Doing your taxes isn't fun, but it's not as big of a headache as you might have heard -- especially if you're a recent college grad. Whether you are filling out a simple tax return or have a more complex situation, our tips for first-time filers will help you conquer this milestone of adulthood with ease.
If you don't expect to claim many tax deductions
Use an online tool to fill out your tax return for free. You can file your state and federal returns on the IRS's website for free if you made less than $60,000 last year. The IRS has a free electronic form for those who made more than $60,000, but it gives you less step-by-step help and doesn't offer the option to complete a state return. TurboTax offers a free version of its tax filing software for both federal and state returns, and H&R Block will help you file your federal return for free (but it's $9.99 per state form).
Once you pick a tool you like, organize the documents you need. Employers usually send out W-2 forms, which show your income from the previous year, in January. The company that services your student loans, if you have any, will send you Form 1098-E, a student loan interest statement. Round up any paperwork that applies to the deductions or credits you plan to take. Have your Social Security number handy, too.
If your tax situation is more complex
Pick the right professional. If you want to be certain you've done your taxes correctly, or you have a small business or other circumstance that makes your taxes more complicated, hire a professional to help you. A pro will charge you about $260 to file a return with lots of deductions and about $150 for a simpler return, according to a survey by the National Society of Accountants.
There are still risks when you go this route, says Steven Melnick, director of tax programs at Baruch College. "Even if you decide to go with a professional, you have to be careful," he says. If you can, choose an accountant who comes recommended by friends or relatives. You don't want your tax preparer to overcharge you or make mistakes, leading you to owe the IRS money later on.
Know which tax breaks apply to you. One of the biggest mistakes recent graduates make is not taking advantage of little-known tax breaks that could save them money, Melnick says. If you started a small business last year, while you were in school or after you graduated, you may qualify for several small business tax breaks. One of the lesser-known deductions is for startup costs, Melnick says, like travel to potential business locations and business-related calls on your cellphone.
If you made less than $30,000 last year and you contributed to a retirement account, you could also qualify for the saver's credit. It can reduce your tax bill by up to 50 percent of the first $2,000 you saved in an individual account or in an account you set up through work. The credit is one of the many reasons you should save for retirement. You may also be able to deduct moving expenses if you moved for a new job last year.
Knowing the language. Whichever category you fall into, take note of these quick-and-dirty tax terms to make sure you're as prepared as possible to file your return.
Tax return: The document that reports to the IRS how much money you made and other information about your finances in the previous year. You'll also file one for each state you worked in last year, if that state has an income tax of its own. These are what's due by April 15, and they let the government know if it took too much or too little income tax out of your paycheck.
Tax refund: The good part. After you send in your return, you may get a tax refund, which is a payment from the government giving you back the extra money you paid throughout the year in income tax.
Tax deduction: An amount of money, spent on certain circumstances, that's subtracted from your overall taxable income. Say you made $40,000 last year at your job, and you paid $300 in interest on your student loans. The government doesn't tax student loan interest, so when you report it on your tax return, the IRS subtracts $300 from the $40,000 you made.
Tax credit: A tax break that directly reduces the amount of tax you owe. A tax credit is more powerful than a tax deduction of the same amount. For example, a $1,000 deduction reduces your taxable income by $1,000, which could shrink your taxes by a few hundred dollars. A $1,000 tax credit, by contrast, knocks the full $1,000 off your tax bill.
If you think of doing your taxes as a way to get back money you rightfully earned, you'll turn a tedious chore into a liberating ritual with a potentially great payoff.
Still in school? Check out these answers to eight student FAQs about taxes.