Financial Education Resources

Filing your taxes for the first time can be exciting but also intimidating. We’ll walk you through the process step by step so you can avoid mistakes.

If this is your first time filing taxes on your own, congratulations! It’s a major adulting milestone. This article helps you understand some important terms used when preparing your tax forms, so you can file with confidence.

Income

You might have heard the term “gross income.” Your gross income is the total amount of money you earned during the year. This includes wages and tips from a job, plus any interest, dividends, or capital gains.

In January or early February, you should receive forms like these from your employer and any other income sources reporting your gross income.

• W-2

You’ll get this form from your employer. It will list your income as well as the amount of federal and any state and local taxes that have been withheld, along with Social Security and Medicare taxes.

• 1099-DIV

You’ll receive this form from any financial institution or brokerage firm where you have an investment account. It will indicate the dividend or other distributions from your investments.

• 1099-INT

Financial institutions will send you this form if you earned $10 or more in interest from savings.

• 1099-NEC

If you did any freelance or consultant work, you’ll receive this document from each client or business.

Adjustments to Income

The federal government, most states, and some local governments tax your earnings. But the good news is that you can automatically subtract certain things from your gross income to lower the amount that is taxed. These are called above-the-line deductions, which give you your adjusted gross income.

Forms for common above-the-line deductions include:

• 1098-T

If you attended school, your college or career school will send you a Tuition Statement that lists qualified tuition and education expenses. You may be able to claim these expenses as a deduction.

• 1099-SA

This form lists distributions from a Health Savings Account (HSA).

• 1040 Schedule SE

If you’re self-employed or a gig worker, you will use this form to determine the Social Security and Medicare taxes due on your net earnings.

• 5498

You’ll receive this if you contributed to an Individual Retirement Account (IRA).

Other Deductions

You can take other deductions to reduce the amount of income that you’ll have to pay taxes on. The number left after you’ve subtracted these deductions is your taxable income. You can choose to take the standard deduction or itemize deductions. Many people choose the standard deduction, which is determined by your filing status (such as single, married, or head of household). The standard deduction lowers your income by a fixed amount. The Internal Revenue Service (IRS) publishes the standard deduction each year online and in the directions that come with your tax form.

If your itemized deductions exceed the standard deduction, you can choose to itemize, using Form 1040 Schedule A. Itemized deductions include:

• Mortgage Interest Deduction

If you have a home mortgage, you’ll receive form 1098 from your lender. It shows the amount you paid in interest as well as private mortgage insurance and points.

• Charitable Contributions Deduction

You can deduct up to a certain amount in cash or property contributions donated to a qualified tax-exempt charity as a single taxpayer without having to itemize. If you donated a vehicle to a qualified tax-exempt charity, you will receive form 1098-C from that charity. You must include this form with your tax return if you itemize this expense.

• Self-Employment Expenses Deduction

Use form 1040 Schedule C to list work-related expenses if you are a freelancer or self-employed.

• Home Office Deduction

If you use part of your home exclusively for business-related activity, you can write off a portion of your rent, utilities, maintenance, and other expenses.

Tax Credits

Unlike deductions, a tax credit is a dollar-for-dollar reduction in the amount of tax you owe. Depending on your individual situation, you may be entitled to a refund if your tax credits are more than what you owe.

A variety of credits can help reduce your tax bill:

• American Opportunity Tax Credit

This is a tax credit to help pay expenses for the first four years of post-high-school education.

• Child Tax Credit

The IRS provides tax credits for children up to age 17.

• Child and Dependent Care Credit

This federal tax benefit helps if you paid for child care or adult care for a dependent while you worked or looked for work.

• Earned Income Credit

Low- to moderate-income workers and families can use this credit to get a tax break.

• Lifetime Learning Credit

This tax credit can help eligible students pay for undergraduate classes, graduate education, and courses to help get or improve job skills. The good news is there’s no limit on the number of years you can claim the credit.

• Saver’s Credit

You’ll get a credit for contributions to an IRA, 401(k), 403(b), or certain other retirement plans. You're eligible for this credit if you are 18 or older, not a full-time student, and can’t be claimed as a dependent on another person's tax return.

Tax Brackets

Simply put, tax brackets show you the tax rate you will pay on each portion of your income. The U.S tax system is a progressive system, meaning that different portions of your income will be taxed at different rates. As you make more money, you may enter a higher tax bracket and owe a higher percentage in taxes. But keep in mind that when an income increase moves you into a higher tax bracket, you pay only the higher tax rate on the part of your income that falls into that bracket.

Tax rates include:

• Marginal Tax Rate

                This is the tax rate at which you pay taxes on your last dollar earned.

• Effective Tax rate

This is the average rate at which you pay taxes.

Deadlines

Experts agree that it’s better to file your taxes early and not wait until the last minute. The IRS generally starts accepting returns in mid to late January, and if you’re owed a refund the sooner you file, the sooner you’ll get it.

Doing your taxes can seem overwhelming, but it’s important to take your time and not rush. Rushing leads to stress, which might cause you to make mistakes – sometimes costly ones.

Experts recommend gathering all the documents you need before you start working on your return. Being prepared can help you tackle the job confidently.

Here are some other dates to be aware of:

• January 1

The calendar tax year kicks off on the first day of January.

• January 31

W-2s and most 1099 forms are distributed to taxpayers.

• April 15

Tax Day! This is the day federal tax returns are due and also the date for requesting a tax extension.

•  October 15

If you requested a six-month extension, this is the last day to file a tax return.

• December 31

This is the last day to take any action that could affect your taxes for the year.

Note: If any deadline falls on a weekend or holiday, the due date will be the next business day.

Ways to File

Taxpayers have several choices to help with preparing and filing a return.

• Tax Software

If you have mainly employment income to report and just claim a standard deduction, filing your taxes yourself might be a good way to go. There are several tax software programs on the market that walk you through the process. You may be able to file online for free through the IRS or a tax software provider.

• Human Help

If you have a more complicated financial situation with income from multiple sources and different kinds of deductions, it could be a smart move to enlist professional help. A tax preparer or certified public account can do your taxes and may also find ways to save you money by uncovering deductions and preventing penalties.

• A Combination of the Two

Another option is preparing your return using a tax software program and then having a tax expert review it. Turbo Tax and H&R Block both offer this service, which can take a lot of the guesswork – and stress – out of filing your taxes.

Tackling Tax Season

Filing your taxes, especially for the first time, is a big responsibility. But you can make it easier by keeping good records, organizing your paperwork, taking advantage of tax preparation software, and asking for expert help when you need it. 

Fidelity Bank does not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.