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The Facts About Taxes

MoneyEDU

By identifying and preparing the right forms and documents -- and keeping detailed records -- you can ensure that your taxes are paid promptly and accurately.

Filing your own taxes is one of those milestone events that every younger person looks forward to with a mix of trepidation and excitement. It's a rite of passage in terms of adulthood, but it can also be a bit stressful if you don't know what you're doing. After all -- who relishes the prospect of the IRS knocking on your door because you've made some fundamental error while preparing your taxes?

To help you avoid that fate, below you'll find all of the information you need to know to file your taxes with confidence -- and earn any refund money to which your entitled.

A Tour Through Basic Tax Principles

The essential principle of taxation is as follows: The more money you make, the more complex your your taxes become. If you have significant investment holdings, for example, paying a tax professional to help file your taxes might be advisable. If your finances are strictly of the basic "job, credit cards and bank account" variety, filing taxes on your own might be easier than you think.

The most common types of tax forms are the 1040, the 1040A and the 1040EZ. The 1040 is the standard tax form used to report income, and it allows you to lower your taxes by claiming expenses, tax credits and deductions. The 1040A is a shorter, two-page version of the 1040. It's also, however, more limited, in that it only allows certain deductions and tax credits to be claimed.

If you're young, single, make less than $100,000 and plan on taking no deductions, the 1040EZ is likely your best option. It's the shortest and easiest of the three, and can be filled out in as little as 15 minutes in many cases.

Once you've identified the correct form to use, it's time to get all of your financial documentation in order. If you're an employee with no investments, you need nothing more than a W2. If you're a freelancer or contract employee, you'll need a document called a MISC-1099. Other important documents include: 1099-B forms for trades and investments; the 1098-E, which helps you deduct interest paid on student loans, and Form 1098, which helps you deduct interest paid on a mortgage.

Once you've got everything prepared, you may wish to familiarize yourself with some common tax terms that arise frequently when filing a return.

These include:

  • AGI (Adjusted Gross Income). Your AGI can be calculated by taking your gross income (everything you've earned that year) and subtracting any deductions that you're allowed to take. If you're filing a 1040EZ and aren't claiming any deductions, the IRS allows you to take one standard deduction (currently $9,300 if you're a head of household).
  • Itemized deductions. If you forego the standard deduction, you can itemize a list of all your deductions (things such as insurance premiums, medical expenses, travel costs etc.).
  • Dependent. A dependent is someone (usually a child or relative) who lives with you and is supported by you. The IRS allows you to deduct a certain portion of your taxable income for each qualified dependent.
  • Tax Credits. Tax credits allow you to deduct a certain portion of your total money owed to the IRS. For example, some products that are sold (electric cars, for example) come with tax credits that can be used by the buyer.

The Takeaway

Filing your taxes doesn't have to be a stressful experience. By identifying and preparing the right forms and documents -- and keeping detailed records-- you can ensure that your taxes are paid promptly and accurately.

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