You’ve probably heard a lot about taxes—the concept is hard to escape. But details on what exactly “doing taxes” involves are hard to come by until it’s time to do them yourself. And with tax season in full swing, you don’t want to be stuck behind because of a learning curve. So, here’s what you need to know about doing your taxes, and doing them right.
What are taxes?
Taxes are fees individuals and businesses are required to pay to the government. Taxes are paid on three levels: federal, state, and local. These fees are used to fund government services and programs.
As an employee, a percentage of your earnings is withheld by your employer and sent to the government on your behalf. These withholdings are your “income taxes”—taxes imposed on your income. Income taxes are also taken from various other forms of “taxable income.”
Taxable income is income that can be taxed. Taxable income includes but is not limited to:
Nontaxable is income that cannot be taxed. Nontaxable income includes, but is not limited to:
- Accident and personal injury rewards
- Cash rebates
- Child support and foster care payments
- Inheritances and Gifts
- Life insurance payouts
- Scholarships or fellowship grants
- Veterans benefits
- Welfare benefits
Some of these “nontaxable” incomes can be taxed under specific circumstances. For example, scholarship money used for purposes besides tuition or other specified expenses is rendered taxable.
What is the IRS?
The International Revenue Service (IRS) is a bureau of the Department of the Treasury responsible for:
- Collecting taxes
- Processing and distributing tax returns
- Enforcing tax laws (ensuring everyone properly pays taxes)
- Investigating and reporting tax fraud and evasion
The IRS is the government organization collecting and tracking your taxes. They are the ones with whom you file your taxes, and receive your tax return from.
What is a tax return?
When taxes are deducted from your pay by your employer, you will either have overpaid or underpaid. When the amount withheld is more than you owe, you have “overpaid.” A tax return is the correction of overpayment on taxes by refunding the overpayment. Most college students will have overpaid unless they have avoided overpayment.
To receive your refund, you must file your taxes.
Should I File Taxes?
The purpose of filing taxes is to create a summary of your taxes over the last year. You want to know how much you owe in taxes, how much you paid, and if you overpaid or you still owe. Filing taxes is required in receiving a tax return for overpayment or correcting underpayment.
You aren’t required to file if you earned less than $12,400 (the standard deduction amount for filing single in 2020), but you may still do so.
Filing as a Dependent
As a full-time college student, you can be claimed as a dependent until you are 24. If you are working while in school, your parents/guardian must still provide more than half of your financial support to claim you.
If you are claimed as a student dependent on another person’s tax return, you are required to file your own taxes if:
- Your total earned income is more than $12,400.
- Your total unearned income is more than $1,100.
If you do not meet the standard deduction, you may choose to file. Some dependents choose to file when they are not required to do so to claim their tax refund.
Dependents and College
When you are claimed as a student dependent, you may not be able to take advantage of education credits. The American Opportunity Tax Credit and the Lifetime Learning Credit are both subject to phase-outs after $80,000 for single filers and $160,000 for married filing jointly. If the person who claims you as a dependent is ineligible for the credits, and that by being claimed, you will also be ineligible.
Dependents and Stimulus
Dependents did not receive the first two COVID stimulus payments. However, as of the third stimulus payment going out in 2021’s tax season, tax filers will receive a $1,400 stimulus payment for claiming adult dependents.
The American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.
The credit repays 100% of the first $2,000 of qualified education expenses for each eligible student and 25% of the next $2,000.
To be eligible for AOTC, you:
- Must be pursuing a degree or other recognized education credential.
- Must be enrolled at least half-time for 1 academic term that began in the tax year.
- Must have a Modified Adjusted Gross Income of $80,000 or less. (most students qualify)
- Cannot claim the AOTC or the former Hope credit for more than 4 years.
- Cannot have a felony drug conviction within the tax year.
Claiming the Credit
Whether you can file or if it is in your best interest to be claimed as a dependent and file or file independently is up to you and your parents/guardians. Talk with your parents before you file to see if filing is right for you.
How to File
When is the tax filing deadline?
The tax filing deadline for 2021 was originally set on April 15 but was extended to May 17 due to the ongoing coronavirus pandemic.
Tax Filing Documents
Your “Wage and Tax Statement,” or Form W-2, is a form provided by your employer that states your income from the previous year, tax withheld by your employer, and other information.
You will get a W-2 from each employer that paid you at least $600 during the year, which you will need to file your taxes. An employer has to provide you with a W-2 and send a copy to the IRS and the state. You should receive this form by January 31st. You need a W-2 from your employer to file your tax return. Some companies make these forms available online.
Form 1099 reports income not paid to you by your employer. This includes self-employment earnings, interest and dividends, government payments, and more. Freelance workers and independent contractors will get a 1099 in place of a W-2, as they do not have an employer.
There are various 1099 forms for different forms of income. For example, people who receive certain government payments like unemployment compensation requires a unique form.
If you receive income not paid to you by your employer, you will need a 1099 to do your taxes. The person or entity that has paid you is responsible for filling out the appropriate 1099 tax form and sending it to you by January 31.
Form 1098-T is used by students and parents/guardians who have made paid qualified tuition and college expenses during the tax year. The form allows students and parents to claim certain educational credits.
Eligible educational institutions file Form 1098-T for each student they enroll and for whom a reportable transaction is made. Insurers file this form for each individual to whom they made reimbursements or refunds of qualified tuition and related expenses. You should receive this from your school by January 31st.
Other Records, Statements, and Receipts
What are tax deduction records?
Tax deduction records are any records from previous tax returns that show what deductions you took. You want to keep these, as they may be required for future filing and record-keeping purposes.
What are expense receipts?
Expense receipts are records and receipts of any business-related transactions you made with your own money. These receipts are needed as evidence of your spending so your employer can reimburse you. For example, when buying a business lunch, you want to keep a receipt so your employer can later repay you for any costs.
- Gather your paperwork, including:
- A W-2 form from each employer
- Other earning and interest statements (1099 and 1099-INT forms)
- Receipts for charitable donations and medical and business expenses if you are itemizing your return
- Choose your filing status.
- Filing status is based on whether you’re married. The percentage you pay toward household expenses also affects your filing status.
- Decide how you want to file your taxes.
- The IRS recommends using tax preparation software to e-file for the easiest and most accurate returns.
- Determine if you are taking the standard deduction or itemizing your return.
- The standard deduction is usually used by students.
- Itemized deductions really only pay off if your total itemized deductions are higher than the standard deduction.
- If you owe money, learn how to make a tax payment, including applying for a payment plan.
- File your taxes by May 17, 2021.
TIP: Check out these IRS Free File Online Options for easy filing!
To speed refunds and help with their tax filing, the IRS urges people to follow these steps:
- File electronically and use direct deposit for the quickest refunds.
- Check IRS.gov for the latest tax information, including the latest on Economic Impact Payments. There is no need to call.
- For those who may be eligible for stimulus payments, they should carefully review the guidelines for the Recovery Rebate Credit.
- Most people received Economic Impact Payments automatically, and anyone who received the maximum amount does not need to include any information about their payments when they file.
- However, those who didn’t receive a payment or only received a partial payment may be eligible to claim the Recovery Rebate Credit when they file their 2020 tax return. Tax preparation software, including IRS Free File, will help taxpayers figure the amount.
- Remember, advance stimulus payments received separately are not taxable, and they do not reduce the taxpayer’s refund when they file in 2021.
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