6 steps for 20-something tax filers
Whether this is your first time filing your federal income tax return or your fifth, following a few simple steps can help you avoid rookie mistakes and take advantage of money-saving opportunities.
Know whether you need to file
If you earned more than $10,350,1 you need to file a tax return. But check with your parents to see if they plan to claim you as a dependent. If so, you may need to file if you earned more than $6,3002 in income or if you had unearned income—from things like investments—that topped $1,050,2 or if your gross income was more than the larger of $1,050 or your earned income (up to $5,950) plus $350.
Know which benefits you’re eligible for
Getting a sense of which credits and deductions you may be eligible for can help you save the proper documentation and avoid a last-minute scramble. Here are a few to consider:
- Saver’s credit. If your filing status is single and your adjusted gross income is $30,750 or less,1 you may be eligible for a tax credit if you contribute to a retirement plan.
- Student loan interest. You can deduct up to $2,500 in interest payments, depending on your modified adjusted gross income.
- Moving expenses. If you move more than 50 miles for a new job, you may be eligible for a deduction.
- Job search expenses. If you have a job but are looking for a new position in the same field, job search expenses, such as headhunter fees and résumé printing, may be deductible.
- Charitable deductions. Donating to your alma mater or a favorite charity? Generally, you can deduct those donations if you itemize your taxes.
- Freelance expenses. You may be able to claim deductions for work-related expenses such as industry subscriptions and office supplies.
If you think you may qualify for additional credits or deductions, check the IRS website.
Be organized all year long
Once you know which tax benefits you’re likely to use, you can stay on top of related paperwork all year long, making your life easier during tax season. You probably want to keep receipts for things like charitable donations, job expenses and medical bills, or other items from step 2. You may also want to keep statements from student loans or investments. Having these handy and organized can help you determine whether to itemize and make the process easier. You should keep your paperwork after you file, too. The IRS recommends keeping records for three years.
Get familiar with the paperwork
At some point in the beginning of the year, you should receive tax forms from your employers. If you are a full-time employee, you will receive a Form W-2 detailing your earnings, as well as which taxes were withheld. If you work freelance or on a contract, you will likely receive a Form 1099-MISC detailing what you earned. You may also receive documents showing interest earned on investments (Forms 1099-DIV or 1099-INT, for example), or student loan interest you’ve paid (Form 1098-E). If you’re a college student (or you have a dependent who is), you’ll receive a Form 1098-T to help you figure out deductions and credits related to education expenses. Keep this paperwork handy, since it will help you fill out your return.
Tip: You can’t file your taxes until you’ve received a Form W-2 or 1099 from every place you have worked during the year. When it comes time to file, you use those documents to fill out a Form 1040—the IRS form for individual income taxes. You can choose from three versions of this form.
Know your timeline
You should receive your Forms W-2 and 1099 in January or February. That gives you about two months to prepare your tax return. In general, experts recommend filing tax returns earlier rather than later. The earlier you file, the better your chances of avoiding tax-related identity theft, a crime that’s on the rise. Plus, if you’re owed a refund, you will get it sooner.
Tip: Think you need some extra time to file? Generally, you can file an extension giving you a six-month extension. But if you owe the government money, you still need to pay your estimated taxes in full by the due date, generally April 15, to avoid penalties and interest.
Determine how to file
You can file with the IRS, either online or by mail. You can also use online software to walk you through the process, including instructions for different options, like whether to itemize. This may be helpful if you are prone to math mistakes, since computation errors are some of the most common problems with tax submissions. Often these programs charge fees. Some people may prefer in-person help from a tax accountant.
Tip: To help avoid scams, check the IRS website to make sure you use a registered tax preparer.
- Numbers refer to the 2016 tax year, for single filing status, under age 65, and are subject to change.
- Numbers refer to the 2016 tax year, for single filing status, under age 65, and not blind, and are subject to change.
Neither Bank of America nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.