Learning about taxes isn’t fun. But understanding some basics can help you be better prepared for tax filing time.
1. Call home (if you are under 24) to confirm how your parents are claiming
If you’re under 24 years old, ask your parents if they’re claiming you as a dependent on their tax returns before you file yours. If you’re out of college or have a full-time job, chances are you’ll file on your own. But you can avoid headaches by checking first.
2. Review your withholdings
It’s easy to brag when you get a big refund check, but what that really means is you’ve been lending the government money interest-free for the year. Work with your employer to adjust the amount withheld from each paycheck so it more accurately reflects the taxes you’ll need to pay at the end of the year. The IRS offers an online calculator to help you fill out the W-4 form your employer uses to figure out how much to withhold from each paycheck.
3. See if any “Self-Employed” rules apply to you
Whether you’re driving for a ride-sharing service once a week or occasionally freelancing, you’ll need to pay taxes on any self-employment income. Unlike your regular paycheck, taxes aren’t withheld, which requires extra planning and recordkeeping on your part.
In many cases you’ll be expected to pay taxes quarterly rather than paying it all at the end of the year or you may face penalties when you file in April. However, you may be able to deduct many expenses related to your side job. See Self-Employed Individuals Tax Center for details and worksheets.
4. Take advantage of free filing tools, if you qualify
From accountants to tax software, there are plenty of places for you to turn for help filing your taxes. But if you make less than $72,000 a year, the IRS offers free software to guide you through the process of completing and filing your returns. Even if you make more, you can still complete and file the forms online for free -- there’s just less guidance.1
5. Itemize, if it makes sense for your situation
Unless you have a large number of deductible expenses, it makes more sense to take the standard deduction ($12,550 for individuals or $25,100 for married couples filing jointly in 20212). But if you have a mortgage, state and local taxes, large medical bills or self-employment expenses, you may have enough deductions to justify itemizing.
It’s not just the big-ticket items, though. Charitable donations, home efficiency improvements, job hunting and self-employment expenses can be deducted if you itemize. Be sure to keep all receipts and records so you’ll be able to calculate accurately when it’s time to do taxes and back up your deductions if you get audited.
6. Student loans may be deductible
Student loan interest may be deductible up to $2,500 even if you don’t itemize. If you’re still in college or continuing your education, you may be eligible for the American Opportunity Tax Credit or the Lifetime Learning Credit, each of which can potentially reduce your tax burden by thousands of dollars.
7. Take advantage of pre-tax opportunities and employer matches
If your employer offers a 401(k) or other retirement plan, look at it as an opportunity to put away your money before it’s taxed. Just as important, if your employer matches your contributions, make it a priority to meet the match. It’s an opportunity to double your money.
8. Consider the tax implications of life event milestones
Getting married? Expecting children? Both have significant tax implications. Inform Social Security if you change your name when you get married or divorced, and make sure you apply for Social Security numbers for your newborn children. They’ll need one if you plan on claiming them as a dependent on your tax return. If you’re thinking about tying the knot, do it on or before December 31. You’ll be able to file as a married couple for the entire year.
If you move because of a job change, or if you moved for a job right out of college, you may be able to deduct moving expenses, even if you don’t itemize. However, certain criteria must be met including distance moved and time spent at the new job.
9. State of mind – remember state taxes
Once you’re done with your federal taxes, don’t forget you’ll probably need to file state income taxes unless you live in one of the seven states that don’t have them. Filing dates may differ, so be sure you know what you have to do and when to file. Many popular tax software programs carry over information from your federal return, saving you time when you need to tackle your state taxes.
Taxes are just part of your broader financial picture, which includes savings, investments, and your plans for the future. Consider working with a financial professional or look to Nationwide to find an investment professional today.