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A Guide to Doing Your Taxes for the Very First Time

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Filing taxes can be intimidating no matter how many times you’ve done it, but it can be especially challenging if it’s your first time.

What documents do you need to collect? What information do you need to report? What deadlines do you have to meet? What if you make a mistake?

It’s a lot to keep track of and there’s a fair amount at stake as well. Accurately filing your taxes will not only help you avoid potential penalties, but it will ensure that you get the maximum refund possible.

This article will guide you through the entire process so that you know how to successfully file your taxes for the first time.

How to decide whether you need to file a return

Not everyone needs to file a federal income tax return, though if you worked for any significant part of the year, it is likely that you do.

You generally need to file a tax return if you earned more than the standard deduction amount, which for 2018 is $12,000 for single filers, $24,000 for married couples filing jointly and $18,000 for anyone filing as head of household. If you’re claimed as a dependent on someone else’s tax return, such as your parents, you generally need to file a return if you made more than $1,050 during the year.

But even if you don’t meet those thresholds, there are still situations in which it may make sense to file a return.

“If you paid federal and state withholding taxes, you would need to file a return in order to potentially get a refund,” said Chris Panek, a CPA in Avon, Minn.

You also need to file a return to qualify for certain tax credits, such as the Earned Income Tax Credit (EITC), which can put a significant amount of money back in your pocket if you’re working but earning a low income.

At the end of the day, it’s often worth filing unless you’re absolutely certain that you don’t need to file and that you won’t qualify for a refund or any tax credits.

“There’s no risk to filing a return,” said Panek. “You need to file a return in order to potentially get a refund, and if you do file a return and didn’t need to, there shouldn’t be any risk at all.”

If you’d like some help deciding whether it’s worth filing a tax return, you can use the following tool provided by the IRS: Do I Need to File a Tax Return?

The tax filing deadlines you need to meet

April 15 is the standard tax filing deadline, but that date can be adjusted for weekends and holidays. In 2019, the tax filing deadline is April 17.

Meeting this deadline is critical because failure to file on time can have several negative consequences.

First, you may be subject to a failure-to-file penalty, which is typically calculated as up to 5% of your unpaid taxes for each month that you’re late, with a maximum penalty of 25% of your unpaid taxes.

Second, if you haven’t paid your taxes in full by the deadline, you may be subject to a penalty as well, typically calculated as 0.5%-1% of your unpaid taxes for each month that you’re late, though the combined failure-to-file penalty and failure-to-pay penalty can’t be more than 5% in any given month.

Finally, you won’t receive your refund or be able to claim tax credits unless you file. You do have three years from the original due date in order to file and claim a refund, but, again, waiting can subject you to penalties, and in any case receiving that refund earlier is better than receiving it later.

If, for whatever reason, you are having trouble filing an accurate return by the April 17 deadline, you are allowed to request an automatic six-month extension that gives you until Oct. 15 to file your return. There are no eligibility requirements to get an extension, and requesting an extension by April 17 will allow you to avoid the failure-to-file penalties as long as you meet that Oct.15 deadline.

It’s worth noting, however, that the extension only applies to the filing of your return and not to the payment of your tax liability. You still need to pay in full by April 17 in order to avoid the failure-to-pay penalty.

“I would highly recommend that you get your return done by April 15,” said Panek. “A lot of times people aren’t thinking about their taxes by the time extensions are due, and if you do owe money, that’s still due on April 15.”

How to collect and organize the necessary tax documents

One of the most confusing parts of filing your taxes, especially the first time around, is knowing which tax forms you need to collect, when you should expect to receive them and how to keep everything organized so that you’re ready when it’s time to put it all together.

The first step is to simply have a basic system for keeping everything organized so that whenever you do receive a document, you’ll have somewhere to keep it.

“I definitely recommend to clients, especially if they’re getting a lot of documents in the mail, that they keep a folder where they can keep them all,” said Panek. “Every time you receive something, put it in that folder and just let it accumulate so that when [you] start your return, you have all of it ready to go.”

According to Panek, most tax documents have to be sent out by Jan. 31. That includes W-2s that report your earned income from your employers, 1099-INTs that report interest earned on your bank accounts and 1099-DIVs that report dividend income earned from your investments.

