Taxes and adulting: What to know about filing taxes on your own for the first time | CNN Business

Taxes and adulting: What to know about filing taxes on your own for the first time | CNN Business

New York

For most people in their early- to mid-20s, filing taxes is right up there with having to pay rent and realizing you can’t take summers off anymore: an unwelcome fact of being an adult.

If you’re a recent graduate working your first full-time job or supporting yourself for the first time, this tax-filing season may indeed be your first experience doing your own taxes without the help of a parent.

So here are seven things to keep in mind.

If you’re confounded by filing your taxes, you may think it’s because you’re young and inexperienced. Nonsense. Tax filers of all ages get confused by tax rules and the intricacies of all the tax documents required. And it doesn’t help that tax provisions are tweaked frequently.

Your tax return is a financial snapshot of your life over a 12-month period, in this case 2022. And a lot can happen during that time that will have tax implications and need to be reported.

“Think about what went on in your life in the past year,” said Tom O’Saben, the director of tax content at the National Association of Tax Preparers.

For example, O’Saben asked, did you work more than one job? Did you move for a new job? Did you get laid off? Did you get married or have a child? Did you make student loan payments? Did you make money selling anything you own? Did you buy a home?

Next, pull together all necessary documentation. In addition to receipts and other paperwork you may have kept, you should also have tax forms that were either mailed to you or sent electronically — from your employers, brokerage firms, college, loan servicers, the state unemployment office, etc.

You’ll need the information on these forms to fill out your tax return accurately. Keep in mind, the IRS also has a copy of these “third-party” forms that were sent to you, so its systems will flag if there is any discrepancy between what is on the form sent to you and what you put on your return.

Most people realize what they earn at a full-time job is subject to income tax and that those taxes are automatically withheld by your employer.

But any side hustle income you generate, or money you make as a gig worker, is also taxable, even if you’re paid in cash or via a payment app. Ditto for tips. And often tax on that type of income is not withheld. You’re just paid a gross amount and will have to set aside money to cover the taxes owed on it.

Severance payments and unemployment benefits may be taxable too.

And so is investment income — meaning the profits (or “capital gain”) you make on the sale of an investment or property — which is basically the price for which you sell something minus the original price you paid for it. (Also worth noting: if you have investment income, also called “passive” income, it is taxed at a lower rate than your paycheck — i.e., “earned” income — assuming you held your investment longer than a year.)

Most dividends and interest payments are also taxable.

And remember all that lucrative fun you had betting on the SuperBowl or spending a weekend with friends in Vegas? Yup, your winnings from gambling and sports betting are considered taxable income. (The semi-good news is if you had any gambling losses last year, they can offset your wins, so it may be that you won’t owe tax on your winnings if your losses cancel them out.)

For many of these types of income you should have received forms from your employer (a W2 if you’re a full-time employee); from your clients if you’re a contract or gig worker (eg. a 1099-K, a 1099-NEC) or, starting next year, from the payment apps on which you get paid for your goods and services (e.g., a 1099-MISC). Meanwhile, banks and brokerage firms will send you 1099-INTs (for interest), 1099-DIVs (for dividends) and 1099-Bs (for your capital gains and losses).

If you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming, you don’t have to file a state tax return because those states don’t impose an income tax. If you live in New Hampshire and Tennessee, you won’t have to file a return for your salary and wages. But you may have to file a return if you got income from dividends and interest during the tax year.

The standard deduction reduces your adjusted gross income. The amount for tax year 2022 is $12,950 for singles; $25,900 for married couples filing jointly; and $19,400 for heads of household (e.g., a single parent).

“That’s the amount of money you don’t have to pay tax on,” O’Saben noted.

The only filers who itemize their deductions are those whose deductions add up to more than the standard deduction. Itemized deductions include: charitable contributions, state and local income and property taxes, mortgage interest and casualty loss if you live in a federally declared disaster area.

But even if you just take the standard deduction you may also take in addition what are called “above-the-line” deductions. These include up to $2,500 in student loan interest that you paid in 2022 (your student loan servicer should send you a Form 1098-E); any contributions you made to a deductible IRA or to a Health Savings Account; and, if you’re a teacher, up to $300 of what you spent on school supplies and personal protective equipment for your classroom.

[For a fuller list of different types of taxable income (“additional income”) and above-the-line deductions (“adjustments to income”), see Schedule 1 to the federal 1040 form.]

A tax credit is a dollar-for-dollar reduction of your tax bill and if it’s a “refundable” credit, which some are, it can actually increase your refund.

Some credits to be aware of, especially if you’re not making a lot of income:

The Earned Income Tax Credit: The EITC is intended to help low- and moderate-income workers (defined in 2022 as those with earned income under $59,187), and especially filers with children.

The EITC is also available to earners without qualifying children and it’s worth $560 for 2022.

Education credits: If you were in school last year, footed the costs and are not claimed as a dependent on anyone else’s tax return, you may be eligible for an American Opportunity Tax Credit or a Lifetime Learning Credit. To see if you qualify, here’s an IRS table comparing the eligibility requirements and the value of each of those credits. Also, check to see if your educational institution sent you a Form 1098-T, which you will need if you claim one of these credits.

The Saver’s Credit: The Saver’s Credit is a federal match for lower-income earners’ retirement contributions for up to $2,000 a year.

The Child Tax Credit: If you’re a parent you may claim a maximum child tax credit of $2,000 for each child through age 16 if your modified adjusted gross income is below $200,000 ($400,000 if filing jointly). Above those levels, the child tax credit starts to get reduced. And the portion of the credit treated as refundable — meaning it is paid to you even if you don’t owe any federal income tax — is capped at $1,500, and that is only available to those with earned income of at least $2,500.

And if you paid for child care in 2022, you may be eligible to claim a dependent care credit.

Your federal tax return is due on April 18. That is the day by which you must have filed your 2022 individual tax return and paid any remaining federal income taxes owed for last year. The only exceptions are for those who lived in federally declared disaster areas, in which case their deadlines are later.

But anyone can apply for — and will automatically be granted — a six-month extension until October 16, 2023 to file their return if they submit Form 4868 by April 18.

Note, though, that an extension to file is not an extension to pay if you still owe the IRS more in taxes for last year than you actually paid in 2022.

So, unless you have good reason to believe you will receive a refund, get a ballpark estimate of what more you think you’ll owe the IRS and send in that check by April 18 if you file for an extension. Otherwise you could be hit with a late payment penalty. And that could be compounded by a failure-to-file penalty if you didn’t file on time or didn’t get an automatic filing extension.

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