If you recently entered the "real world," you may soon encounter the realest thing about it: filing taxes.
Yes, nothing screams (or, more likely, sighs) "I'm an adult" than W-2s, deductions, and adjusted gross income. And while that all sounds painful, doing your taxes for the first time doesn't have to be that bad. In fact, you can make it easier just by being able to answer these five questions.
1. Are You Someone's Dependent?
An easy way to determine if you're a dependent is to ask your parent or guardian if they are claiming you on their tax return. They can claim you as either a qualifying child or qualifying relative, depending on your situation.
Generally, you might be a qualifying child if:
- You are under 19 OR under 24 and a full-time student.
- You lived with a parent or guardian for more than half the year. (Note: Even if you were away at school, you still "lived" at your primary residence, according to the IRS.)
- That individual provided more than half of your financial support for the year.
If you are not a qualifying child, you may still be a dependent as a qualifying relative if:
- An individual provided more than half of your financial support for the year.
- You lived with that individual for the entire year OR that individual is your parent, grandparent, aunt, uncle, or sibling.
- Your gross income was less than the dependency exemption (3,950 for 2014).
If someone claims you as a dependent, it can significantly impact your income tax return. For instance, that individual can claim your exemption instead of you ($3,950 for 2014). You also may not be able to claim certain deductions and credits on your return that you may otherwise qualify for (e.g., Earned Income Tax Credit, American Opportunity Credit).
2. Do You Need To File Taxes As A Dependent?
Typically, yes. If you receive income as a dependent, you likely have to file an income tax return. (Maybe the person claiming you will help you out -- they should if they take your $3,950 exemption!)
Dependents must file a tax return for 2014 if any of the following are true:
- You have net-self-employment income of more than $400 during the year.
- You have unearned income (e.g., interest or dividend income) over $1,000.
- You have earned income (e.g., wages from an employer) over $6,200.
- Your gross income is greater than either $1,000 or your earned income (up to $5,800) plus $350 (whichever is larger).
3. What Is Your Filing Status?
Your filing status helps determine your filing requirements, standard deduction, tax rate, and eligibility for certain tax deductions and credits. The five filing statuses are:
- Single: You are unmarried at the end of the tax year.
- Married Filing Jointly (MFJ): You are married at the end of the year and file a single return that combines you and your spouse's income and deductions.
- Married Filing Separately (MFS): You are married at the end of the year but choose to file a separate return from your spouse.
- Head Of Household: You are unmarried (or considered unmarried for tax purposes) and maintained a home for a dependent child for more than half the year.
- Qualifying Widow(er) With Dependent Child: You are unmarried, your spouse died, and you maintained a home for a dependent child for the entire year. This filing status is available for two years after the year of the spouse's death.
If you qualify for more than one filing status, do the math and choose the one that results in the lowest amount of tax.
4. Do You Have The Documents You Need?
You will receive a few common documents to prepare your return. Most will arrive in the mail. Be sure to set them aside (and keep them together) when they do.
- Form W-2 - Wages and Tax Statement: Employers issue this form, which reports your annual earnings and taxes withheld. You'll use this information to report income on your tax return.
- Form 1099-MISC - Miscellaneous Income: This form reports the payment of miscellaneous income, including income paid to non-employees. A taxpayer just entering the workforce would likely receive a Form 1099-MISC for compensation earned as an independent contractor (i.e., not as an employee). This is often the status for temporary workers.
- Form 1099-INT, 1099-DIV: These forms report interest or dividend income. You must report the amount on these forms as income on your return.
- Form 1098-E - Student Loan Interest Statement: This form reports interest payments you made on student loans. You'd use this form to claim the student loan interest deduction on your return. If you paid less than600 in interest over the tax year, you have to request this form from your loan holder.
- Form 1098-T - Tuition Statement: This form reports the amount of qualified tuition and related expenses billed and paid for during the year, as well as the amount of scholarships or grants you received. You'd use this form to claim the American Opportunity Credit, the Lifetime Learning Credit, or the tuition and fees deduction.
- Form 1098 - Mortgage Interest Statement: Form 1098 reports interest payments you made on your mortgage throughout the year. In certain cases, mortgage interest might be tax-deductible as an itemized deduction.
5. Which Deduction Should You Take?
When filing a tax return, you can either take the standard deduction or itemize your deductions. For 2014, the standard deduction is $6,200 for a single taxpayer ($12,400 for married taxpayers filing a joint return). As you might expect, opt for itemizing deductions only if their total would exceed those standard deduction amounts.
Expenses that you can itemize include home mortgage interest, state income taxes, real estate and personal property tax, and gifts to charities. Young professionals typically get the greatest benefit by taking the standard deduction. However, those paying mortgage interest may earn more by itemizing.
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This article was provided by H&R Block and H&R Block Dollars & Sense. SALT has teamed up with these organizations to help students and alums take control of tricky financial topics -- like how to file taxes for the first time.
H&R Block, Inc. (NYSE: HRB) is the world's largest consumer tax services provider. More than 650 million tax returns have been prepared worldwide by and through H&R Block since 1955. H&R Block Dollars & Sense helps increase financial literacy among teenagers through curriculum and resources, grants to supplement the cost of personal finance education and scholarships to help young Americans pay for higher education. Since 2009, H&R Block Dollars & Sense has awarded teens and educators with more than $5 million in grants and scholarships. For more information, visit the H&R Block Newsroom or hrblockdollarsandsense.org.