As tax season is upon us, it’s time to start thinking about filing your taxes. Filing your taxes can seem intimidating if you are a recent graduate just joining the workforce or if you are filing for the first time. It’s not uncommon to ask yourself questions like, “What form should I be using?” or “What does a tax deduction mean?” Knowing what common tax terms mean, what the different tax forms are, and some general tips about filing will help you understand the process better.
A critical step in filing your taxes correctly is to understand what common tax terms mean. Terms like withholding, deduction, and adjusted gross income (AGI) are terms used frequently.
This is the amount of money taken out of your check during each pay period. The amount taken out is sent to the Internal Revenue Service (IRS) for federal income taxes. When you file, the IRS determines if you paid too much or too little. If you didn’t pay enough, then you’ll owe more. If you paid too much, then you’ll receive a refund.
Receiving a tax refund this year? Take a look at Seven Ways to Make Your Tax Refund Count.
This is the dollar amount that can be subtracted from your taxable income. As the taxable income amount is reduced, the amount you’ll owe in taxes will also decrease.
Adjusted Gross Income
This is the total amount of your earnings minus specific deductions, also known as “adjustments” or “above-the-line” deductions. This helps determine your eligibility for more deductions or credits that can be taken “below the line.”
Now that you have a basic understanding of tax terms, let’s take a look at some common tax forms.
The W-2 is a form you should have received in January from your employer if you work a regular full-time or part-time job. If you have more than one job, you’ll have more than one W-2. Make sure you receive all of them before you start filing your tax return.
This is a form you’ll receive if you are paid as a contractor or have an additional source of income such as a side job.
You’ll receive this form if you have student loans. The financial institution will send you this form.
If you’ve received any taxable scholarships, you’ll receive this form.
A Few Tips for Filing
Get professional help. If you want tax advice or you own a business, seeking out a qualified tax professional is an ideal solution. They can help you with strategic planning, understanding tax forms better, and help you work through any financial situations that arise.
Did you know First Bank Wealth Management offers Tax Evaluation services?
Start preparing early. Taxes aren’t due until April 15 and are based on the tax brackets established by the IRS. Make sure you start early to avoid missing the filing deadline. If you miss the deadline, you’ll incur a late-filing penalty that ranges from 5% to a maximum penalty of 25%. Additionally, make sure your tax bill is paid in full by the same deadline.
Collect the information you need. Things like your social security number, educational expenses, retirement account contributions, and the state and local taxes you paid are a few things you’ll want to make sure you collect before filing.
As you begin your taxes or are preparing to work with a certified tax professional, keep in mind the terms, forms, and tips to help you with the process. Start preparing early and make sure you have all the documents and information you need. The First Bank Wealth Management team members are on-hand and ready to assist with advanced, up-to-date knowledge in tax law and help you through any complicated financial situations you might run into.
Sources: NerdWallet, TaxSlayer. As always, consult with a certified tax professional for this year's tax guidelines and rules.