Filing Your First Tax Return

If you worked while attending high school or college, you may not have needed to file a tax return. If you did file, most students had help from a parent, guardian, neighbor or maybe your parents had their tax preparer complete your return. Now that you have either graduated and have your first “real” job, what steps are you going to take when filing your first tax return?

“We didn’t learn about filing taxes in high school or college.“

This comment, or variations of it, is often heard when someone is filing their first tax return. Now that you are earning an income and paying taxes, ask these questions:

• Do you need to file a tax return?
• Can you prepare your own return?
• Do you need an accountant?

Do you need to file a tax return?

The IRS has a free tool to help determine if you are required to file a federal tax return or if you should file to receive a refund. The Interactive Tax Assistant (ITA) will walk you through a set of questions to help you determine if your need to file a tax return for the past three years. To use the ITA, click here.

Can you prepare your own return?

Absolutely. The IRS has an option called Free File available in English and Spanish. Guided tax preparation is available for free if your Adjusted Gross Income is $73,000 or less and fillable forms are available for any income level.

How IRS Free File Offers Work:

• You must begin your filing option at IRS.gov. Going directly to a company’s website will result in not receiving the benefits offered here.
• Choose an IRS Free File option, guided tax preparation or Free File Fillable Forms.
• You will be directed to the IRS partner’s website to create a new account or if you are a previous user, log in to an existing account.
• Prepare and efile your federal tax return.

Do you need an accountant?

Think about the changes in your life. Did you start or buy a business? Do you work from home?  Did you pay interest on student loans? Earn interest on a bank account, dividends, retirement account, health savings account or flexible spending account? Did you buy a home or invest in real estate? Do you have other investments such as stocks, earned dividends, bonds, bitcoin, etc.? Did you have lifestyle changes such as getting married, divorced, have a child and received childcare tax credits, or have capital gains? 

WM WISDOM:
If your tax situation is complicated, you may need to hire a professional accountant to prepare your tax return.

Organize Your Tax Documents

Fortunately, most, if not all, of the documents needed to file a tax return may be obtained electronically. Create a folder on your laptop, other preferred device or in the cloud to organize the tax documents needed to file your 2021 tax return. Download everything into the same folder and be certain to name each item.

Employment

If you are working for an employer, you will need a copy of your W-2. If you are self-employed, either full or part-time, you should receive a Form1099 from the people you performed services for. Keep in mind that if you had multiple employers or hired by multiple companies as a self-employed individual, you will need to provide a W-2 or 1099 for each position held.

Gig Worker or Side Hustle

If you are a gig worker, the income is taxable. The IRS has ways to help manage taxes for gig work, including tips on record keeping and forms to file. To learn more, click here to visit the IRS Gig Economy Tax Center.

If you have multiple revenue streams that pay via Venmo, PayPal or other payment apps, and you generated more than $600 annually for commercial income, the app is required to report the income collected to the IRS. Certain apps, such as PayPal and Venmo offer users the ability to tag categories for each transaction. If you use the same app for business and pleasure, be certain to categorize appropriately to avoid problems when filing your taxes.

If a side hustle includes selling wares on sites such as ebay, you may be responsible for paying sales tax and/or income tax on sales. Be certain to retain records and download a copy of tax Form 1099-K and  include that income with your tax filing.

Charitable Contributions or Donations

Did you donate your household goods or furnishings to a 501(c)(3) charity when you moved out of your campus apartment? Did you make a donation to a religious organization, animal shelter or non-profit group? Before the COVID-19 pandemic, you could only deduct charitable contributions if you itemized deductions on Schedule A (Form 1040) Itemized Deductions.

For 2021, individuals who do not itemize their deductions may deduct up to $300 ($600 for married individuals filing joint returns) from gross income for their qualified cash charitable contributions to public charities, private operating foundations, and federal, state, and local governments.

If you take the $300 deduction, you need to make certain to have a receipt or proof of monetary donation in case your return is audited.  

If you have a recurring donation to a nonprofit, or made a donation via Venmo, credit card, Paypal, etc., be certain to obtain a copy to file with your tax return.

Form 1098-E: Interest Payments on Student Loans

Depending on when you attended college, and what type of student loan, you may or may not have paid interest on your student loan(s). In 2020, through the COVID-19 emergency relief for federal student loans, loans have a 0% interest rate. If the first year of your federal student loan was in 2020 or 2021, there will be no interest to claim. If you have student loans through other providers, for example, a private bank or lender, you will most likely have ongoing interest. Student loan providers will issue a Form 1098-E that will show the amount of interest paid during the year.

FORM 1099-INT: Interest Income

If you receive more than $10 interest on a savings or checking account, you will receive a Form 1099-INT from the institution that paid the interest. Interest is a form of income and must be reported on your taxes.

Period of Limitations for Assessment of Tax

The IRS requires you to keep records, such as receipts, canceled checks, and other documents that support an item of income, a deduction, or a credit appearing on a return as long as they may become material in the administration of any provision of the Internal Revenue Code, which generally will be until the period of limitations expires for that return.

You should keep your tax return and supporting documentation for a minimum of three years. Keep in mind there is no limit to assess tax when you file a fraudulent return or if you did not file a return.

For a list of IRS limitations and record keeping, click here.

Questions?

Should you have questions about this topic, or any other topics related to your personal or business situation, please contact us at any time.

DISCLAIMER: The WM Update, WM Wednesday Wisdom, WM Daily Update COVID-19, COVID-19 Business Resources, COVID-19 Client News Alerts and other related communications are intended to provide general information, including information regarding legislative COVID-19 relief measures, as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.