A newbie's guide to filing your taxes
Doing your taxes during a pandemic is stressful enough. Filing your taxes for the first time during a pandemic can feel even more stressful. Before you start spiraling, though, some words of reassurance: “As a young person, it’s actually pretty easy,” especially if you’ve been checking in on your finances throughout the year, so that you know what tax documents to expect, says Mary Beth Storjohann, a certified financial planner and founder of financial education and empowerment platform Workable Wealth.
Even if you haven’t stayed on top of your finances as much as you would’ve liked — totally understandable, given the tumultuous AF year known as 2020 — Storjohann says you still have options. She and Choncé Maddox, a certified financial education instructor and personal finance blogger, shared their advice on how to make the process as smooth as possible.
Here’s a beginner’s guide to doing your taxes.
Mark your calendar
The Internal Revenue Service has extended the federal income tax filing deadline for the 2020 tax year from April 15 to May 17. Some states have pushed their state income tax filing deadlines, too, but not all, Storjohann tells Mic. To confirm when you need to file your state income tax return, she suggests Googling “2020 tax filing deadline, [your state].”
Evaluate your situation
Still deciding between using a self-filing service like TurboTax and hiring a tax professional? Start by assessing the complexity of your situation, Storjohann says.
If it’s pretty straightforward — that is, you work for an employer that sends you a W-2 form, and you’ve earned interest on a savings account, “those online platforms will be easy to utilize” — even if you have kids and own a home, she explains. (A W-2 form lists the income you earned from your employer last year and how much tax they withheld, among other information, per NerdWallet.) “They’ll tell you which box to look at in your W-2, you plug in that information, and they’ll walk you through it.”
On the other hand, if you own a business, or have inheritances or investment accounts, you might want to opt for professional help, especially if you’re new to managing your finances, Storjohann notes. She also suggests hiring a tax professional if this is your first year working a side hustle, and/or you aren’t managing it as a separate entity — in other words, you’re mixing your income and expenses from your side hustle with those from your day job, in the same bank accounts.
A tax professional will help you manage your side hustle separately from your other work, Storjohann says. My accountant helped me in this regard with my freelance writing business. When I started working with her, she listed all the information she needed from me to file my taxes, including income statements and other documents, as well as my business-related expenses, broken down by category. Since then, I’ve relied heavily on her checklist to track my business-related finances throughout the year.
“Trust your gut,” Storjohann says. “If you have anxiety in any way about doing it on your own, just spend a little extra money and pay somebody to do it for you.” If you know that filing your taxes turns you into a hot anxious mess, you’d ideally budget for professional help beforehand to avoid that vicious cycle of stress and procrastination that could ensure if you attempt to go at it alone.
Ideally, you’d want to hire an accountant by the end of January, before they’re booked up, Storjohann says. Otherwise, she suggests asking your personal and professional networks for recommendations rather than wading through a morass of Google and Yelp search results. If your situation isn’t that complicated, and you just want a pro to put you at ease the first time around, something like H&R Block — which allows walk-ins — would suffice.
That said, “self-filing platforms are getting better and better,” and some even offer free representation in case the IRS audits you, Maddox says. There’s no clear-cut answer. It all depends on your personal needs and your comfort with filing solo.
Gather the necessary records and documents
Here’s a basic list of the information needed to file your taxes, whether you decide to use a self-filing service or work with a professional, according to Storjohann:
Personal information: Your name, date of birth, Social Security Number, and routing and bank account numbers (needed to withdraw any balances due or deposit any refunds). You’ll also need this information for your spouse, if you’re filing jointly, as well as the names, dates of birth, and Social Security Numbers for any dependents.
- 1099-INT for any bank accounts that earned interest or dividends
- 1099G for any unemployment income
- 1099-MISC and 1099-NEC for contract work
- Information you’ve tracked on your own
- Business-related expenses
- Any estimated tax payments for contract work
- If you have kids: Childcare expenses that you’ve tracked, since you can write some off to earn certain credits
- If you own a home: Mortgage interest and property tax payments
- Charitable donations
- Medical expenses
- Health insurance payments. If you’re like me and buy health insurance through the Affordable Care Act, you’ll get Form 1095-A, which has information about your coverage.
Note that you’re still responsible for reporting income from any companies that didn’t send you a 1099, Storjohann says. “If you didn’t get a 1099 from a company that you worked for, and they paid you $10,000, you still need to report that $10,000 on your taxes and pay what you owe on it,” she says. Maddox agrees. “Make sure the amount [on the 1099] matches the income you tracked on your own,” she says. Creating separate checking and savings accounts for your business or side hustle will make income and expense tracking way easier, Storjohann says.
Maddox also suggests collecting annual contribution statements from charities you’ve donated to. For those of you paying off student loans, my accountant also asks me to provide her with Form 1098-E, the Student Loan Interest Statement, which your lender should’ve sent you.
Ideally, you’d upload tax forms onto a Google Drive or Dropbox folder as you receive them so that they’re ready to go come tax season, she adds. If you don’t have time to organize them, even setting them aside can help. “Sometimes it can be overwhelming to receive a ton of tax statements in the mail all at once, but try to stash everything in a folder until you can sort through it,” Maddox says. “Each year, I make a file folder for tax documents.”
You’re probably better off just claiming the standard deduction
Deductions lower your taxable income, Storjohann explains. According to the IRS, the standard deduction varies from year to year, and by filing status. For 2020, the standard deduction is $12,400 for single people and married people filing separately, and twice that amount, or $24,800, for married people filing jointly. Itemizing deductions for certain expenses can work in your favor if they exceed the standard deduction, Storjohann says, so that you pay less taxes than you would if you’d claimed it.
“If you have a deduction beyond that $12,400, that’s when you move into itemization — if you’re paying more than $12,400 total in your property taxes, state taxes, mortgage interest, and charitable contribution,” she says. “But most [young] people aren’t doing that at this point in time.” You’ll most likely benefit more from claiming the standard deduction.
Don’t obsess over tax credits and deductions
Storjohann notes that there are lots of blog posts on the eligibility criteria for tax credits and deductions, suggesting the average consumer needs to know which of these they can claim. But you actually don’t, she points out. That’s the beauty of using a self-filing service or working with a professional. “You trust either the online service that you’re using to be programmed with all of those things, or the accountant or CPA that you hire will know all of those things,” she says. Both will ask you questions in order gauge whether you qualify for these deductions and credits.
In other words, you don’t need to be a tax expert to file your taxes. Nowadays, many self-filing services are really intuitive and user-friendly, Storjohann says. But if you need a human to walk you through the process or just offer some reassurance, you can always call an accountant. Filing your taxes may seem like a Scary Adulting Task, but it doesn’t have to be.