Preparing for Tax Day doesn’t have to be overwhelming if you’re a first-time filer, even if it appears everyone around you is scrambling to understand future tax policies and meet their deadlines.
This year, Tax Day is April 18, but first-time filers should start preparing their documents now and find a tax professional to work with, if they’re not going with do-it-yourself programs. More than 153 million tax returns are expected this year, according to the Internal Revenue Service, and 32 million have already filed their 2017 returns as of Feb. 10. Total tax return volume through Jan. 27 was down 33% from a year ago, Intuit Inc., INTU, -0.37% which provides tax-preparation software, said last week citing Internal Revenue Service data. You are required to file your taxes if your gross income in 2016 was at least $4,050.
Don’t wait for expected tax policy changes from President Trump, either. Trump has pledged to lower tax rates for just about everybody, but those changes would go into effect for taxes to be filed next year, so they won’t impact the taxes you’ll be filing by April 18.
If you have unpaid student loans and aren’t meeting your monthly payments, the IRS will use your federal tax refund to pay down the debt, said David Lopez, a certified public accountant and member of the American Institute of CPAs. The Treasury Offset Program receives notices of delinquent debts from creditor agencies, such as the Department of Education. Other debts include child support or state income tax. So long as you’re paying your dues on time, your refund is yours to do with what you will.
Then again, student loans don’t have to put a damper on your tax refund — in some cases, college graduates can deduct up to $2,500 of their student loan interest from their taxable income, under Form 1040. To qualify you must have a loan from an approved lender, been enrolled at least half-time and have a modified adjusted gross income of less than $80,000.
First-time filers especially should not procrastinate to do their taxes, experts said, so that you don’t face unexpected problems or find yourself needing help with little time to spare. Don’t rush through the process, as suggested on TurboTax’s website. At the same time, don’t rush to file as soon as possible: make sure you have all of the information you need, and if you need more time, ask the IRS for an extension, according to personal finance website Bankrate.com.
Also, if you’re filing for the first time, discuss with your parents their tax plans, as they may claim you as a dependent, as well as some of your college costs, personal finance website Bankrate.com suggested. When taxpayers are dependents of another filer, they can’t claim a personal exemption for themselves.
Know the deductions available to you
Along with student loan deductions, there are a few other tax breaks first-time filers should be aware of, said Joe O’Boyle, a financial adviser at Voya Financial and based in Beverly Hills, including certain deductions and credits and tax-advantageous accounts.
Taxpayers should be attuned to potential deductions they can claim, such as moving expenses or job-related costs. Here is a list from the IRS of all credits and deductions individuals may claim, which includes donating to charities and job search expenses. You should keep records of your expenses, with a receipt or credit card statement.
Though not specific to first-time filers, not everyone filing for the first time may know they can benefit from other tax breaks. For example, individuals can also claim the Retirement Savings Contributions Credit, a tax credit up to $2,000 if they are single or $4,000 if married and filing jointly, and is based on contributions to any retirement account, including an employer-sponsored 401(k) plan or individual retirement account (IRA). The credit depends on how much you contribute and your gross income. Tax credits are better than tax deductions because credits are equal to dollars, as opposed to deductions, which is a percentage, O’Boyle said. Also, health savings accounts (HSAs) are specifically for medical costs, have significant tax benefits: the money deposited there is tax-free, the earnings grow tax-free and if put toward qualifying expenses, the withdrawals are tax-free too. You can find out if you qualify for HSAs by asking your insurance provider or human resources professional at your job.
Decide the best way of filing
Depending on what type of work you do, you will either receive a W-2, which is for salaried employees and shows the federal, state, city and Social Security taxes that were withheld, or a 1099-MISC, for independent contractors that doesn't include withheld taxes.
Other documents to gather include any bank statements where you earned interest in your accounts, investment statements and student loan paperwork, which may get you a tax break. The financial institutions you work with will send you these year-end documents, or you can request or download them from your online accounts. You can choose to self-file, using software such as Intuit’s Turbo Tax or H&R Block HRB, -1.55% , or find a tax professional to walk you through it. More than 53 million tax returns were prepared by individuals themselves — out of the 152.5 million returns filed by the end of 2016, according to the Internal Revenue Service.
First-time filers’ returns should be fairly simple, Lopez said, but as they get more complex it may be worth consulting with a professional. Doing so can range from a couple of hundred dollars to upward of $1,000, compared to software that costs about $50 but, depending on how complicated your taxes are, could save you money too.