April 15 (18 April 2022). Now that you’re an adult, this date probably gives you some type of anxiety. Filing taxes can seem very overwhelming and intimidating. You have all these forms that you need to keep track of and understand what each one is for.
Below, we are giving you the breakdown on the basics of tax forms and filing your individual income tax return AKA the Form 1040. Our goal here is to help you feel empowered when filling out your tax forms and understand what is being asked from you.
Disclaimer: This is not professional tax advice. This is to provide general knowledge on how to approach doing your taxes.
Why file early?
Get your money back sooner.
Although April 15 (18 April 2022) is the official Federal tax day, we highly recommend not putting off filing your taxes to the last minute. Honestly, once you get all the necessary forms, just file your taxes right away. If you are getting a refund, that is your money just sitting there. The earlier you file, the earlier you can get that money back. And if you owe you have more time to save.
How can I make paying taxes hurt less?
You definitely don’t want to lose or owe money when you file your taxes, so how do you make it hurt less?
First, pay yourself. Contribute to your retirement account- it reduces your taxable income up to $6,000 for IRA or $19,500 for 401(k).
Second, let’s talk about withholdings. Withholdings are essentially the amount of money you put aside that you’re going to use to pay taxes on for the year.You can use a paycheck calculator like https://smartasset.com/taxes/paycheck-calculator.
If you have an employer, you can elect how much Federal and State taxes your employer deducts or withholds from your paycheck. If you go into your paystub, you’ll see these federal and state tax withholdings. We recommend you use a paycheck calculator. The calculator will also show you how you are paying for Social Security (6.2%) and Medicare (1.45%). Keep in mind that if you opt for no withholdings or a reduced percentage, you will pay a underpayment penalty (3 - 5%) and you will need to come up with all the money by tax due date or pay late payment penalty, so paying your taxes with every paycheck or quarterly is a lot less painful .
An underpayment penalty is a fine levied by the IRS on taxpayers who don't pay enough of their estimated taxes or have enough withheld from their wages, or those who pay late. To avoid an underpayment penalty, individuals must pay either 100% of last year's tax or 90% of this year's tax.
If you are self-employed, using the paycheck calculator is even more important because you are also liable for paying Social Security (12.4%), Medicare (2.9%), and Federal and State taxes. It is your responsibility to make sure you are paying your taxes as you are earning, so you eliminate penalties and minimize a large tax bill. Typically 30% of your earnings.
What do you need to file your taxes?
In order to make tax filing less overwhelming, one tip we recommend is gathering all the forms your employer, clients, and/or the government have sent you and saving it to a file folder on your desktop. Depending on your situation, the types of forms you will need may vary, so I’ve listed out common scenarios below.
Are you employed?
✅ W-2
If you are employed by an external employer, the W-2 is a form that contains information about your salary. This will also detail your 401(k) contributions.
Are you unemployed?
✅ 1099-G
If you’re unemployed, you should receive a copy of this from your government agency. This contains information about unemployment benefits you received, and any taxes withheld.
Are you self-employed?
This is where it gets a little more complicated and you should do additional research to ensure that you have all the necessary forms for your business. Below I’ve detailed the basics.
✅ 1099-NEC
If you are an independent contractor or freelancer, your clients should send you a Form 1099-NEC showing how much they paid you during the year. You’ll need these to calculate and report your total income from your contract or freelance work.
✅ Schedule K-1
This form is typically needed if you have an LLC for your business. It is used to report each partner’s share of the partnership’s income, losses, tax deductions, and tax credits.
✅ Schedule C
A Schedule C is a tax form that you file with your Form 1040 to report profit, loss, and expenses from your business. So if you’re self-employed, it’s important to keep a record and take note of all your business’ expenses to offset the costs.
Do you have other forms of income?
Savings Accounts
✅ 1099-INT
A 1099-INT details interest income that you receive from your bank i.e. your savings account. You can obtain this from your online bank account.
Stocks and Bonds
✅ 1099-DIV
A 1099-DIV reports dividends and capital gains from your taxable investments. So if you’ve been putting money into stocks, make sure you obtain this from your brokerage.
✅ 1099-B
A 1099-B depicts any capital gains or losses realized in your taxable accounts. So if you sold stock, bonds, or other securities through a broker, you will also need to obtain this from your broker.
Other Forms of Income
✅ 1099-MISC
A 1099-MISC tax form is a type of form that reports miscellaneous income. These can include:
At least $600 for
Rental income
Prizes and awards
Medical and health care payments
Fish (or other aquatic life) you sold for resale
Cash from a notional principal contract to a person, partnership, or estate
Payments from clients if you’re an attorney
Proceeds from a fishing boat
At least $10 in royalties or broker payments
At least $5000 in consumer product sales conducted anywhere other than a permanent retail establishment
What about deductions?
If you don’t know what deductions are, it’s basically reducing the total amount of tax you owe and getting into a lower tax bracket. So the ultimate goal is to pay less tax.
These deductions are things that the government wants to encourage like donating to charities and home ownership, etc.
Standard Deductions vs. Itemized Deductions
So there are two ways to reduce that taxable income: standard deductions and itemized deductions. Most people (about 70%) file standard deductions.
If you do own a home or have other deductible expenses like property tax, mortgage interest, or charity, then it’s probably worth filing for the itemized deductions. However if you opt to go this route, make sure that the total is greater than the standard deduction amount, which is $12,550 for 2021 or 12,850 (if you donated $300 to charity).
If you don’t own a home or have these other expenses, then it would be more beneficial to do a standard deduction. The good news is that the software will tell you what is best for you.
Okay, great. So how do I file my taxes?
If you have simple tax returns, then there are plenty of free software programs out there. The average cost for a basic tax form preparation is about $220. Use the IRS link https://apps.irs.gov/app/freeFile/browse-all-offers/ to pay as little as $0 or as much as $9.95.
I personally used OLT Free File - Federal Taxes and State Taxes Online and paid $9.95. The great thing about using these software programs is that they make it easy to file your taxes. It guides you through the process where you simply answer questions and input the information from the tax forms you saved earlier.
IRS Free File
The IRS has a partnership with a nonprofit organization called the Free File Alliance that provides access to free guided tax preparation. So if you make less than $73k per year, take advantage of this! You can access this by visiting http://www.irs.gov/freefile.
If you make more than $73K there are other low cost options like OLT.com for $9.95.
Still feeling nervous? File your taxes with us!
If you’re still intimidated by the thought of filing your taxes, we are here for you! Tune in to our Taxes: Step-by-Step Example podcast episode, where you can file your taxes alongside Elizabeth as she walks through her tax forms.
Now go get your money back! Happy filing! 🤗