free File.
It’s important to double-check what their income limits and other requirements might be for free services. Then, choose the service that best suits your needs.
Alternatively, if you fall above the income threshold and don’t want to pay for tax software, you can also download the tax return forms for free from the IRS website or Free File. For your first time, it might be wise to do both so you can see if it matches up and you’ll get a better grip on how your taxes work.
After you’ve chosen which option you’ll use to file your tax return, it’s time to get all your necessary documentation in order.
Depending on your work situation and whether you have earnings from interest or dividend income, you’ll need to assemble yourForm W2 and1099 forms.
You’ll get your W2 form from your employer which will indicate how much you’ve earned and how much of your paycheck was already withheld for income tax. You’ll have more than one W2 form if you have more than one job, and you can’t file your taxes until your employer has given you this form.
You’ll only need 1099 forms if you’ve earned money outside of a salaried job. This could be income like dividends from the stock market, interest from savings, or independent freelance work from any business that’s paid you more than $600 in a year for non-employee services.
Regardless of whether you’re using tax software or filling it in manually on paper, you’ll still need these forms for a successful tax return.
When crunching the numbers on your W2 form, it might seem like you’re paying a lot to the IRS, but luckily most taxpayers are allowed to claim tax deductions and credit on their tax bill.
Let’s start with the standard deductions. The amount of deductions you can claim is dependent on your filing status – whether you’re single, married, or head of a household. These standard deductions increase slightly each year as determined by inflation.
For the 2020 tax year filed in 2021, the following deductions can be made:
You can also opt for itemizing your deductions instead of going for the lump-sum of standard deductions – but you can’t do both.
Itemizing deductions involves compiling a list of all your qualifying expenses throughout the tax year on a separate form (Schedule A) which has to be submitted alongside your tax return. You should only go for this option if you’ve had a lot of expenses that far outweigh the standard deduction.
Some taxpayers however are forced to do itemized billing. This will be the case if you’re married and filing separately and your spouse did itemized billing, or you’re a nonresident or dual-status alien.
Regardless of which option you go for, keeping a record of everything will save you a lot of money you might not even know about. You also have to be able to provide proof for these expenses so never throw away the relevant receipts or invoices.
While deductions are taken from your total income, tax credits are subtracted directly from your total tax bill. They are either refundable (can be paid back to you if your tax bill is zero or less) or non-refundable (you can’t get the money back even if the bill is zero).
For example, if your tax bill comes to $500, but a non-refundable tax credit is $600, it will reduce your bill to zero but you won’t get the extra $100 back.
However, if that tax credit was refundable, you’d be eligible for a tax return of $100.
When it comes to tax credits and deductions, however, it’s very important to know and understand your filing status.
Here are the five filing categories acknowledged by the IRS:
Once you’ve figured out your filing status, you can determine which tax rate applies to your income. The more you earn, the higher your tax rate will be.
The IRS has seven tax brackets, and the rate can increase the more you earn.
A single filer earning between $9,875 and $40,125 would pay 10% on the first $9,875 income they’ve earned, and 12% after that. If you’re the head of a household, that threshold will be higher (between $14,100 and $53,700) but the tax rates would be the same.
The tax rate can go all the way up to 37% for high-income earners.
Before you start your tax journey, here are a few extra tips to help you through the process.
As mentioned, start with getting all your documents together that the IRS might need. This includes your W2 forms, 1099, proof of other income, and expenses that count as deductions. It can also include paying off your student loan.
If you’re looking up ‘how to file taxes for the first time’, chances are you’re a young adult that might still be a dependent.
Have a talk with your parents first if you’re a full-time student under the age of 24 or earned less than $4,300 in 2020 and are financially dependent on your parents. They can claim you as a dependent on their tax return. Although you’ll still have to file your own taxes if you earned above the required threshold.
Go through the list of tax deductions and credits for anything that might apply to you to lower your tax bill. For first-timers, this might be education credits, student loan interest deductions, orEarned Income Tax Credit. You cantake a look here for the full list of tax deductions and credits available.
In a world where freelancing has become more popular, it’s important that you declare all income you receive, including if it’s working part-time as an Uber driver. All the income you earn is taxable and you are by law required to declare all your income on your tax return.
In this day and age, it’s much easier to file your taxes online on the IRS website. Filing online means you don’t have to stand in long queues and try to figure out the mailing system. When you file your taxes online you’ll also get your tax return back faster.
Filing taxes form a very important part of your adult life, and taking a keen interest in your finances is important for managing your wealth as you get older. Paying taxes is inevitable. But you can be smart about how you file your taxes and making sure you claim all your available deductions and tax credits.
If you’ve been wondering ‘how to file taxes for the first time’, we hope the process is now a little clearer for you. Use the tips we provided above to guide you through the process. If you’re unsure about anything while filing for the first time, talk to a tax professional or have someone who’s done their taxes many times to make sure yours is correct before you file.