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Preparing your tax return for the first time
While it may seem overwhelming, the key to your tax return is being prepared. Watch to see what steps you should take before you file your first return.
Preparing your tax return for the first time can be a daunting task. Gathering all the forms, information, and receipts, and getting it all done before the deadline can feel overwhelming.
We've put together a plan that you can use to tackle tax season one step at a time - that way, you aren't left scrambling at the last minute.
Let's take a look.
Know your timeline
For most people, federal income tax returns and most state and local income tax returns are generally due April 15th, unless that day falls on a weekend or holiday. You should verify the actual filing deadlines by visiting the IRS and state tax authority websites.
So in January and February you should begin to receive tax forms from employers, schools, and financial institutions that you'll need in order to prepare your tax return. This means you'll have two to three months to put everything together before the deadline.
You'll want to plan some time to gather and organize other documents you'll need for your tax return as well. These are documents you may have gathered throughout the previous year, such as receipts for donations, deductible expenses, and any other receipts or account statements that will help you prepare your return. It's a good idea to keep these all in a safe place so you can easily access them when you need them.
Filing your tax return early can help you get your refund early, if you're owed one. Plus, filing early can help you avoid an increasingly common form of identity theft where thieves steal your personal information to file a fraudulent claim for your refund early in the year.
So, in January or February, your first step is to put your arriving tax documents in a safe place and begin to plan when you'll sit down to prepare your tax return.
As your tax documents start arriving by mail and e-mail, it's a good idea to know what you should be looking for. That way you'll know when you have all the forms you need, or whether there are any missing.
Some common forms you may receive include Form W-2s, from employers you worked for in the past year, or Form 1099 MISCs if you worked as an independent contractor. You should expect either a Form W-2 or 1099-MISC from any employer or client who paid you $600 or more during the year. These forms are also sent to the IRS and show the IRS how much you earned.
If you're still in school, you should also get a Form 1098-T tuition statement that shows how much you paid in tuition, as well as any amounts you received from grants or fellowships.
There are many other important documents or statements you may receive as well. These could include documents regarding any retirement fund contributions you made or health care or welfare subsidies you received. As well as statements detailing how much interest you've paid on your student loans, and statements of dividends, interest and gain that you've earned from your savings and other investments.
You should receive all of your tax documents by the end of February. To keep track of everything, you could make a list, writing out each source of income, each financial account, and any subsidies you received, checking each one off as you receive the appropriate form. That way you'll know when you have everything you need to file.
At the same time you start receiving your tax documents, you can gather up some of your own documents as well.
These can include monthly bank and credit card statements and your tax return from last year, if you have one. All of these may have information you'll need to prepare your tax return.
You'll also want to collect any receipts you have from charitable donations you made, and any job-related expenses or medical expenses you had, as these may be deductible.
And if you didn't do it this past year, it can help to gather these documents as you get them throughout the year in a box or file. This can save you a lot of time when you're working on your tax return next year.
Keeping your documents organized in one place is also helpful in case you are selected for an audit by the IRS. You should hang onto these documents for at least three years.
Preparing and filing your tax return
Once you've got all the paperwork you need, you're ready to prepare your Form 1040, Form 1040A or Form 1040EZ-these are your federal income tax return forms.
You have a few options that can make preparing your return easy:
One option is to go online and prepare your return using "Free File."
If your adjusted gross income-this is a specific tax term which basically means your income minus certain tax deductions-anyway, if your adjusted gross income is less than a certain limit, the IRS has free tax prep software that can make preparing your tax return easier with features that can help you figure out any deductions or credits you might be able to take.
And if your adjusted gross income is higher than that limit, the IRS has electronic versions of the paper forms that will do the math for you, but they only offer basic guidance and won't give you the same kind of help figuring out which deductions or credits you might be able to take.
If you want a bit more guidance, you can use paid tax preparation software or online tools. These tools can walk you through how to prepare your tax return, and help you figure out any deductions or credits you might be eligible for.
And, if you want one-on-one help, you can go to a tax preparation firm or accountant.
But, if you choose to work with a tax professional, make sure you are working with someone you can trust. You will be giving this person access to a lot of sensitive personal information, so choose a tax professional carefully. The IRS has a directory of verified tax preparers that may help you find a verified tax preparer in your area. While this isn't a guarantee of their trustworthiness, this IRS directory is at least a good place to start. Also, keep in mind that you may also need to prepare and file state or local tax returns in addition to your federal return.
Once you've prepared your tax return, you're ready to file.
You can file your tax return as early as mid-January or anytime up to the April 15th deadline. However, if you know you won't be able to get your tax return filed by April 15th, you can file for an extension that will typically push the deadline back to October 15th of the same year.
However, even if you file an extension, this does not give you an extension to pay any amount of taxes you may owe as the deadline to pay your taxes is generally April 15th.
If you end up owing the government money after April 15th, you could be responsible for interest on what you owe and possibly penalties as well.
In addition, if you plan on filing an extension with the IRS, you may also have to file an extension with your state of residence and any other state where you're required to file a tax return.
Once you've filed your tax return, you'll know if you owe money to the IRS, or if you're owed a refund.
If you're owed a refund, the fastest way to receive it is to have the IRS deposit the refund directly into your bank account. If you filed your return electronically, the IRS could issue a refund in as few as ten days. Otherwise, the IRS issues the vast majority of direct deposit refunds in 21 days or less. Once you file, you can use the "Where's My Refund?" tool on the IRS website to find out when you should expect it.
You could also choose to let the IRS keep your refund and credit it to your tax obligation for the coming year.
If you owe money, you can mail in a check or money order, or authorize the IRS to withdraw the amount directly from your account. You can also pay using a credit or debit card, but you might have to pay a small fee to the IRS for this service. In addition, if you use a credit card, you could be charged additional interest if you carry a balance on the card.
If you can't afford to pay what you owe, the IRS offers payment plans. You could also choose to delay your payment, though you'll be responsible for interest and you may be subject to penalties if you do.
If you'd like to reduce the possibility of owing money on your taxes at the end of next year, you can consider working with a tax professional who may be able to offer advice and steps you can take.
While organizing your documents and preparing your tax return can be time consuming, breaking it down into steps between January and April can make it more manageable.
And keeping everything organized for next year can save you a ton of time when tax season rolls around again, so that hopefully, the process will be even easier.
The material provided on this website is for informational use only and is not intended for financial or investment advice. Bank of America and/or its partners assume no liability for any loss or damage resulting from one's reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment management.