Filing Taxes for the First Time: Everything You Need to Know

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When I was in college, the idea of filing taxes sounded both entirely foreign and super complicated. I envisioned my parents laboring over shoeboxes filled with receipts, hunched over an accounting calculator, trying to decipher some tax code in some massive book that they hid away.

Luckily, the process doesn’t suck nearly that bad.

I’m guessing that, if you’re here, you’ve never done your own taxes, either.

No need to fear! Doing your own taxes isn’t that bad. Even if you’re a student or a first-time filer, I’m confident you can do them on your own basically issue-free.

And, even better… you don’t have to do any math when doing your own taxes.

#blessed ????

In this ultimate guide for first-time tax filers, I break down:

  • The basics of US taxes – so you can start to understand the logic to IRS madness
  • The most important deductions to watch for as a student, recent grad, & young adult
  • HOW you can do your own taxes, along with the pros & cons of different tax softwares
  • What forms you need to watch for before submitting taxes

Please note: this post contains affiliate links. What that means is, if you click a link and make a purchase, I may make a commission no additional cost to you. For more details, please read my Affiliate Disclosure!

The Basics of US Taxes

I love this Tweet because it pretty well summarizes how absurd the US tax code is.

Urban legends speak of the tax code topping out at over 70,000 pages. That urban legend definitely exaggerates how long US tax code is, but that doesn’t change the main point: US taxes are complicated.

Don’t be scared, though. There is plenty of tax software out there to help anyone get their taxes done quickly, cheaply, and most importantly correctly.

Simplified US tax theory

US taxes are progressive. This means that the more money you make, the higher your tax percentage is.

This isn’t just money you make at your job! ALL the money you make is technically taxable. Profits on selling a house, gambling winnings, tips, and cash from your side hustle are all taxable income.

To figure out what the tax rate is based on your income level, you have to look at the tax bracket. Tax brackets do NOT tell you what percentage of your income goes to Uncle Sam, contrary to what most people believe. Your income is broken up into chunks (or brackets!) and each bracket is taxed at an increasing rate. If you’re really curious, read more about tax brackets here.

tl;dr – your tax rate is a lot lower than whatever tax bracket you fall into, so that’s great news.

Your effective tax rate just tells you about what you owe for Federal income taxes. Uncle Sam has other ways to reduce your paycheck. There’s Medicare, Social Security, state income taxes … we’ll talk about that more in the “Other types of taxes” section.

Luckily, there are ways to reduce how much money the government takes. Everyone qualifies for the Standard Deduction, which we talk about in more detail later. There’s also tax credits & deductions that you may qualify for depending on what you did that year.

And online tax software will help you figure all of this out to maximize your return!

What is “Filing Status”?

Filing status tells the IRS roughly your relationship status. Sounds weird, but it’s true. Your filing status determines what tax bracket you fall in, what kinds of deductions & credits you qualify for, and so much more. There are 5 ways you can file your taxes:

  • Single filer: Single AF. This is for unmarried, divorced, or separated people.
  • Married filing jointly: Married and combing incomes with your spouse. For most income levels, this will actually reduce your taxes. At relatively high income levels, however, married filing jointly creates a tax penalty.
  • Surviving spouse: This is equivalent to married filing jointly, but it is used if one spouse has died.
  • Married filing separately: For married people who want to keep everything separate: incomes, deductions, credits, all of it. It’s a bit of a unique situation but can be tax-advantaged under certain circumstances.
  • Head of household: This may sound really 1950’s Madmen-esque but it really isn’t. This tax status is for anyone who is single or unmarried, lives with at least one qualifying family member, and pays at least half the total household bills.

Withholdings versus taxes

I hear people talk all the time about how the government takes 35% of their paycheck and they actually pay MORE in taxes if they work overtime versus regular time. “Why work overtime?!” is kinda the point they’re making.

This is because they don’t understand the difference between withholdings and taxes.

What I mean by that: when you start a new job, you fill out a W-4. This form helps your employer figure out how much of your paycheck to give you and how much to “withhold” for taxes. When money is withheld, it goes to the government as your tax payment.

But when you file your taxes, you calculate how much money you ACTUALLY owe the government. If you paid too much – if your withholdings were too high – you’ll get a tax refund. That means that they took too much out of your paycheck every pay period.

