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The Ultimate Guide to Filing Taxes

Erica Gellerman

WealthFit Contributor

Let’s be honest: filing taxes can be confusing and complex. If you aren’t sure how to do your taxes, you’re certainly not alone.

With recent changes, 77% of workers surveyed are confused by new tax legislation. There is a benefit to learning the intricacies of filing taxes and the tax code (hint: it’s green!). Not only will it make doing your taxes a little less painful; you can learn ways to save money in the process. 

In this article, we will explain just that, along with:

  • Why taxes exist
  • Whether or not YOU have to file taxes 
  • How to file your taxes — for free 
  • What deductions are and how to claim them 
  • Why the tax deadline is so important

If this is your first time doing taxes, or if you’ve done your own taxes for many years, keep reading to ensure that you’re filing correctly.

What Are Taxes and Why Do They Exist?

Taxes are a way for the federal, state, or local government to raise money to cover their expenses.

Taxes come in three main forms:

Income Tax

Income tax is a tax on the amount of income that you earn during the year (like from a job or investments. The Federal government relies mainly on income tax revenue.

Sales Tax

Sales tax is a tax on consumption — when you buy items, you get taxed. State governments rely on state income and sales taxes.

Property Tax

Property taxes are taxes you pay for owning property, like a home. Local governments use property taxes to cover their expenses.

In this article, we’ll be focusing on federal income taxes, which is usually the largest tax bill for Americans. The Internal Revenue Service — or IRS — was created to be the tax collection agency for the government. 

Do I Have To File Taxes?

With the tax deadline approaching, you may wonder if you really need to file or if you can skip filing taxes this year. Not everyone has to file taxes. But even if you don’t have to file, you still may want to. Here’s why. 

Whether you have to file will depend on three factors:

  • your filing status
  • income
  • age

The 1040 instructions published by the IRS for 2019 include the following information to help you decide whether you need to file. 

When reading this chart, understand that “gross income” is money that you may have received during the year that isn’t tax-exempt.

If someone else can claim you as a dependent on their tax return (such as your parents), different thresholds apply, which you can find on page 10 of the IRS 1040 instructions for 2019.

If you don’t have to file taxes...

Based on this information, even if the IRS doesn’t require you to file, there are reasons you may want to do so. 

If you worked for an employer that withheld federal income taxes for you, you may be owed a refund. You have to file taxes to get that refund.

There are also tax credits offered that are refundable, meaning that even if you don’t owe money in taxes, you can still get a refund. These tax credits include:

Earned Income Tax Credit (EITC)

If you didn’t earn a lot of money, you may be eligible for the EITC. Since this is a refundable credit, you could get money back without paying taxes. 

Child Tax Credit

Up to $1,400 of this tax credit is refundable for each qualifying child you have under the age of 17. 

American Opportunity Tax Credit

This education tax credit for students is partially refundable. 

If you do have to file taxes — like the majority of Americans — let’s walk through the process step by step. 

How To Do Your Taxes: 7 Steps

 If you’re not sure how to do your taxes, these seven steps will help you navigate the process.

Step 1: Gather the Right Documents

Before you jump into your taxes, it’s important to spend time getting prepared. It takes the average taxpayer (who doesn’t own a business) seven hours to file their taxes. This includes three hours of tax planning and record-keeping. 

Start by gathering all documents you might need to help you file your taxes. This includes:

  • Your prior year tax return, if applicable
  • A photo ID
  • Social security numbers and birth dates for you and anyone included on your tax return (a spouse or dependents)
  • W-2 Forms from all employers
  • Any 1099 forms, including 1099-Misc, 1099-K, 1099-DIV, and 1099-INT
  • Your bank account and routing number
  • If you plan to itemize deductions (covered below), any supporting documents that are needed
  • Total amount paid to a daycare provider and their tax ID number
  • 1098-T for any tuition paid
  • 1098 Mortgage Interest Statement for mortgage interest paid on your primary residence

This isn’t a full list — depending on your situation not all of these will apply to you and there may be other documents that you need. But this should help get you started finding documents and getting organized. 

Step 2: Decide How You’re Going to File

The big question when deciding how to do our taxes: do you DIY your taxes or file a tax pro? There are plenty of options, but how do you decide what is right for you? Let’s explore both.

Complexity

Do you have a fairly basic situation or are things a little more complex?

If you are taking the standard deduction, are a W-2 employee, and haven’t had any large transactions during the year (like selling a home), your tax return is probably going to be straightforward. Filing yourself — or with the help of an online filing software — probably won’t be too challenging.

When things start getting more complex, it might be a better idea to bring in the pros. If you own a business, an investment property, or want to itemize deductions, a tax professional can help you walk through the details. 

Bottom line: if you’re confused about how to do your taxes, getting professional help is a good idea.

Cost

If you don’t know how to do your taxes, hiring someone will cost you more than doing it on your own. According to the National Society of Accountants, it costs an average of $176 to hire someone to prepare and submit a federal and state tax return with no itemized deductions. 

If you decide to use an online tax filing program, you might be able to have your federal tax return submitted for free. If you make under $69,000 you can use free filing products that are available on the IRS website. 