Other forms you might need to collect, depending on your situation, include:

  • Form 1098 – Reports mortgage interest paid during the year.
  • Form 1099-MISC – Reports income earned as an independent contractor.
  • Forms 1095-A, B and C – Reports on your health insurance coverage.
  • Form 1098-E – Reports on student loan interest paid during the year.
  • Schedule K-1 – Reports income earned as part-owner of a business. According to Panek, these forms typically aren’t required to be sent out until March 15.
  • Receipts for charitable deductions, medical expenses and child care expenses that could potentially be deductible.

While you don’t want to wait until the last minute to file your taxes, Panek recommends that you do give it some time so that you can be sure you have everything you need before starting the process.

“You want to make sure that you have all your forms before you file so you don’t have to go back and amend that return,” said Panek. “Since everything is sent out by Jan. 31, it wouldn’t be beneficial to file your taxes before then unless you’re absolutely sure that you have all the forms you need.”

How to file your taxes

Once you’ve decided that you need to file a return and you’ve collected all the documents you think you’ll need, it’s time to file your taxes.

There are a few different ways to go about it, and the right choice depends on the specifics of your situation.

Option #1: IRS free e-file

If you make $66,000 or less, you are eligible to use the IRS’ free tax-filing software that guides you through the process of filling out the return. If you make more than $66,000, you can use the free fillable forms offered by the IRS, though you won’t have the benefit of software to guide you through them.

If your income is low enough to qualify for the free software, and if your overall tax situation is relatively simple, this option may be a no-brainer.

“This can be great if you have a simple return, meaning that you’re simply getting a W-2 from your employer and you potentially have some simple investments,” said Panek.

The fillable forms can also be useful, but Panek warns that since you don’t receive the same kind of guidance, it’s a better option for people who have a stronger foundation in taxes.

“A lot of people will use the free services when they understand the tax law,” said Panek. “But if you are filing a return and you’re not sure about what you should be entering in, I would seek out a professional tax preparer to help you out.”

Option #2: Tax preparation software

If you don’t qualify for the free IRS e-file option, and if your situation isn’t complicated enough to hire a professional tax preparer, paying for tax preparation software may be a good middle ground.

The cost of tax preparation software ranges from just a few dollars to almost $200, depending on the complexity of your situation. And while you don’t get the expertise of a professional reviewing your situation, you do benefit from more guidance than you would get if you filed your taxes on your own.

“The software will guide through some questions to help you understand what you need to report,” said Panek. “If you have a simple enough return and you feel comfortable with the software, it’s fine to do this on your own.”

Option #3: Professional tax preparer

If you have a complicated tax situation, are unsure about anything in your return, or if you’d like a little guidance about how to minimize your tax payments, it may be worth paying to work with a professional tax preparer.

“Whenever you feel that your tax return is getting more complicated, or you’re unsure of how you should be adjusting things within your tax return, I always suggest that you seek out a professional,” said Panek. “The nice thing is that they’ll be able to sit down with you and go more in-depth, and they may ask questions that otherwise wouldn’t come up.”

In addition to making sure that the current year’s return is done right, Panek said that a professional tax preparer could help you make decisions like how much to contribute to your employer retirement plan next year by showing you exactly how those contributions would affect your return. If you’re starting a business, a tax professional could also make sure that you set it up properly with a tax ID and help you understand which expenses are deductible.

The biggest downside to working with a professional is the cost. It can vary a lot depending on the type of professional you use and the scope of service you need, but it will almost certainly cost more than using tax preparation software.

Still, Panek says that in many cases, the cost will be worth it and that it may not be quite as burdensome as it seems on the surface.

“If you’re looking at something like TurboTax, the dollar amount that you’re spending on the software could go right to the person you’re paying to prepare your taxes,” said Panek. “A tax preparer can even first help you with the question of whether you need to file, and then you can decide whether you want to hire them to help you out.”

There are a number of factors to consider when hiring a tax preparer, and the IRS offers two useful resources to help you make a good decision:

When you can expect a refund

One piece of good news when it comes to filing taxes is that if you’re owed a refund, you will typically receive it fairly quickly. According to the IRS, most refunds are issued in less than 21 days and you can check the status of your refund within 24 hours of filing an electronic return.

