Let’s face it: Filing taxes is confusing. It’s intimidating. It’s slightly less painful than stepping on a Lego brick. And it’s one of the lame parts of being an adult. But it has to be done, especially if you want to build wealth (and, you know, be a U.S. citizen . . . ’Merica!).
1. Figure out whether you need to file.
Honestly, depending on how old you are and a few other factors, you might not even need to worry about filing taxes yet (ah, the blissful joy of youth). But before you breathe a sigh of tax-exempt relief, there are a few basic details you need to know to figure out whether or not you need to file.
Here are some common questions you might have about this step:
Do dependents need to file taxes?
Even if you’re technically still dependent on your parents—meaning you live with them, they pay your bills, etc.—and even if your parents still claim you as a dependent on their own tax return, you might still need to file based on how much money you earned in 2021. Read on, my friend.
How much money do I need to make to file taxes?
“How much do you have to make to file taxes?” is a question I hear a lot from teenagers who just got their first job and are wondering if they make enough money to have to pay up. Here’s how to be sure:
Taxes shouldn’t be this complicated. Connect with a RamseyTrusted tax advisor.
Let’s say your parents claim you as a dependent on their tax return, you’re not married, and you’re also not blind or over the age of 65 as of the end of 2021 (leave it to the government to be weirdly specific). You should file taxes if one of these situations applies to you:
- Your unearned income was more than $1,100.
- Your gross income (the money you earn before taxes are taken out) was more than whichever of these totals is bigger: either $1,100 or your earned income plus $350.
If you’re living that single life, your parents don’t claim you as a dependent, and you’re under 65, then you’ll need to file if your gross income in tax year 2021 was at least $12,550. If you’re married and filing jointly (meaning you and your spouse are putting all of your details on the same tax return) and both of you are under 65, you should file if your gross income was at least $25,100. And let me tell you, as a married man myself, the only thing more romantic than filing taxes together is . . . literally anything else.
Hold up. What’s earned and unearned income?
Earned income is any money made from working a job, like your salary and wages, bonuses, commissions and tips. Unearned income is money earned without working—interest earned from a savings account, for example.
Some other forms of unearned income include alimony, dividends, capital gains, etc. But if this is your first time filing taxes, I’d be willing to bet that interest is the only type of unearned income that applies to you. And I’m not even a betting man. That’s how confident I am.
If I’m a freelancer, do I need to pay taxes?
Maybe you thought you’d be able to travel around blogging and Instagramming like the free spirit you are and escape the clutches of the IRS in the process—but if you earned at least $400 from freelance work during the year, then you need to pay taxes on it. Bummer. My money mentor Dave Ramsey suggests setting aside about 25–30% of every check you get from freelance work so you aren’t left high and dry (and broke) when tax season rolls around.
2. Get your documents together.
There are a few different documents you’ll need in order to file your taxes. (This is the fun part.) Here are the main ones to keep in mind:
- W2 form: If you earn a salary or wage, your employer will send you this.
- 1099 form: If you’re a freelancer or self-employed, you should get one of these from every client who paid you at least $600 during the tax year.
- Charitable donations: If you donate to a nonprofit religious, educational or charitable group, make sure you get a donation receipt (and hang on to it!) because you’ll need that at tax time.
- Mortgage interest statements
- Investment income statements
- Form 8822: You’ll need this if you moved in the past year.
- SS-5: You’ll need this if you changed your name in the past year.
- W-4: If you started making a new income in the past year, this form will adjust tax withholdings.
Again, if you’re just now learning how to file taxes for the first time, then the W2, 1099 and charitable donation forms are probably the only ones that apply to you (unless you already have a bunch of investments or own a house at 20 years old or something, in which case—my mind is mind blown. Way to go!). But it never hurts to double-check with a tax professional.
3. Choose your filing status.
As a first-time tax filer, this step should be pretty easy. Your filing status will help you know what your standard deduction is, how much you’ll owe, if you qualify for certain credits, and other official-sounding stuff like that.
There are five different filing statuses:
1. Single: Your filing status is single if you’re not married (duh), divorced, legally separated or widowed before the tax year.
2. Married filing jointly: We’ve been over this one. This is for us lucky married people who choose to file a joint tax return. You can usually save more this way!
3. Married filing separately: This one is for you married people who choose to file separate tax returns for whatever reason. That’s up to you guys, but make sure you look at both joint and separate options and pick the one that’s most affordable for you.
