What to Know Before Filing Taxes for the First Time
It’s no surprise that many people have mixed reviews about the Internal Revenue Service (IRS)—most taxpayers don’t enjoy paying money on their property or income that they already own. Whether you’re behind Trump’s Tax Cuts and Jobs Act or think his promises fell flat, chances are that you think the U.S. tax code is at least a little broken.
If you’re filing taxes for the first time, it’ll feel especially confusing. Who has to file? What counts as income? How do I qualify for tax deductions and credits… and what’s the difference between the two?
Your questions are valid and you’re not alone in your confusion. Fortunately, we’re here to break down a few pointers on what you need to know before filing taxes for the first time in order to make the process much more approachable. Hopefully after this read, you’ll feel less intimidated by the IRS and more confident about the tax money you can get back into your pocket.
Who has to file taxes?
So you made a little money this year and aren’t sure whether you’re required to report it to the IRS? If you’re filing taxes for the first time, you’re probably not trying to get rich from trading derivatives; it’s more likely that you earned income babysitting the neighbors’ kids or from working your first part-time job.
The filing requirement will depend on your income, age, and filing status (for the purpose of this article on first-time tax filers, we’re assuming the reader is younger than 65 years old and filing under the Single status).
As of 2017, you’re required to file taxes if:
- You made at least $1,050 or more in unearned income
- You made at least $6,350 or more in earned income
- You had net earnings of $400 or more from self-employment
What counts as income?
Earned income refers to money you earn from working; it’s reported by your employer to the IRS via Form W2. You should get your personal W2 by mail prior to tax season—which will show you how much you’ve earned and whether you’re required to file taxes—but if you never received it or lost it after the fact, you can learn how to get a copy of your W2 online.
Unearned income is passive and does not come from working wages. It’s unlikely that as a single, first-time tax filer, you receive unearned income from alimony, pension, or distribution from retirement accounts, but you might receive unearned income in the form of:
- Capital gains
- Interest income
- Stock dividends
- Bond interest
- Rental real estate
If you’re not sure whether or not Bitcoin counts as income, keep in mind that 0.04% of cryptocurrency investors reported a capital gain to the US Internal Revenue Service. That’s only 100 out of 250,000 investors, so if you choose not to report crypto gains, you’ll be in good company.
Finally, the IRS considers self-employment income as any income derived from carrying on a “business or trade” as a sole proprietor, independent contractor, or some forms of partnerships.
If you only babysat a few times and received cash under the table, you probably don’t need to report these earnings to the IRS. However, if you were more of a part-time nanny and received a Form 1099, you’ll be required to file this earned income on your tax return.
From 1099 is for independent contractors, but some companies won’t issue these until paying you over $600. Remember, the requirement for self-employed income is $400 or more, so be sure to keep your own bookkeeping records and diligently record all financial transactions related to your business.
What are tax credits and deductions?
In some cases, you might not be required to file taxes, but it could still be in your interest to do so anyway. You could be able to receive a refund on federal income tax withheld and/or excess estimated payments. You might also be able to take advantage of refundable tax credits, such as:
- Earned Income Tax Credit
- American Opportunity Tax Credit
- Additional Child Tax Credit
… and more. If you’re not eligible for tax credits, you might qualify for certain write-offs or deductions that lower your tax obligation, such as charitable donations or work-related travel expenses.
Once you get a feel for the U.S. tax code and how it can work to your favor, you can relieve your money-related stress. Follow these beginner’s tips and your first tax season can be a breeze!
Eduard Watson Author
An experienced finance writer for more than 10 years, active industry watcher, and gadget enthusiast.