Don't look now, but we're just 10 days away from the tax filing deadline in 2014. For many us tax time has become something of a monotonous and laborious routine that involves compiling receipts, breaking out our dusty calculators, and either utilizing tax-prepping software or engaging our local tax professional or accountant to complete our filing.
For others, though, primarily young adults, this could be their first year preparing to file a tax return. I recall my first year of filing a tax return nearly two decades ago, and frankly it was kind of scary and a bit overwhelming. I didn't quite know what to expect or what to bring to my tax professional, as we're talking about a time before commonly used tax-prepping software.
Today, to hopefully quell some of that uncertainty for first-time filers, we're going to look at five important tips and reminders in order to make your taxes a breeze.
1. Gather all essential paperwork
The first step to successfully completing your taxes is in ensuring that you have all of the appropriate income and deduction paperwork. This means your W-2 or 1099 forms that describe income earned in the previous year, as well as any other pertinent forms such as dividend income, interest income, or capital gains income should you have investments. Other forms and/or receipts to consider gathering would be charitable deductions, eligible deductions for interest paid on your education (Form 1098-E), or contributions made to a retirement account.
One thing to consider, especially if you're a young adult, is that you may have had a number of part-time jobs in the previous year. You need to include all of these W-2s or 1099s in your tax filing or you'll be failing to report income to the government. Remember, businesses report your W-2s to the government, meaning they already have a copy of your wages, so honesty is always going to be the best policy when filing your taxes.
2. Seek out common and often forgotten deductions
In addition to potentially forgetting about part-time income, first-time filers aren't particularly adept at seeking out all of the deductions they may be entitled to.
For example, many first-time filers often forget that the IRS allows them to claim job-search expenses such as resume printing and travel. You may not think saving receipts for these actions is worthwhile, but they can actually add up quickly. Other commonly overlooked deductions and credits include state or local sales taxes and Earned Income Tax Credits you'd qualify for, assuming you have no children, if you're between the ages of 25 and 65, have lived in the U.S. for at least half of 2013, if you aren't someone else's dependent, and if you've earned less than $14,340 in adjusted gross income. You can find the full guidelines for the EITC and whether you'll qualify from the IRS by clicking here.
3. Understand the difference between tax deductions and tax credits
Terminology is another big hurdle for new tax filers, especially as it pertains to tax deductions and tax credits. Let's keep in mind that both are good -- you want deductions and credits! However, the two aren't the same, and it pays to know the difference.
Tax deductions are qualifying expenses that help lower your taxable income. These are items such as job search expenses, contributions to a qualified retirement account, tuition and fees, and student loan interest, to name a few.
Tax credits, on the other hand, are subtractions against your tax liability, such as the EITC, qualifying tax credits for home improvements, or for individuals and families that pay for the dependent care of another person.
While both deductions and credits help, tax credits are far more valuable as you'll see a dollar-for-dollar deduction against your tax liability for each credit you qualify for. Comparatively, a deduction will only reduce your taxable income by your marginal tax percentage, which is well below 100% (thankfully!).
4. File your taxes electronically
Whether you choose to do your taxes yourself using tax-prepping software from any number of tax software companies or you seek out the help of a tax professional or accountant, make sure you ultimately file your tax return electronically.
There are a number of advantages to e-filing as opposed to paper filing, including a quicker tax refund should you be due money from the government, considerably more legible print for IRS agents to read, and most importantly, a considerably lower chance of errors. According to TurboTax, there's a 41 times greater potential for errors to occur on paper forms than those who file their taxes electronically. Therefore, do yourself a favor and put the odds on your side by e-filing.
5. Don't miss the deadline
Lastly, as trivial and straightforward as this may sound, don't miss the tax filing deadline of Tuesday, April 15.
Keep in mind that the IRS merely requires you to have submitted your taxes electronically, or to have had your taxes postmarked before 12 a.m. on April 16 in order to meet the deadline, which still leaves you plenty of time to complete your taxes over the next 10 days.
If you aren't able to complete your taxes by April 15, make you sure file Form 4868, which gives you a six-month filing extension until Oct. 15. It's not entirely a "get out of jail free" card, in that if you expect to owe money you're still required to send in that estimated amount with your extension request, but it's better than missing the deadline completely and paying what can be some hefty penalties and interest fines.
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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