Friends, it's that time of year. Tax season is here, and you should already have a nice collection of envelopes with "official tax document" splashed across the front. As excited as you may be about the prospect of a hefty refund, the process of actually filing taxes can be seriously daunting. Especially if this is your first time filing, you may find yourself asking a frenzy of questions: What forms do I need? What happens if I mess up? Should I hire someone to do this for me? Your response may be to sit on your couch, watch another three episodes of House of Cards and let your taxes take a back seat until the last possible minute.
We've all been there, but procrastinating is not the way to deal. You risk making errors and missing out on potential deductions if you rush through your return. You have to file your return (or an extension form) and pay any money you owe by April 15. If you're due a refund, you should file even sooner to get your money back stat — and to get ahead of identity thieves, who might claim your refund before you do. (By the way, if you do get a refund, you may want to adjust your withholding to fatten up your paycheck throughout the year.) To make tax season a little less scary, we have some tips to help you with your big tax questions and get you on your way.
First, figure out if you even have to file. If in 2013 you were under the age of 24, in school full time for at least five months, living at home for more than half the year and getting more than half of your financial support from your parents, your parents can still claim you as a dependent. In that case, you will only need to file federal taxes if your earned income was more than $6,100 or your unearned income (money from things such as interest or stock dividends) was higher than $1,000. If you're no longer a dependent, the threshold for filing is higher. You're required to file a tax return if you earned more than $10,000 in 2013. (Even if you don't have to file, you may choose to do so if you're due a refund.)
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Next, consider all your sources of income from 2013 and any potential tax credits or deductions, and gather all supporting tax documents. On the income side of the equation, your employer(s) should have sent you a W-2 form, which is a record of money you earned and the amount that was taken out of your pay for things such as federal taxes and Social Security. If you did any type of freelance or contract work during the year, you might receive a 1099 miscellaneous income document. Not all of these documents will show up via snail mail; you may have to head online and dig them up yourself. If you're missing a form, you're still responsible for reporting all of your income and payments accurately. "Keep track of all your income, and make sure it is detailed properly," says Tom Colitsas, managing partner at New Jersey-based Princeton Financial Group.
As for tax breaks, know that credits, which lower your taxes dollar for dollar, are more valuable than deductions, which reduce your amount of taxable income.
For example, your education could help put money back in your pocket with a couple of tax-credit options. The American Opportunity Credit is worth up to $2,500 for each of your first four years in college. The Lifetime Learning Credit is 20% of the first $10,000 in tuition and applies to any post-high-school courses designed to acquire or improve job skills, including grad school. You can claim only one of the credits at a time; the credit is usually claimed by parents, but it's all yours if you paid your own tuition. Make sure your school provided you with a 1098-T tuition statement. Plus, if you (or even your parents) paid interest on your student loans, you can deduct as much as $2,500. Score! If you paid at least $600 of interest on student loans in 2013, you'll get a 1098-E student loan interest statement. (See Tax Savings for Young People for many more tax credit and deduction possibilities.)
Your Filing Options
Once you have all your paperwork collected, it's time to actually fill out the tax forms and file. Which federal form should you use? Folks who don't own real estate, have no investment earnings or dependent children, are under the age of 65 and make less than $100,000 can file a 1040EZ, a fairly simple one-page tax form. Otherwise, you'll have to go with one of the longer forms, the 1040A or the full 1040, available online at www.irs.gov.
On the 1040EZ, there's no option for itemized deductions or potential tax credits for, say, tuition payments or unreimbursed work expenses. But for most young people, the standard deduction will more than cover all the deductions they might otherwise itemize. "Standard deduction basically means that the government is giving you a certain amount of deductions free and clear," says Howard Samuels, a CPA at KDMS LLC, an accounting firm with offices in New York and New Jersey. The standard deduction for 2013 is $6,100 if you're single and no one else can claim you as a dependent.
You can go old school and print and fill out paper tax returns and mail them to the appropriate locations. But, especially if you plan to file the longer forms, it will be easier, cleaner and likely beneficial to your bottom line to fill out and file electronically — and I'm going to tell you how to do so free in most cases.
"If you've ever seen those forms, they can get pretty scary pretty quickly," says Eric Roebuck, a senior product manager at H&R Block. Particularly helpful for tax novices hoping to claim deductions and credits, various tax software can guide you to savings with simple questions such as, "Did you get married this year?" or "Did you make payments on student-loan debt?" "You don't need to know tax laws; you just answer questions about your life," says Lisa Greene-Lewis, a CPA for TurboTax.
Plus, if you get a little confused during the filing process, most software offers a chat option, with trained experts standing by to answer questions. H&R Block takes it a step further, offering the option of going over your return with a professional in one of their many offices around the country. Software also comes with the added bonus of error checking before you file so you can fix small mistakes, such as forgetting a digit in your Social Security number or incorrectly adding up your total income, before they turn into bigger problems and hold up your return.
You may qualify for some free digital filing if your adjusted gross income was $58,000 or less in 2013. Through the IRS Free File program, you can use federal tax-preparation software, such as TurboTax, TaxAct or H&R Block, to fill out and file your federal return electronically at no cost; you might even get free help with your state taxes. Each company has its own eligibility requirements, so you'll have to answer a few questions to get started and see which programs are available to you at no charge.
Even if your income exceeds the IRS Free File threshold, you might still be able to use tax software to fill out and file your federal return free. If you can use the 1040EZ, TurboTax and H&R Block let you file free (although you'll pay to file your state return). TaxAct allows all filers to tackle their federal returns free. "Their goal is to hook taxpayers when they're young, so they'll come back and pay when they're making more money," explains Sandra Block, a senior associate editor here at Kiplinger who covers tax issues.
For other filers, such software with electronic filing capabilities can be purchased for less than $50.
When should you seek help from a tax pro? If you have more-complex tax factors such as self-employment or investment income, or if tax time makes you particularly jumpy, it might be worth it to get in-depth assistance. But it won't come cheap. As a general rule, expect to spend at least $100 for a consultation and filing for the most basic returns (no itemizing, no real estate and no dependents). If you have tax issues such as self-employment, withdrawals from a retirement account, or a property purchase, you're easily looking at a bill of more than $250. More comprehensive-service accountants, who will be on call for any tax questions, are likely to charge even more.
If you decide to outsource your taxes, the first step is finding someone you trust. Referrals are key here. Ask friends and family members who live in your state who their tax person is and what their experience has been. Can't find someone via referral? Companies that specialize in tax preparation, such as Jackson Hewitt, Liberty Tax and H&R Block, have offices where you can meet with a tax pro to get your return done. You can also search for smaller accounting firms in your town using search engines such as Yelp, where you can check out peer reviews.
Once you find someone, make sure to vet them yourself. "A phone call or some e-mail exchanges are key with a new CPA," says Samuels, who strongly suggests getting an estimate before you actually head in to get your taxes done. Questions about their certifications and how long they've been preparing taxes, and their thoughts about your personal tax situation, are all fair game. (See Five Steps to Hiring a Tax Pro for more information.)
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