When withholdings are calculated, it takes your paycheck and extrapolates it out the rest of the year. So if you have one juicy week of overtime like my example above, you’re going to collect a nice fat check. It’s going to look like you’re on track to make a ton more money that year, so you get more money withheld.

It’ll come back at tax return time, no worries.

So, tl;dr: the taxes deducted from your paycheck are withholding taxes. During tax season, you figure out how much you ACTUALLY owe. If you overpaid in withholding taxes, you’ll get a tax refund!

Other types of taxes

If you look at your paycheck, you’re going to see that a lot of your money disappears pretty quickly. Of course, not all of the deductions are taxes.

The first paycheck reductions you’ll see are insurance. Depending on what your employer offers, you may see medical, dental, and/or vision deducted from your paycheck.

The next deduction is anything you contribute to a 401(k) plan. This is your money, just for later on, so that’s good.

Now to the other taxes the government takes from each paycheck!

Depending on where you live, you’ll see state income taxes withheld, labeled as SIT. You may also see some sort of local tax, as well. For instance, when I worked in Denver, I was taxed something like $5 every paycheck for the “privilege” of working downtown, or whatever.

EVERYONE, however, will see the following other deductions from their paycheck:

  • FIT: This just means “Federal Income Tax.” This is the line item that your main taxes fall under.
  • FICA: This means “Federal Insurance Contributions Act.” This is just Social Security, which is taxed at 6.2%. This doesn’t matter for most people, but you only get taxed on FICA for the first $132,900 you earn in 2019. This value goes up to $137,700 in 2020.
  • MEDI: This is sometimes included in FICA but not always. This is for Medicare, which is taxed at 1.4%. Again, this doesn’t apply to most people, but if you make over $200k you get taxed an additional 0.9%.
  • Between FICA and MEDI, these extra taxes take an additional 7.65% of your income.

The “standard deduction”

Remember how I said the government has different ways for you to reduce your taxable income?

Well, they assume that everyone qualifies for some kind of deduction. Since everyone qualifies for something, they created the standard deduction.

It is a standard amount that is deducted from everyone’s taxable income in an attempt to simplify taxes and cover any tax deductions most people would qualify for.

You can EITHER take the standard deduction or itemize your deductions. The standard deduction simplifies everything. You get it no matter what. If you itemize, you have to prove it. Some deductions ARE permissible with the standard deduction. We’ll talk more about this later.

If you’re a first-time filer, you will PROBABLY take the standard deduction. Your tax software will help you figure this out.

For 2019, the standard deduction is as follows:

  • $12,200 for single filers and married filing separately
  • $24,400 for married filing jointly
  • $18,350 for heads of household
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Deductions versus credits

A tax deduction reduces how much tax you pay. If your taxable income is $10,000 and you get a deduction for $3,000, then you only have to pay taxes on $7,000. To find out what a tax deduction is worth, take the deduction amount and multiply it by your effective tax rate.

A tax credit is literally a credit towards your tax bill. If you got a tax credit for $3,000, you get to reduce your tax bill by $3,000. If it’s refundable tax credit, you can even get the cash back as a refund! A credit is straight-up money in your pocket, making them WAY more valuable than tax deductions.

The Most Common Tax Deductions & Credits for Young Adults

Remember! A tax credit reduce your tax bill dollar-for-dollar. Tax deductions reduce your taxable income. We like tax credits more.

Common tax credits for a first-time filer

There are going to be caveats to any of these credits. Your tax software will work through them, but if you have any questions about specific credits & deductions, check out the IRS website.

Child tax credit

If you have kiddos, you’ll qualify for the Child Tax Credit! The credit is up to $2,000 per qualifying dependent child. It’s only partially refundable, but hey, better than nothing. Be aware, there are income restrictions.

Child & dependent care credit

Putting your kids in daycare or other childcare? That s#!& is expensive. Luckily, you can get a credit for 20-35%, depending on income, of all your qualified childcare expenses.

Education tax credits

If you were in school for the tax year that you’re filing for, you’re probably eligible for one of these two available tax credits!

American Opportunity Tax Credit

This tax credit is worth more ?but it’s harder to qualify for. It’s worth up to $2,500 AND up to $1,000 is refundable.

PLEASE NOTE: YOUR TAX SOFTWARE MAY NOT HELP YOU MAKE THE RIGHT DECISION HERE.

