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First time filing taxes? Don’t make these 5 mistakes

Filing federal income tax returns for the first time can be a challenge. The number of forms, credits, rules, and exceptions to the rules can feel overwhelming, even for those who have been filing for years. Tax changes also occur rapidly, so tax information can quickly become distorted online.

 

But if this is your first time filing a federal tax return, fear not! In this blog, we’ll provide you with current tax information for your 2021 return and share how you can avoid some rookie mistakes. As you navigate the ever-changing and intricate world of taxes, we believe these tips can steer you away from some common pitfalls to help you file correctly!

 

Before reading further, it’s important to note that the purpose of this article is to provide you with helpful information. For clarification regarding your federal income tax return, we recommend that you seek the assistance of a licensed tax professional or visit the Internal Revenue Service (IRS) website.

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5 Rookie Mistakes to Avoid When Filing Taxes

1. Determining Your Filing Status

Before you begin your federal tax return, you’ll need to clarify whether you can be claimed as a dependent of another taxpayer.

 

You can be considered a dependent if you are either a qualifying child or a qualifying relative. Each type of dependent is subject to different rules, which we have included below.

 

You can be a qualifying child if you meet all the requirements below.

  • You are under 19 years old by the end of the year or a Full-Time Student under 24 years old.
  • You are the child, stepchild, foster child, sibling, half-sibling, stepsibling, or descendant of another taxpayer. This is typically a parent or guardian.
  • You lived with the taxpayer noted above for more than half a year. However, several exceptions do apply, including being considered a Full-Time Student.
  • You did not provide more than one-half of your own support during the tax year.
  • You are a U.S. citizen, U.S. national, U.S. resident, or a resident of Canada or Mexico.
  • You are not married, or you are married but filing separately and meet all the above requirements.

 

You could be a qualifying relative if:

  • You are not a qualifying child, and you lived with the relative all year unless you are listed in the “Relatives Who Don’t Have to Live With You” in Publication 501.
  • Your gross income was less than $4,300 in 2021, and the relative provided more than half of your support.
  • You are not claimed as a dependent by another taxpayer.

 

Qualifying relatives are often elderly members of your family who need financial support, such as aging parents or a grandparent.

 

Once you’ve confirmed your dependent or independent status, you need to make sure that this is reflected in your federal tax return.

 

Side note: If you are a dependent and your earned income was more than $12,550, which is the standard deduction for 2021 (more about this below), or your unearned income is $1,100, or more, then you are required to file a federal tax return, even though you may be a dependent of another taxpayer.

 

2. I don’t think I make enough to have to file a tax return

By making more money, you could owe more in taxes. The federal marginal income tax brackets range from 10% to 37%, with the lowest percentage (10%) for single filers with a taxable income of up to $9,950 or married individuals filing joint returns with an income of up to$19,900.A But do you necessarily have to file taxes if your income is within a relatively low range? You may have heard some say that they don’t make enough to file taxes, but is there any truth to this?

 

How much do I have to earn to be required to file a tax return?

According to the IRS, the requirement to file a federal income tax return depends on several factors. However, individuals would not necessarily have to file if their earned income falls below the federal standard deduction amount for the tax year they are filing a federal tax return.

 

This rule does not always apply to individuals who are considered self-employed. You should seek the advice of a licensed tax professional or visit the IRS website for more information.

 

For 2021, the standard deduction for a single taxpayer under the age of 65 is $12,550, and the standard deduction for married individuals filing jointly is $25,100.

 

Should you file taxes even if you don’t make the required amount of income?

If you are under the income thresholds listed above (amount deducted by utilizing the standard deduction), it may be in your best interest to still file a federal tax return. If a portion of that income was withheld for federal tax, then it will come back to you as a refund.

 

Along with receiving a refund for withheld income tax, you must file a tax return to claim a refundable tax credit such as the Earned Income Tax Credit (EITC) or the Premium Tax Credit (PTC).B A licensed tax professional and numerous tax software programs can help you determine whether you can claim certain refundable tax credits.

 

3. All I need is my W-2 form.

Filing a federal income tax return requires submitting the U.S. Individual Income Tax Return referred to as the Form 1040 or Form 1040-SR for senior citizens. In this form, you must include your basic information such as name, address, and filing status, along with information regarding your income, healthcare coverage, taxes you’ve already paid, and the refund you’re entitled to receive.

 

A Form W-2 provides information regarding your annual wages, taxable benefits earned, and the total amount of federal income tax withheld from your paychecks throughout the year. Employers would send it to you if you earned at least $600 in wages from them during the year.