“It varies in terms of how fast they come back and what you have going on in your tax return,” said Panek. “But I’ve had people who have gotten their refunds back by the next week.”

You can choose to receive your refund either via mail or by direct deposit into your bank account. According to the IRS, choosing direct deposit is both more secure and it allows you to get your refund quicker. You can even choose to split your refund among three different bank accounts if you’d like.

Of course, while it’s always nice to receive a big chunk of money all at once, there’s plenty of debate over the benefits of a refund compared with reducing your withholding so that you receive more money in your paychecks over the course of the year.

On the one hand, getting that refund can help you pay off debt, build savings or fund a college savings account in one fell swoop. On the other hand, a big refund means that you’ve essentially been loaning the government money for the past year, money that could have been yours to do with as you pleased.

“Some people that rely on that big refund because they’re not savers and they would rather have the government save that money for them,” said Panek. “Other people don’t want their money anywhere else. If there’s money that should be theirs, they want to be saving it themselves.”

“I personally like to get my clients as close to their actual tax liability as possible,” added Panek. “That way, they’re not getting a big refund and don’t owe a big tax bill.”

If, after filling out your taxes, you feel like your refund was either too big or too small, you can fill out a new W-4 and submit it to your employer so that they can adjust your withholding up or down. The IRS can help you figure out how to make those adjustments with their Paycheck Checkup tool.

Other common tax questions

Every tax situation is different, so you may still have questions even after reviewing all of the information above. The IRS offers a helpful FAQ that addresses many of the most common questions, and here are a few more answers that may point you in the right direction.

How will the new tax law affect me?

With the 2018 tax reforms in effect, one big question is how the new rules will affect your personal tax return.

The truth is that there are a lot of variables in every tax return, so there’s no way to say for certain how you will be affected. For example, a higher standard deduction will largely help people who don’t itemize their deductions, but a stricter limit on state and local tax deductions may hurt people in high-tax states, such as California and New York.

On the whole, income tax brackets have largely been decreased, which means that many people may see at least a small decrease in their tax bill compared with recent years. But the only way to know for sure is to do your taxes as accurately as possible and see where things land.

How can I reduce my tax liability?

There aren’t many ways to reduce your tax liability after Dec.31, but you do have until April 15 to make traditional IRA contributions for the prior year and those contributions are deductible on your tax return.

If eligible, you can contribute up to $5,500 to your IRA for 2018 (it’s $6,500 if you are age 50 or older). If you’re married, your spouse can potentially make another $5,500 contribution, allowing you to reduce your taxable income by as much as $11,000.

How do I pay taxes I owe?

If you file your return and find out that you owe taxes, remember that you have until April 17 to make that payment, or else you may be subject to penalties.

The IRS offers several different ways to pay, including paying directly from your bank account, by debit or credit card, or sending in a check.

What if I can’t afford to pay?

If you can’t afford to pay the taxes you owe, you can file an online payment agreement that may allow you to delay payment for up to 120 days or to create an installment plan so that you can make payments over time. You can also call the helpline at 800-829-1040 to discuss your options with a representative.

File without fear

Although filing your taxes for the first time can feel overwhelming and intimidating, the truth is that there’s not much to fear. The main potential penalties are associated with not filing, and as long as you meet the deadlines, there are ways to work with the IRS even if you owe money.

The keys to filing your return successfully are simply to be on the lookout for tax documents that come your way, keep them organized in a place where you’ll remember them and use whatever guidance you need in completing your return on time.

As long as you do those things, you should be just fine.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Matt Becker
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Matt Becker is a writer at MagnifyMoney. You can email Matt here

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How to Save on Back-to-School Shopping

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Parents often revel in the calm and quiet that comes when kids head back to school, but they aren’t likely to enjoy the excess spending that also accompanies the back-to-school season. According to the National Retail Federation, parents will set a record in 2019, spending an average of $696.70 per household on children in elementary school through high school.

 

“It was interesting to see the across-the-board increases in spending levels,” said Mark Mathews, vice president for research development and industry analysis with the NRF. “Elevated levels of consumer sentiment, healthy household balance sheets, low inflation and recent wage gains all seem to be contributing to a confident consumer who is willing to spend money on back-to-school supplies.”

