The Best Way to File Taxes
The Best Way to File Taxes When Filing a Tax Return for the First Time
When you do your taxes for the first time, it can be somewhat intimidating. You’re afraid you’ll forget something, or worse, that you’ll mess things up. Don’t sweat it, the best way to file taxes the first time, or for that matter, anytime, is file your taxes online.
Sure, there are lots of rules to look out for, but if you do them online at our site, you don’t have to be concerned with them. We know all the rules and regulations and will make it very easy for you. All you need to do is to answer a few simple questions that also reminds you of any forms to look for.
But since this is your first time that you’re filing your taxes, we’ll give you some of the basics in taxes that will help you to understand just how they work.
The basics of taxes
The U.S. income tax system, or code, was devised to provide the funds needed for the federal government to operate, and also for politicians to give away to foreign governments to buy favors. Every person that works in the USA pays a portion of their income to the IRS. Not only on wages, but on investments and other things too.
Your taxes that you pay are based on your filing status, and the various tax breaks that you’re entitled to according to that filing status. Normally, you can’t be sure if you will get a refund or will owe at the end of the year, until you file your tax return. But you can prepare an estimate using the total income you expect to receive that year.
The best way to start
The best way to file taxes is by using tax software, like our online tax filing program on our website. If you try to prepare them manually, there’s a good chance of making math errors, and carrying over the wrong figure to a schedule.
You can download the tax forms that you’ll need from the IRS website, but as we said, it’s too easy to make an error doing them that way. Plus, you’d have to know maximums and minimums for some things, as filling out forms manually wouldn’t give them to you.
Review all of your tax documents
The first thing you need to do, no matter how you file your tax return, is to gather all of the tax forms that were sent to you. These include your W-2’s, 1099 forms for interest and/or dividends, and any 1099’s you receive if you have a side gig, such as a freelancer.
If you happen to be buying a home, you might be able to itemize your deductions. In that case you would need to gather all of your receipts for medical bills, real estate taxes, charitable contributions, both cash and maybe in-kind, like clothing, etc. to Goodwill.
If you had a side gig, make sure you gather all receipts for the various expenses that you can deduct. That would also include auto mileage if you used your car for the side business. Gathering all of these tax documents is your starting point, and is one of the best ways to file taxes.
How tax credits and deductions affect your return
The amount shown in block 1 of your W-2 form is the gross income reported on your tax return. However, that amount would be reduced by the standard deduction or the total of your itemized deductions, if you had enough. The result would be your taxable income that is used to calculate your tax bill. If you had a tax credit, that would reduce the tax you owed.
Some of the things that younger taxpayers can deduct are student loan interest and a variety of tax credits. Some of the more popular ones are education credits, retirement contribution credit, child tax credit, other dependent credit, dependent care credit, and the earned income credit.
From 2017 and back there used to be a deduction for personal exemptions for yourself, your spouse, and any qualified dependents. When the Tax Cuts and Jobs Act was passed in late 2017, it eliminated the personal exemption deduction for 2018 and forward.
A Tax credit is usually better than a deduction
First of all, some tax credits are refundable and others are non-refundable. We don’t mean to confuse the situation, but that’s the way Congress set them up. A tax credit would be applied to the amount of tax you owe. If it erased all of your tax bill, the IRS would refund the balance not used, as a refund to you on a refundable tax credit.
If all of the tax bill was erased, and there was a balance of the credit remaining, the IRS kept it, then the tax credit was non-refundable.
The new standard deduction
For those taxpayers that don’t have enough deductions to be able to itemize on Schedule A, the IRS has a standard deduction. In years before 2018, there was a small standard deduction along with the personal exemption deduction, but the TCJA changed those.
It eliminated the personal exemption and then raised the standard deduction substantially to compensate. For the tax year 2020, the standard deduction for a single person is $12,400, for a married couple filing jointly, it’s $24,800. Those filing as head of household can deduct $18,650. This deduction is increased slightly each year based on inflation.
Maybe itemizing deductions is better
When you file your return, you have the choice of using the standard deduction or itemizing deductions. The only way to be sure, is to gather all of your qualified expenses for the Schedule A. Gather all bills for items that you paid out of pocket for medical insurance and other medical expenses, including miles driven for medical care.
If you’re buying a home, there will be a bill for real estate taxes, maybe a personal property tax bill, state income taxes paid in a previous year. Then get a total of charitable contributions you have receipts for. You’ll need to calculate the value of in-kind contributions to places like Goodwill, etc.
If the total itemized deductions are higher than the standard deduction, then you can use them on your return. Be careful though, sometimes your state tax return allows itemized deductions, and if your itemized deductions are slightly lower than the standard deduction, it might be better overall to itemize on both returns.
You need to be on top of the best way to file taxes. Sometimes what you see is not the way it is.
Know what your filing status is
This area can be confusing for some individuals, especially if their situation isn’t cut and dry. You need to make sure that you choose the right one because the wrong one can change the results of your tax return dramatically. Plus, if the IRS gets wind of it, the penalty wheel begins to spin – fast.
They are, as follows:
- Married and filing jointly – You’re married to your spouse and you file a joint return together.
- Married filing separately – You’re married but you and your spouse decide to file separate returns.
- Qualifying widow (er) – You were married before your spouse died within the past 2 years. You must have a qualifying dependent child. You can file using married filing joint tax rates.
- Head of Household – You may still be legally married but for the last 6 months of the tax year, you didn’t live with your spouse. You also need to have a qualifying dependent living with you and pay more than 50% of the cost of keeping up your home for that tax year.
- Single – This means that you may be divorced or never married, or separated by a court order.
The rules in effect for filing as a qualifying widow (er) or head of household can be very complex, and even subject to interpretation, so the best way to file taxes might be to seek a tax professional.
Understanding the various tax brackets
The filing status you use directly affects your tax rate. In 2020, there are 7 tax brackets spanning the entire spectrum of income. Basically, the higher your taxable income, the higher the tax bracket. The lowest bracket or rate is 10% and the highest is 37%.
We won’t add to the confusion by listing the various rates for the filing status used. You can look these up on the IRS website.
Tips for filing your first tax return
The best way to file taxes the first time you file is to visit our website and let us guide you through every step of the way. As you review and read the interview questions, you’ll be reminded of the various tax forms that you will need.
It will also explain the various tax terms and what you need to know. After you enter the information from the tax forms that were sent to you, the program will automatically prepare the return for you. It will also make sure you received all tax deductions and tax credits that you are eligible for, based on your filing status. Without a doubt, this is the best way to file taxes.
Gust Lenglet is the CEO of HBS Financial Group, Ltd., an accounting & tax preparation firm in Maryland. He has more than 25 years of experience in the banking and financial industry. Gust started his career as a loan officer at a major national bank, and then moved on to become controller of a multi-state law firm. In recent years, he has written many financial articles that have been published on Ezine Articles and many websites.