Mar 4th 2010
Filing taxes for the first time after landing a full-time job out of college can be daunting. Or trying to piece together the details of all the jobs you've worked last year could seem a little overwhelming. But don't let the prospect of doing your taxes scare you out of getting as large a refund as you deserve. The Illinois CPA Society offers a few tips for under-30 Millennials filing 2009 returns.
1. Take advantage of all available credits and deductions. This year there are tax credits and deductions for all kinds of expenses including homes (First-Time Homebuyer Credit) and cars (Cash for Clunkers). Check to see what's available and what you can use; just be sure you have the documentation to back up your claims. Here are some of the money-saving possibilities:
- Education Credits - If you're paying for your college expenses you could be eligible for the American Opportunity Credit, formerly the Hope Education Credit, which has increased from $1,800 to $2,500. Alternatively, the Lifetime Learning Credit provides a credit of up to $2,000 per taxpayer for qualified higher education expenses, and there are other education-related advantages such as the Student Loan Interest Tax Deduction and the Tuition and Fees Tax Deduction.
- Earned Income Tax Credit (EITC) - If your income has gone down this year, or if you were claimed as someone's dependent in the past, you may not be aware of this credit. The amount of the credit, and determining if you qualify for it, is based on income, marital status, and number of children. For example if you are not claiming any children, your adjusted gross income and earned income must be less than $13,440 ($18,440 for married and filing jointly) to qualify for the credit. If you are below that income level, the maximum credit you could claim is $457. This is a refundable credit, so you get the money back even if you do not owe any tax or the credit is more than you owe. Visit the IRS Web site, and use their EITC Assistant Tool to determine if you're eligible for the credit and to learn more about the qualifying income levels and credit amounts.
- Deduction for Tax Paid on a New Car - A great way to reduce your taxable income is to take advantage of the deduction for taxes paid on a new car. The new vehicle needs to have been purchased in 2009 after February 16; the amount will depend on what taxes and fees apply in your state.
2. Follow your instincts and e-file. You're accustomed to paying bills and banking online, so do as the IRS recommends and e-file. You'll probably get your refund faster and the IRS has helpful electronic options like Free File, a free federal online tax preparation and electronic filing program for eligible taxpayers. You can even arrange to have your refund directly deposited to your account.
3. File the simplest form possible. Instead of automatically filing the regular 1040 form, find out if you can file the 1040A or 1040EZ forms. These forms are generally the best for young, single, non-dependent filers who have minimal credits, and they also include directions on how to figure out some of the more difficult credits, like the Making Work Pay and Earned Income Tax Credits.
4. Pencil it in before you type. Here's a throwback to the old way of doing things that just might help save some money - complete your tax forms by hand before you e-file. While it may seem like an extra step, by printing the form and taking the time to double-check your work, you're less likely to make mistakes that can cost you.
5. Don't just write "0." If you leave the line blank instead of hunting for an answer, you may be missing out on a refund or underpaying, which will cost you later. If you're unsure if you qualify for a credit, or have questions about a line item, check the instruction manual for the form. If you're feeling confused and think you might be entitled to deductions or credits, it's time to contact a tax pro.
6. Review those odd jobs. Did you get paid for any free lance or temp work, or maybe for work done for family or friends? Make sure you double-check what type of forms you received from any and all employers. A 1099 of any kind is not the same as a W-2 and needs to be filed differently. You may even be viewed as self-employed for any payment you received at these jobs. If this is the case, you'll need to fill out a longer form and include a Schedule C, or possibly a Schedule SE, depending on how much income went untaxed. All income is required to be reported on your tax return, whether or not you received a form from the payer.
As you do your taxes, you may realize that some situations arise that are more difficult than you can handle on your own - issues like residency in multiple states, inheritances, choosing among the available student tax credits, or paying off student loans. If you have questions, take them to a CPA. It's a good time to start a relationship with a local CPA who can help you sort out this year's return and keep your finances in line for years to come.