If you’re planning a trip to the store before classes start, there are a few ways to curb the spending and save some bucks.

Plan ahead

No parent should set foot out the door for back-to-school shopping without first taking stock of what they already have. Plenty of old supplies from previous years might still be usable, especially arts and crafts items like crayons, pencils and pens, as well as more expensive things like backpacks, lunch boxes and calculators.

Crossing a few items off your list is a good first step when it comes to saving, but learning how to budget is also important. It’s tempting to run down the back-to-school aisle and grab every colorful notebook and snazzy pencil case in sight, but it doesn’t make a lot of financial sense. Create a realistic budget based on the items you actually need, and try your best to stick to it. If possible, do most of your shopping online, since it’s easier to keep a running tally of how much you’re spending as you shop.

Be smart about sales

Although you’re bound to run into many back-to-school sales this time of year, you don’t need to buy 12 notebooks just because they’re cheaper right now. In fact, you shouldn’t assume the sales price is the best price at all, said consumer savings expert Andrea Woroch. Instead, always comparison shop.

“Run a quick Google search online or on your phone to see if another store is selling the same or a similar item for less,” she said. “Most big box stores will price match, so you won’t even have to drive to another store to get the better deal.” For example, Target, Staples and Walmart all have price matching policies.

Clip coupons and shop discount stores

Coupons have definitely made a digital comeback, with countless apps and websites dedicated to listing all your options in one place. “Spending a few minutes looking for coupons can help you get a better discount,” Woroch said. “Use apps like CouponSherpa, for instance. Or, use the Honey browser tool, which automatically searches and applies relevant coupons to your online order.”

Many stores also offer discounts to valued customers who sign up for their rewards program, like Walgreens and CVS, while craft stores like Michaels regularly offer discounts. Don’t knock purchasing basics like paper and writing supplies from the Dollar Tree, either — you might be surprised by what you find, and those types of items are often the same quality wherever you buy them.

Tax advantage of tax-free holidays

On select dates throughout the year, different states offer state sales tax holidays, or days where you can purchase items without having to pay sales tax on them. You can find a full list of the 2019 state sales tax holidays here, but some upcoming ones include:

  • August 18-24: Connecticut, clothing and footwear
  • August 17-18: Massachusetts, specific items costing less than $2,500 per item

Split bulk purchases

You can usually save money by buying certain items — like construction paper, pens, pencils and folders — in bulk, but you can save even more by splitting those bulk items with other families. Not only is this a great way to share savings, Woroch said, but you can earn rewards faster by charging everything on your card and then having the families pay you back.

Redeem your rewards

If you have a cash back credit card, now’s the time to use it. “Most credit cards give you the best redemption value when you opt for statement credit or have the cash rewards deposited into your bank,” Woroch said. “You can set this money aside for back-to-school shopping.”

Alternatively, Woroch suggested checking to see if your particular card allows you to redeem points for gift cards to retailers where you plan to shop.

Use discounted gift cards

Besides redeeming credit card points for retailer gift cards, you can also scour the web for cheap gift cards online. Planning a trip to Target? Scan websites like Raise, Cardpool and CardCash first. These sites buy and sell unused gift cards at a discount, meaning you can save on purchases you were planning to make anyway.

Consider having your kids contribute

Depending on your child’s age, back-to-school shopping might be the perfect time to start having them contribute to their own goods, especially if they earn an allowance or have a job. Talking to your kids about money at a young age — whether about budgeting, saving or spending — will help them develop solid money habits that will pay off in the future.

Parents already seem to be catching on to this idea. “It was surprising to see how much of their own money kids are contributing towards the back-to-school bills,” Mathews said. “Teens and pre-teens will be spending $63 of their own money, which works out to $1.5 billion overall. This is significantly higher than the levels we saw a decade ago.”

Although the news about increased spending on back-to-school supplies may be alarming, these days there are more ways than ever to save. A little ingenuity, resourcefulness and research can go a long way.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Cheryl Lock
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Cheryl Lock is a writer at MagnifyMoney. You can email Cheryl at [email protected]

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Survey: Most Americans Have Raided Their Retirement Savings

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Successfully saving for retirement requires dedication and self-restraint, but more than half the country admits to robbing their future selves in order to satisfy today’s spending needs, according to a new survey by MagnifyMoney. While the economic pressures bearing down on workers today make their actions understandable, the hard truth is that many Americans are turning an already-difficult task that much harder by tapping into their retirement savings early.