4. Head of household: If you’re not married, have paid for more than half the household expenses for the year, and can claim a dependent on your tax return, this is the filing status for you. This mostly applies to single parents.
5. Qualifying widow(er): You can still file jointly with your spouse if they passed away and you don’t get married again in the same tax year. This filing status is available for up to two years after the year of your spouse’s death.
Note: There are a bunch of other tax rules for special situations, like if your spouse is in a combat zone and can’t sign, you’re married but your parents still claim you as a dependent on their return, etc. I don’t have the time or energy to cover all of that in this article. (Would you guys want to read a 20-page article about taxes? Only if you’re an aspiring CPA.) But you can find all of these details—and a lot of other answers to your questions—on IRS.gov, the official website for all things tax-related.
4. Decide if you want to take the standard deduction or itemize.
The standard deduction is a specific dollar amount that lowers the income you’re taxed on. Like we’ve touched on already, for single filers, that dollar amount is $12,550. For qualifying widow(er)s or people who are married filing jointly, that dollar amount is $25,100.
So, for example, if your filing status is single, you made $30,000 in 2021, and you decided to take the standard deduction, you would only pay taxes on $17,450.
If you take the standard deduction, you don’t have to add up receipts or fill out any extra forms to see which individual deductions you qualify for. Just use Form 1040 to add up your income, subtract the standard deduction, and boom! The bottom line will show if you’re getting a refund or if you owe more.
The standard deduction is pretty cool because it lowers your taxable income (which means you might owe less money) even if you don’t qualify for any itemized deductions.
Your other option is to itemize all your deductions. People who choose this option keep receipts of qualifying expenses throughout the tax year and record them in Schedule A (Form 1040).
Some examples of these types of expenses would be:
- Out-of-pocket medical or dental expenses
- Charitable donations
- Large work-related expenses that weren’t reimbursed (for example, some people can claim money spent on gas if they had to drive a lot for work)
- Paid mortgage interest or real estate taxes
Depending on which tax bracket you’re in, your itemized deductions will reduce your taxable income by a certain amount—so it only makes sense to itemize if those deductions add up to more than the standard deduction.
Most people go for the standard deduction because it’s easier and faster, but for some people, itemizing can help them save a lot more money. Talking with a tax pro can help you figure out which option makes the most sense for you.
Got a headache yet? Don’t worry, this wild ride is almost over.
5. Actually file your taxes for the first time.
All right, party people. You’ve got your documents. You know your filing status. You decided if you’re taking the standard deduction or itemizing all the way. Now it’s time to actually file your taxes. Game on.
There are a few different ways to do this:
- You could get the help of a tax pro, which can seriously help with the stress and confusion.
- You could use tax software (which can be a good option if your tax situation is pretty simple).
- You could fill out all the paperwork yourself and mail it to the IRS. (This is my least favorite option. My handwriting is terrible, and I have a hard time finding pens.)
Once that’s done, it’s time to run a couple victory laps, because guess what? You just learned how to file taxes for the first time. I’m so proud. I’m not even a runner, but I’m pretty sure I could run through a wall (if it’s extremely soft drywall) after getting my tax return filed.
6. Watch for a refund (and adjust withholdings if needed).
When you e-file your taxes, you’ll hear from the IRS within a few days if your return was accepted. If you’re getting a refund, you can check the status at the IRS’s website. Guys, this is not your sign to go out and buy that Peloton you’ve been wanting. It may sound great, but this actually means too much money was withheld from your paycheck throughout the tax year. All that money was yours in the first place, and you should get to keep more of it during the year.
There’s also a chance you’ll owe money to the IRS instead of getting a refund. Sure, it’s a bummer, but go ahead and file and pay by (or before) Tax Day. If you don’t, you’ll get hit with all sorts of penalties and interest. For real—you don’t want to tick off the tax man.
If you get a massive refund or owe a lot to the IRS, you’ll want to adjust your withholdings (the amount of money that’s taken out of your paycheck for taxes) so your tax bill lands as close to zero as possible. The HR folks at your workplace should be able to help you with this if you get stuck.
Once you adjust your withholdings as needed, all that’s left to do is get organized for next year by buying a folder for all your tax documents and receipts. Make it fun and buy a colorful Lisa Frank folder for nostalgia. Whatever lights your little heart up. Oh, and you’ll want to hang on to them for at least three years just in case.
Congrats—not only for making it through an article about tax returns, but also because this means you’re officially an adult! Happy tax filing!