Be sure to read the IRS rules above, but to qualify, you generally have to:

  • Be seeking some kind of credential, like a degree
  • Be enrolled at least half time for half the tax year
  • Be within the first 4 years of post-secondary degree (VERY important!). If you’re on the 5-year plan, you CANNOT claim this in your 5th year. More on this below.)
  • Make less than $80k if single or filing separately & less than $160k if filing jointly.

Ok! So why all the warnings in this section?

It is VERY easy to screw this tax credit up. I did it. And the IRS figured it out and I got a $2,500 bill 3 years later.

Ok! Here’s the explanation:

The AOTC is only for 4 TAX years of credit, per student. Academic years do NOT follow tax years. I’ll explain what I mean.

My parents claimed me as a dependent until I graduated college. I entered college in fall 2008. So for the 2008, 2009, 2010, and 2011 tax seasons, my dad was able to claim the AOTC on my behalf, since I was a dependent.

When I went to file my 2012 taxes (since I graduated in 2012!), my tax software recommended the AOTC. This was year 5 of me claiming AOTC. I was NOT eligible because it had already been claimed for 4 years.

So I got a $2,500 bill from the IRS. Yay.

SO. When you do your own taxes, do NOT claim the AOTC without speaking to whoever filed your taxes the preceding years. It’s an expensive mistake!

Lifetime Learning Tax Credit

Just like the name implies, this credit is intended for anyone incurring education expenses. You don’t have to be pursuing a degree or be enrolled for a certain number of credit hours. Yay for lifetime learning!

It does have lower income caps and is entirely nonrefundable. If you make below the income cap, it is worth up to $2,000 per year. If you don’t qualify for the AOTC, you can still claim the Lifetime Learning Credit.

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Common tax deductions for a first-time filer

Much like with credits, there are going to be caveats to any of these deductions. Your tax software will work through them, but if you have any questions about specific credits & deductions, check out the IRS website.

Student loan interest

You can claim this even if you claim the standard deduction YAY!

You can deduct up to $2,500 in student loan INTEREST, depending on income, per year. The income cap is $80k for single filers and $160k for joint filers, so most people can claim their interest on their taxes.

Educator’s expenses

Are you a teacher? We all know you spend money out of your own pocket to keep your classroom running. The IRS knows this, too, and will allow you to deduct up to $250 in expenses (as long as you have receipts and it wasn’t reimbursed).

AND! You can claim this WITH the standard deduction, too!

Local taxes (state, local, sales, & property tax)

Any taxes paid locally can be deducted up to $10,000. However, you CANNOT claim the standard deduction with this. And you can only claim property taxes with EITHER state & local taxes OR sales tax.

The property tax deduction is really for people who live somewhere with relatively high property taxes. Where I live, the property tax rate is about 2.5% so owning a $400k property hits that $10k cap immediately. Some places also have high state income taxes, so in places where BOTH high property and high state taxes exist, it’s easy to hit the $10k limit.

And let’s talk about sales tax. This can only be combined with property taxes and requires meticulous receipt keeping. It’s generally obnoxious but may be worthwhile if you’ve made some large purchases, like a vehicle.

Mortgage interest & PMI

Again, this cannot be combined with the standard deduction. But if you have a mortgage, the interest and private mortgage insurance costs can be deducted. You can only claim interest up to the first $750k of property value, but how many of us actually have to worry about that?

Capital losses

If you invest somewhere and actually lose money, you can claim up to $3000 of net losses against your income. What do I mean by net losses? Well, if you made $2000 investing in Apple but lost $1500 investing in WeWork, you had a net gain of $500. But if you actually lost $5000 in WeWork, you would take a $3000 loss.

What happens if your losses exceed $3000? Well, you can roll them over to next year. That’s called a “capital loss carryover”.

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How to Actually DO Your Own Taxes

Blah blah blah. All this tax theory is boring, I know. But, just like in high school when you had to learn math, I think it’s worthwhile to at least semi understand what happens in the magic black box before you use the magic black box.

The good news is, actually DOING your taxes for the first time is pretty easy! It just requires (1) keeping track of all your important tax forms and (2) inputting those forms into your chosen tax software.

Important forms to watch for

In reality, the hardest part of doing your taxes is making sure that every tax form you have is accounted for. A good rule of thumb is any institution that gave you money, took a bunch of money, or stored your money likely owes you a tax form. This means that you should NOT submit your taxes until every tax form has been accounted for.

