The Daily Finance Guide: Filling a Tax Return for the First Timers

Filling a Tax Return for the First Timers

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Doing taxes for the first time includes plenty of rules. But is it difficult. What it requires is some serious detailing. Its useful to have the all basics right about the tax system is about.

For The First Timers

The U.S. tax system is all about how much is owed to the government from your earnings. Income tax is generally held back from your pay by the employer on an computing on an annual basis . It's factored on what you are likely to owe, given certain facts namely the total dependents in the family, expected tax breaks that is allowed to be claimed. .

Only after a tax return is prepared and filed ones knows if there is an excess payment for which a refund is received and in the event of a short payment the balance has to paid by the date of filing, normally April 15.

How To Start

An easy option is using a tax software. where a programs fill out the appropriate forms for you based on your information . Free File Alliance is another option. The IRS has partnered with some tax software providers, including H&R Block, TaxSlayer, and TurboTax, to provide for a free preparation of returns for taxpayers earning $69,000 or less as of 2020. Some have lower income and other qualifying rules, but there are 10 providers from where one can choose

These software is free for use like TurboTax Free Edition and Credit Karma Tax.

Also all the forms can be directly downloaded from the IRS website for filling them up Its available free at Free File. For those earning above the income limits they don't qualify for the free preparation.

Review Your Tax Documents

Collect the W-2 forms and other tax documents you have received, such as 1099 forms. You'll having a single W-2 if you have a single job, but you may have multiple 1099s if you have any interest or dividend income, or if you do freelancing or as an independent contractor. Each financial institution should send you one, and also any entity who has paid you more than $600 for non-employee services.

If you read the information on your W-2s you will understand how much you have earned , how much you paid in taxes over the year through wage withholding.

These documents are the basics of your return, whether you file on paper or use software to file your return electronically.

Deductions And Credits

You don’t pay taxes on all those earnings that appear in box 1 of your W-2 form because you're entitled to claim at least one deduction, and deductions reduce the part of the total income you pay the tax on. Tax credits subtract directly from what you owe to the IRS.

An important tax reductions for youngsters is student loan interest, college education expenses, and credits that can help your retirement planning savings. Some other credits include the Child Tax Credit, the Credit for Other Dependents, the Earned Income Tax Credit, and the American Opportunity Credit, which is an educational credit.

Personal exemptions is something one can deduct from the taxable income, your spouse, and each of your dependents, but they were eliminated by the Tax Cuts and Jobs Act, which went into effect in 2018.

How It Works: Tax Credits

Credits are either refundable or nonrefundable. Both are applied first to the tax owed. A nonrefundable credit can either reduce or erase the amount. For example, you may owe the IRS $800, and realize you can claim a $1,000 nonrefundable credit. This would eliminate your tax debt—you wouldn't owe the IRS anything—but the IRS would keep the $200 difference.

The IRS would send you $200 under the same circumstances if the credit you were able to claim is a refundable credit.

The Standard Deduction

The standard deduction is a specific amount that the Internal Revenue Service lets you deduct from your income, and it varies according to your filing status. For example, it's $12,200 for the 2019 tax year if you're single, $24,400 if you're married and file a joint return with your spouse, and $18,350 if you qualify to file as head of household.3

These deductions are inflation indexed , so they go up annually. They're $12,400, $24,800, and $18,650 respectively in the 2020 tax year.

Itemizing The Deductions

You may claim the lump-sum standard deduction, or itemize all the deductions. This will involve a listing of all the qualifying expenses you paid throughout the year and enter the information on a separate form - Schedule A - that must accompany your return when you submit it. You can't claim both the standard deduction and itemize expenses as well.

Its alright to itemize if the total of all the paid, qualifying expenses exceeds the amount of the standard deduction for your filing status. Or else you'd be paying taxes on more income than required.

Some taxpayers are not allowed to claim the standard deduction, so they must itemize. This would be the case if you're married and filing separate returns, and your spouse has already filed and itemized. You must then do the same on your return.

You must also itemize if you're a nonresident or holding dual-status at any time during the tax year, with some exceptions.

Knowing The Filing Status

The IRS offers five filing statuses, and rightly choosing is critical because it determines your standard deduction and affects other rules:

Married Filing Jointly:

You're married and you and your spouse file a single, joint return together.

Married Filing Separately:

You're married, but you and your spouse select to file separate returns.

Qualifying Widow(er):

You were married, but your spouse died during the last two years. You must have a dependent child to qualify for this status, and you can only use it for two years after the year in which your spouse died.

Head Of Household:

You're "considered unmarried." You might still be legally married to your spouse, but you never lived together during the last six months of the year. You must additionally have a qualifying dependent who lives with you, and you must pay for more than half the cost of maintaining your home during the tax year. Other rules apply as well.

Single:

You've never married, or you're legally divorced or separated by court order.
The rules for the head of household and qualifying widow(er) filing statuses can be particularly complex, so you might want to check with a tax professional to make sure you qualify before you claim either of them.

Understanding the Tax Brackets

Your filing status affects the tax rate. There are seven rates or brackets as of 2020, each spanning a different part of the income, but the income spans vary depending on your filing status.

The more you earn, the higher the percentage of the tax rater. For a single filer with earnings in the range $9,875 and $40,125 would pay 10% or $987 of the first $9,875 earned as of 2020, then 12% on income over this amount, up to $40,125 when the 22% tax bracket starts .

These numbers increase to $14,100 and $53,700 respectively if you qualify for head of household filing status. You'd pay 10% on the first $14,100 you earned, then 12% on the balance up to $53,700, then 22% on income over this amount up to $85,500.7

Head of household filers get to enjoy the 10% tax bracket on an additional $4,225 of income—the difference between $9,875 for single filers and $14,100.

Some Technical points for the First Filing

You may like to complete the return on paper, or decide to use a software which will enable you to assess if calculations on paper match the calculations in the software. The IRS provides a list of forms you can use, and they're available free.

You may also take the help of any professional tax preparer and have them relook the forms when you've through with the return. A prior appointment always helps specially if the filing deadline is close. You may tell your office that you want someone to review your return before the IRS receives it. Normally Tax offices do this for a small fee. .