Tax preparers say it's not uncommon for new taxpayers to show up at their offices unsure about what to do with their W-2s or 1099s. Others, often young people working their first jobs, arrive wanting to file without the proper documents.
Melinda Kibler, a CFP professional with Palisades Hudson Financial Group in Fort Lauderdale, Florida, recommends that taxpayers, new and veteran, create a folder where tax documents can be safely kept for filing.
In addition to the earnings statements, your tax folder should be home to other types of tax forms you receive. These include statements of additional income, such as interest or other investment earnings, as well as documents useful in claiming tax breaks, such as deductible student loan interest listed on Form 1098-E or records of contributions to an IRA.
"In case it would be more beneficial for you to itemize instead of claiming the standard deduction, you should also save records of deductible expenses," says Kibler.
And don't even think about ignoring the tax statements. In most instances, the IRS also gets copies of these tax-related earnings and payments. These amounts are the first things the IRS checks when it begins processing your return.
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2. Talk with your parents
If you are a student looking to file your first tax return, stop. Talk with your parents first. Mom and Dad may be planning to list you as a dependent or claim some of your college costs on their return. Such claim conflicts are common in families where college kids work enough to be required to file a Form 1040.
Tax rules say, however, that when a taxpayer is a dependent of another filer or simply could be claimed as a dependent, that taxpayer isn't allowed to claim a personal exemption on his or her own return. A personal exemption is a dollar amount that every taxpayer can deduct from his or her income, plus any dependents. The bottom line is that an exemption can show up on only one tax return.
There also are issues regarding whether it would be better for parents or the student to claim some education tax breaks.
To avoid creating filing problems for your folks or yourself, look at each of your tax situations and determine the tax-smart way for each of you to file. Chances are your parents could benefit most from these education tax breaks, and if they're helping you pay for college, it would be nice if you let them get first dibs.
3. Decide how to file
You're ready to file. Now you must decide how. More taxpayers each year turn to tax software to complete and file their returns. Inexperienced filers, however, might be more comfortable getting personal help, either from an accountant or a franchise tax operation. But just because your tax return might be relatively uncomplicated, that doesn't absolve you of due diligence in finding a preparer. Take the time to check out potential tax preparers thoroughly.
Inexperienced filers often are easy targets for tax con artists. To protect yourself from such scams, avoid tax preparers who base their fees on how large of a refund they can get for you.
If cost is a concern, you might be able to file for free through the Free File program. This partnership between the IRS and more than a dozen tax software companies is open to taxpayers who make less than a certain amount. The earnings limit for the 2016 tax year is $64,000.
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4. Don't forget tax deductions and tax credits
New taxpayers should make sure they do not leave money on the table, says Art Agulnek, a senior lecturer who teaches taxation courses in the Naveen Jindal School of Management at the University of Texas at Dallas.
Deductions that are often overlooked, says Agulnek, include:
- State and local sales taxes. The IRS allows you to deduct these by using figures based on your income and geographic location, or you can use your own receipts if you have the records.
- Charitable contributions paid through payroll deductions. Employees may retain pay stubs as proof.
- Child and dependent care credit. You may be able to claim this credit if you paid a provider to care for a dependent while you worked or hunted for a job.
- Job search expenses. The IRS allows deductions for costs such as travel and resume printing.
- Earned income tax credit. Families with lower incomes that qualify can claim this credit.
Workplace benefits also can help save on taxes. Workers can contribute to their company 401(k) or other retirement plan where employee contributions are made on a pretax basis and the money grows tax-deferred. Similar tax-saving, employer-provided benefits include health savings accounts or flexible spending accounts.
5. Don't procrastinate
New taxpayers are sometimes intimidated by the process. But don't let that slow your filing process, says Kibler. "You want to leave ample time before the April deadline in case you run into issues, have questions or have trouble getting an appointment with a tax preparer," she says.
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6. Don't be in such a hurry
There is, however, a tax timing flip side. Don't be in such a hurry to file, especially if you're getting a refund, that you make a costly mistake. Make sure you have all the information and supporting documentation to complete your tax return correctly. If you're still awaiting data as the filing deadline nears, ask the IRS for more time.
All you have to do is complete Form 4868. The IRS will give you six more months, until Oct. 16 this year since the usual Oct. 15 deadline is on a Sunday, to finish your filing paperwork.
You must, however, pay any tax amount that you think you will owe when you submit Form 4868 by the April taxes due date, which falls this year on April 18 because of a Washington, D.C., holiday and the weekend. But at least you'll avoid additional penalties and have ample time to finish up your first IRS tax return properly.