Luckily there are rules in place. All institutions that owe you a tax form have to get you the form in a timely manner. So what kinds of forms do you need?

Well, if you had a job, you will get a W2. This shows all the income you received from that employer, as well as anything else that may impact your tax refund. If you have multiple jobs, you’ll have multiple W2s.

If you were a contractor, you’ll get a 1099-MISC. This needs to be filed, too!

Did you store your money in a bank? Your bank may provide you a 1099-INT if you earned any interest income. If you don’t earn much in interest, you don’t really need to worry about this – you need to meet a threshold before the IRS cares.

Did you pay any student loan interest? Well, then you’re owed a 1098-E. Are you a student or recent grad? Your university owes you a 1098-T.

Do you have any investments? Well, they may pay a dividend which means you’ll get a 1099-DIV. In all reality, if you traded at all, you’ll likely get a consolidated 1099 which takes into account dividend income, capital gains, and capital losses.

This isn’t all-encompassing, but at the start of tax season, write down what accounts you have that may be impacted. It’s good to keep a list and cross off the accounts as you get the tax forms.

A good tax software will help remind you if you have more things to enter!

Tax software

There are SO many available tax softwares out there. Some of them are more well-known than others but they all have their pros and cons (including price!).

My first recommendation: sign up for Rakuten. Rakuten offers SO many cash back opportunities on these tax softwares so it’s basically free money. If you sign up through my link, you’ll get $10 back after your first qualified purchase! Holla ???

Filing taxes for the first time - cash back on tax software

I’ve earned over $500 in cash back over the last 5 or so years.

Filing taxes for the first time - it ain't much but it's honest work

I have personally used FreeTaxUSA, TurboTax, and paid someone at a tax preparation service. I will give my personal pros and cons. This choice is ABSOLUTELY up to you, so it may be worth pricing them out and figuring out which interface you feel most comfortable with. You can always look into other options like TaxSlayer, mentioned above via Rakuten!

FreeTaxUSA

FreeTaxUSA is my preferred tax software. I had to move away from them because I had purchased a stock that issued a K1. It’s a quirky and unique form that the software couldn’t handle. I’ve since exited that security, so I’m moving back to FreeTaxUSA going forward.

I like it because it’s FREE! It’s free to file Federal taxes and there’s a small fee to file state. If you choose any of their more premium options (which do have a cost), you are also eligible for 25% cash back with Rakuten.

I’m an engineer so I’m very list-oriented. I like knowing what I’m getting myself into and I like being able to see the big picture. I think FreeTaxUSA accommodates for that thinking style the best. You click through different options and the software tells you what to enter. That’s nice for people who want a good ‘ole black box. But then you can back out and see a list of all the different categories for deductions & credits. I like that, so they are my preference.

TurboTax

TurboTax is definitely more robust than FreeTaxUSA, but that comes at a price. Because I have stock investments, I have to pay something like $70 just to file. That’s annoying. So why am I using them? It’s that dang K1 form I have to deal with. But no big deal, this is the last year.

Besides the price, I find it annoying that TurboTax acts like a big black box. It’s hard for me to see the big picture and it’s hard to see how my different inputs impact my refund. If you get overwhelmed easily, however, this may be your preference.

I also think TurboTax may be better for people who have small businesses. I haven’t used that feature, so I can’t speak to it specifically.

Tax Preparation Services

Last year was my first year of having a K1 and I only realized FreeTaxUSA couldn’t handle it in the eleventh hour. I felt backed into a corner so I ended up going to H&R Block to have someone prepare my taxes.

It ended up costing me something like $200. They charge BY THE FORM, even though they are just entering it the same way you would.

Thank you, next. Hard pass. You can do this.

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tl;dr

  • The more money you make, the higher your tax percentage
  • Your tax bracket does not equal your effective tax rate
  • There are more to taxes than federal taxes – bye-bye money
  • You can reduce how much you owe with tax credits & deductions!
  • Tax credits reduce your tax bill dollar-for dollar. Tax deductions reduce your taxable income. Tax credits are better.
  • To DO your taxes, you just need to enter a bunch of forms into tax software. Easy peasy.
  • Be sure to watch for all your forms! Any place that took a bunch of money, held your money, or gave you money likely owes you a tax form.

And, most importantly…

Get your taxes done before April 15th!

Do you have any questions or comments? Comment below! Good luck to my first-time filers. You got this – doing your own taxes really isn’t that hard!

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