 

That said, the Form W-2 does provide you with needed information regarding your income to help you fill out Form 1040. But, if this is your first time filing a federal tax return, there are other common forms that you need to be aware of and possibly gather before filling out your federal tax return, including:

  • Form 1099-NEC (Non-Employee Compensation), also formerly known as Form 1099-MISC: This document reports income earned by a taxpayer considered an independent contractor or self-employed. An example of this type of occupation would be a freelancer, entrepreneur, or tradesman. The minimum reportable income starts at $600 for the tax year. A taxpayer can reduce this earned income by claiming qualified business-related expenses as tax deductions. This income is reported on a Federal Profit and Loss Form, also known as Schedule C.C

 

  • Form 1099-INT: Payers of interest income such as banks and mutual funds send this form to investors to report interest income earned. If you received $10 or more in interest income during the year, financial entities that paid you interest must send you the Form 1099-INT. Because this is considered taxable income, you’ll need to report it in your Form 1040.

 

For instance, if you’re a dependent on your parent(s) tax return, and they set up a savings account for your funds to accrue interest, you may be required to file your own tax return. You can seek the advice of a tax professional or visit the IRS website for more information.

  • Form 1098-E: Taxpayers who made payments toward their student loan balance may be eligible to deduct the interest paid to the lender for the loans on their federal tax returns. The Form 1098-E reports the amount of interest paid on student loans during the year. Be sure to check if you are eligible for a maximum $2,500 deduction. If you didn’t receive this form in the mail, be sure to contact your loan provider or browse through your loan provider’s website/borrower portal, and you may find it there.

 

  • Form 1095-A: If a taxpayer purchased a healthcare plan through the Healthcare marketplace, then he/she should receive Form 1095-A which details the healthcare cost and the amount of Premium Tax Credit used in co-paying the cost of healthcare. The Premium Tax Credit is required to be reported on a federal tax return. You can visit the Healthcare Marketplace website for more information.

 

If a taxpayer is on a parent(s) health plan but not a dependent on their tax return, then he/she should receive a Form 1095-A to include in Form 1040. If a taxpayer didn’t receive a Form 1095-A, then he/she will need to enter the information from their parent(s)’ Form 1095-A.

 

4. I’ll pay someone to file my taxes for me

Deciding whether to hire a licensed tax professional is an important decision. If you seek professional help, you are essentially paying for assurance that your federal tax return is filed correctly and in compliance with current tax codes. However, this option can be pricier. In 2020, the National Society of Accountants reported an average flat fee of $323 to prepare a Form 1040 with a state income tax return and a Schedule A to itemize personal deductions. Costs can increase depending on the number of required tax forms and schedules included in a taxpayer’s federal tax return.D

 

For taxpayers with complex federal tax returns, seeking a licensed tax professional is often recommended. An example of a more complex return could include business income, farm income, rent income, or high investment income, all of which must abide by multiple tax rules that interact within various sections of the tax Code. Hiring a tax preparer means that you are also not alone when responding to an IRS issue. A licensed tax professional is liable for data submitted to the IRS on the taxpayer’s behalf.

 

However, for those with simpler federal tax returns, there is more help now than ever before to help you file your tax return by yourself. In 2016, the Tax Reform Act simplified tax code requirements, enabling more taxpayers to complete their federal tax returns without professional help. Today, numerous user-friendly tax software are available to walk you through your tax return step by step and provide valuable tips and insights throughout the process. While there are often upfront costs to purchase these products, they can be a significantly cheaper alternative to hiring a tax professional.

 

And even more good news—you can do it for free. If your adjusted gross income (AGI) is $72,000 or less, then you are eligible to file your taxes online for free through the IRS’ partners.E Just make sure to browse through each tax software’s free filing options to ensure you qualify and see if the features offered will meet your individual needs. You can also use the IRS Free File Online Lookup Tool.F

 

5. I’ll just use the standard deduction.

The IRS states that the standard deduction is a specific dollar amount that reduces the income on which you’re taxed. This amount is adjusted each year to account for inflation and varies depending on your filing status. As stated previously, the standard deduction for 2021 is $12,550 for a single taxpayer under 65 and $25,100 for married individuals filing jointly.

 

The standard deduction vs. itemizing

There are two ways to apply deductions on your federal income tax return: itemize or take the standard deduction. By taking the standard deduction, you can’t claim some popular tax breaks that you would get from itemizing, such as medical expenses, mortgage interest payments, and even deductions for state and local property taxes and sales taxes. However, if you’re confident that you’ll receive a bigger tax break from the standard deduction than through some of the aforementioned tax breaks you get from itemizing, then this may be the best route for you.

 

Above-the-Line Deductions

The good news is that there are still a handful of significant deductions referred to as adjustments to income or “above-the-line” that you can claim in addition to your standard deduction.G So, before you file, don’t just rely on your standard deduction because you could miss out on some substantial deductions. Popular ones include:

  • Student loan interest
  • Health savings account contributions
  • Traditional Individual Retirement Account (IRA) contributions

 

Suppose you made quite a few payments towards the interest accrued on your student loans or invested in a savings or retirement account: for any of these situations, you’ll want to plug in this information as these can be deducted from your return in addition to the standard deduction!


 

 
 

 

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