Your First Income Tax Return
Filing your income tax returns may sound frightening, but it is not as bad as it may sound. It is something that everyone has been doing since 1913, and it is something you will be doing for the rest of your life. You may decide to use a professional to prepare your return or prepare it yourself with or without the help of income tax software like TurboTax or TaxCut. In any case, there are some things you should know to make the whole process easier.
Once you have your taxable income calculated, you then apply different tax rates against brackets of your income. There are different rates for single individuals and married couples filing joint returns. Think of this like a stair step - income in your lowest brackets is taxed at the lowest rates and as you climb the stairs, your taxable income gets taxed at higher rates.
Long term capital
gains and qualifying dividends receive favorable tax treatment, based
on taxable income levels.
Then you determine if you owe money with your return or if you have a refund coming. Your employer withholds income taxes from each paycheck. You simply compare what has already been withheld with your calculated tax liability. Generally, unless you have a lot of non-wage income or a complicated tax situation, you will have a small refund or owe a small amount. If your refund is large or if you owe quite a bit, you should consider changing how much you are having withheld.
If you are itemizing your deductions because you have deductions larger than the standard deduction amounts, you will need information documenting those expenses. Your W-2 will have information on state and local income taxes withheld, you will get a statement from your mortgage lender with mortgage interest information and you will need canceled checks or other receipts for other deductions.
When to file
You can also file an application for extension of time to file your return, but most people do not do this unless they absolutely need to. In addition, getting an extension does not remove the requirement of paying any amount due beyond April 15th.
What IRS form(s)
you will need
You may also want to consider using income tax software to prepare your return. There are several programs available including TurboTax, TaxCut and others. These programs make the process easier by stepping you through an interview and printing the forms. They also can enable you to file your return electronically. The IRS website also may have simple software available.
What to keep and
for how long?
Where it gets complicated is usually with investments and home ownership. You need to be able to document what you paid for a stock for three years past the due date of the return reflecting the sale of the stock. Most brokerage firms provide a year end statement that shows this information, so it is a good idea to keep year end statements. Record retention for home ownership involves keeping records of what you paid for your home and the cost of any improvements you make.