Key Findings

  • Approximately 52% of respondents admit to tapping their retirement savings account early for a purpose other than retiring: 23% have done so to pay off debt, 17% for a down payment on a home, 11% for college tuition, 9% for medical expenses, and 3% for some other reason.
  • About 29% say there are some scenarios where it is a good idea to withdraw money early from a retirement savings account.
  • Around 60% of respondents do not know exactly how much they have saved for retirement. Just 40% know the exact amount, while 45% have a rough idea, and 15% have no clue.
  • Almost 25% are unhappy with their retirement savings. 47% are happy with the amount saved, and about 28% are neither happy nor unhappy.
  • Finally, 27% have never thought about how much money they’ll need in retirement.

Why are Americans tapping their retirement savings early?

The two main reasons respondents cited for withdrawing money from their retirement savings are as American as apple pie: home ownership and personal debt. According to the survey, 23% of those making an early withdrawal did so to help pay down non-medical debt, while 17% needed the money for a down payment on a home.

Although the housing market appears to be cooling off compared to just a few years ago, a down payment on a home still requires a significant chunk of change — experts recommend a down payment equaling 20% of the total mortgage to optimize your mortgage payments.

Personal debt, from credit cards to student loans, remains a fixture of everyday economic reality for millions of Americans. In other words, the stressors that cause workers to raid their retirement funds don’t look like they will decrease appreciably in the foreseeable future.

Which Americans are withdrawing money the most?

Breaking down the demographics, older savers are less likely to withdraw money from their retirement fund than younger savers. 54% of millennial savers say they’ve taken an early withdrawal from a retirement savings account, compared with 50% of Gen Xers and 43% of baby boomers. This stands to reason considering that many millennials have now entered the stage of life where they are getting mortgages, starting families and taking on bigger financial obligations while also being decades away from the traditional retirement age. Millennials are also more likely to say that raiding your retirement fund is justified under certain circumstances, as seen in the chart below:

Just one of many bad retirement savings habits

Tapping into retirement funds — whether an employer-sponsored 401(k) or a traditional IRA — before the appropriate age almost always comes with a financial penalty in the form of additional taxes and fees. What is more, you’re diminishing the principle that fuels the compound interest you need to meet your retirement savings goals.

Unfortunately the survey reveals early withdrawals are just one of the many bad habits Americans engage in when it comes to retirement savings. This list of less-than-ideal practices includes:

  • 35% of Americans are not currently saving for retirement. Of those who are, 37% started saving at age 30 or above, and 12% started saving when they were older than 40.
  • 60% of Americans do not know exactly how much they have saved for retirement. Just 40% know the exact amount, while 45% have a rough idea and 15% have no clue.
  • Nearly 1 in 5 Americans don’t contribute enough to their employer-sponsored retirement account to get the maximum company match. Maximizing a company match is one of  your best ways to maximize your retirement savings. Among those with an employer-sponsored retirement savings plan, just 17% of respondents contribute 10% or more of their take-home pay. Almost 5% contribute nothing at all, and nearly 6% are unclear about how much they contribute.

  • Approximately 42% of respondents have made the mistake of withdrawing their entire balance from an employer-sponsored retirement plan when changing jobs without rolling it over – and nearly 15% have done so more than once. A little more than 47% of millennials admit to this faux pas.

The most damning finding of all is that 27% of those surveyed have never thought about how much they’ll need in retirement. And while “ignorance is bliss” may hold true when it comes to some things in life, this expression should not apply to your retirement plans.

Methodology

MagnifyMoney by LendingTree commissioned Qualtrics to conduct an online survey of 1,029 Americans, with the sample base proportioned to represent the general population. The survey was fielded June 24-27, 2019.

Generations are defined as:

  • Millennials are ages 22-37
  • Generation Xers are ages 38-53
  • Baby boomers are ages 54-72

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James Ellis
James Ellis |

James Ellis is a writer at MagnifyMoney. You can email James here