How to File Your First Tax Return
Filing your first tax return doesn't have to be the daunting task you've seen portrayed in the media, especially if your tax situation isn't abnormal. Although we keep hearing about how complex the tax code itself is, most Americans simply need to reconcile a few sources of income, some deductions and credits, and from there, the software or a competent tax preparer can handle the rest. Even more complex situations are becoming easier to handle with the evolution of online tax software and tax-advice sites.
Many Americans will end up qualifying for the first-tier IRS 1040-EZ form. It is the quickest and easiest to complete, provided you don't have dependents (usually children), don't plan on taking a deduction for mortgage interest from a home, had income of under $100,000, and satisfy a few other requirements. (See also: Who Can Qualify for Free Tax Filing with 1040-EZ)
If this doesn't apply to you, then the next tier of complexity (still relatively simple, though) would be the 1040A, which still beats completing Form 1040. The 1040A has allowances for common tax credits and deductions.
Don't fret if you need to complete the Form 1040, though, as that is also quite common, but just a bit more involved than the 1040-EZ and 1040A. Regardless of which camp you fall into, chances are that if this is your first tax return, it can be handled with relative ease, provided you prepared properly, retained the proper information, and are using the right medium for filing.
Forms and Documents You'll Need for Filing
While you'll get most of your income statements after the end of the calendar tax year, there are various pieces of documentation you'll want to be sure to save throughout the year related to deductions, credits, and other events with tax implications. Some of the most common forms and types of documents you'll need to save leading into tax season are the following:
- W-2: This is the tax form your employer should provide, which will outline your income (accounting for 401K and equivalent contributions) and highlight the taxes already withheld during the year.
- 1099-INT: Any interest you earned throughout the year from the likes of savings accounts, money market accounts, and CDs will be sent to you from your bank.
- 1099-DIV: Your mutual fund company or brokerage will send this form for any dividends paid during the year for mutual funds, ETFs, stocks, or other instruments, since dividends are taxable if held outside a retirement account like an IRA.
- 1098: If you're a homeowner paying a mortgage, this form will dictate the mortgage-interest deduction you can take from the prior year.
- 1098-E: You will receive this form from lenders if you have a student loan and paid more than $600 in interest. Use the information from the 1098-E to determine whether you are eligible for student loan deductions.
- FSA/HSA Receipts: If you participated in a Flex Savings Account or Health Savings Account, you'll want to be sure you saved receipts for qualifying health-related expenditures to ensure that you are fully reimbursed for your contributions during the year. In years past, people who had remaining funds in their Flex Savings Accounts would stock up on OTC medicines at the end of the year due to the “use it or lose it” provision, but OTC meds aren’t eligible from 2011 onward. So if you’re participating in an FSA, make sure to check on where you stand mid-year and plan expenditures accordingly.
- Receipts from Charities: If you made charitable contributions, save receipts related to those donations as well.
- 1099-B: Gains and losses from sales of stocks, bonds, mutual funds, and ETFs are common taxable events as well. These transaction records will be sent to you by your brokerage or mutual fund company.
There are myriad other tax forms and documents, but for the majority of Americans, these documents comprise the lion’s share of the paperwork you’ll need to have in-hand prior to tax time. For a more exhaustive list, check out this tax prep checklist.
When to File Your Taxes
If you're anticipating a tax refund, you might as well jump on the activity as early in the year as possible. Personally, I have to wait a bit into the year for a special K-1 tax form that comes later in February from a Master Limited Partnership investment. But the vast majority of Americans can usually start their taxes in January each year.