If you make over $69,000, you’ll have to pay for online filing but filing fees for submitting both state and federal returns generally don’t cost too much. 

Advice

One of the benefits of working with a good tax professional is they can offer you advice. The tax code is complicated and it only gets more complex as your income increases. A good tax preparer can help you be strategic and make smart tax moves that can save you money in the years to come. 

If you need additional help figuring out how to do your taxes, you may want to look into free programs offered. 

The Volunteer Income Tax Assistance (VITA) program offers free help to people who make less than $56,000 per year, have a disability, or have limited English speaking abilities. Volunteers will assist with free income tax preparation and electronic filing.

There’s also a program aimed at people over 60 — Tax Counseling for the Elderly (TCE). You’ll receive free advice about pension and retirement issues. 

The IRS website has a location finder tool to help you locate a VITA or TCE site

Step 3: What Tax Return Should You File?

The IRS used to offer simplified forms for people with no dependents and who earned under a certain income level. Those shorter forms were eliminated, so taxpayers are left with two filing options: 1040 or 1040 SR. 

If you are over 65, you may be able to use the newly created (and shorter) form 1040 SR. Everyone else needs to file the full 1040. 

Step 4: Understand Your Filing Status

How much you pay in taxes depends on your filing status. Your filing status options are:

  • Single: if you weren’t married or were divorced by December 31 of the tax year.
  • Married filing jointly: if you were married at the end of the year. If your spouse passed away during the year and you didn’t remarry or your spouse passed away before you filed taxes, you can still file jointly.
  • Married filing separately: you are married but you and your spouse choose to file your tax returns separately. 
  • Head of household: if you are unmarried and provide a home for a certain other person. You must pass one of two tests outlined in the IRS instructions.
  • Qualifying widower: if your spouse died during the prior two tax years and you didn’t remarry, you have a child or stepchild who is a dependent and lived in your home, and you pay for over half of the cost of maintaining your home.  

Choosing the right filing status can be confusing. If you use tax preparation software, it will walk you through questions to help determine the right filing status for you.

Step 5: Will You Itemize Deductions or Take the Standard Deduction?

When filling out your tax return, you’ll be asked if you want to take a standard deduction or an itemized deduction. These deductions are income that you don’t need to pay tax on. 

The standard deduction is a fixed deduction amount, set by the IRS. For 2019, the standard deduction based on your filing status is: 

  • Single or married and filing separately: $12,200
  • Married filing jointly or qualified widower: $24,400
  • Head of household: $18,350

So if you are single and choose to take the standard deduction, you’ll be able to exclude $12,200 of your income from being taxed. 

Itemized deductions are made of up a list of deductions that you can take, set by the IRS. If you add up all of your itemized deductions and it’s greater than the standard deduction, you’d choose to itemize your deductions and have more of your income excluded from being taxed. 

Some of the things that can be included as itemized deductions are:

  • Mortgage interest paid on up to $750,000 of a mortgage
  • State and local taxes paid (up to $10,000)
  • Donations to charity
  • Medical expenses above a certain threshold

Most people are going to go with the standard deduction — it’s estimated that only 13% of filers choose to itemize deductions

Step 6: Do You Owe Money or Will You Get a Tax Refund?

Next is the moment of truth: will you owe money or will you get a tax refund?

The US Tax System is a pay-as-you-go system meaning that you pay taxes throughout the year. 

If you work for an employer, they automatically withhold taxes from your paycheck.

If you’re self-employed, you make quarterly estimated tax payments. 

The goal is to pay the government the correct amount in taxes during the year so that when you file taxes you don’t owe them anything and they don’t owe you anything. 

But, that’s very difficult to do.

If the IRS owes you a refund, you should expect to get one soon. The IRS reports that 90% of their refunds are issued in less than 21 days. If you elected to get your refund by direct deposit, rather than a paper check, it will speed up how quickly you can get your refund. 

If you owe the government money, you’ll need to pay that by the tax filing deadline of April 15. Even if you get an extension, any money that you owe needs to be paid by April 15 to avoid paying the government penalties and interest. 

Step 7: What’s the Deadline? 

Your personal tax return is due each year on April 15th. In any year that April 15th falls on a weekend or a holiday, your tax return is due on the next business day. 

If you’re not ready to file by the due date, you can request an automatic six-month extension using Form 4868. You’ll have an additional six months to file your taxes, but you won’t get an additional six months to pay them. 

If you expect that you’ll owe money, you’ll still need to pay your taxes by the April 15th due date, or risk being charged interest and late payment penalties. 

How To Do Your Taxes

Yes, the process of filing your taxes can be confusing. But don’t get overwhelmed — the value in understanding the process is that knowledge can help save you money during tax season each year.  

Regardless of how many times you may have filed taxes, use the tools and information in this article as a guide. If you have further questions about filing taxes or tax strategy, such as how to file taxes for your business or more information on how tax write-offs work, click here.

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Written By

Erica Gellerman

Erica Gellerman is a CPA, MBA, personal finance writer, and founder of The Worth Project.

Read more about Erica

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