Taxes will become a big part of students lives now that they have graduated and entered the real world.
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Last week I covered tax tips for recent grads to keep more money in their pockets, and now its time to cover how to file and what documents you need to keep to eliminate the hassle at tax filing time.
Heres what grads needs to keep in mind:
1) If your parents provided more than 50% of your support and you made very little money, you may qualify as their dependent. If you worked part of the year, you may still be required to file a tax return. If so, when you file, remember to check the applicable box on line 5 of Form 1040-EZ to indicate that you are being claimed as a dependent on someone elses return.
2) If you are no longer a dependent on your parents tax return and you are not married, you will probably use the filing status of Single. My nephew has roommates and the lease is in his name so he is in charge of collecting rent and remitting it to the landlordbut this doesnt mean he can file as Head of Household (which is a more advantageous filing status). You may select Head of Household if you have dependent children. It can get complicated, so if you are in a situation where you are providing more than 50% of someones support, check with a tax pro to determine your correct filing status. Or read up on the subject in Publication 17.
3) Do not forget to deduct student loan interest and take the appropriate education credits on next years income tax return, but be sure to check with your parents first if they paid all or part of your tuition. After all, the credits are only allowed to be taken by one party. If you worked part of the year and took a job in another city, you may be able to deduct moving expenses. Check here to see if you qualify and what expenses you can deduct.
4) File your taxes for free. There is no need to go to a tax professional if all you have is one or two Forms W2 to declare. Go online to www.irs.gov and select Free File on the right ruler bar, this will take you to a Web site where calculation of your taxes and electronic filing is offered for free (certain income limitations apply). If you are required to file a state income tax return, you will also have to visit your states Web site to file; the IRS does not automatically file your return with your state government.
5) If you move, make sure your employer and the IRS has your new address and file Form 8822 with the IRS. Also let any other sources of tax documents in on your new location, you want the personnel department to get that W2 to you without delay. You also want to make sure you get 1099s from the following places: your bank for interest earned on your accounts, your broker for dividends earned and reports of stock sales, as well as your college or university showing how much you paid in tuition, or from the student loan folks to show how much you paid in student-loan interest. The documents are mailed by Jan. 31 of each tax year.
6) Set up a file folder to collect tax documents each year and be sure to store a copy of the tax return in the file along with receipts for all deductions in the event of an audit. Start each year with a new folder. As you progress through life, you will likely find your tax situation becoming more complicated and your tax filings can become more of a headache. If you start each year with a clean file, organizing for taxes will be much easier. As tax-related events occur throughout the year, you can file the necessary receipts and documents in the file. When it comes time to prepare your tax return, the data gathering has been done.
7) Do not be scared of being audited. First of all, if all you are declaring is your W2 wages and a little bank interest, you will NOT be audited. The IRS has this information already because both your boss and the bank sent it copies of what they provided to you. The IRS matches its numbers with what you declared on your tax return. If it matches, end of story. If it doesnt, you will receive a letter outlining the corrections and requesting more money or promising a refund depending on which way you erred. The folks who are audited are usually the ones who have numbers to report from their own records, such as income and expenses for a business or a rental property. The IRS might get curious as to the validity of these numbers and come in to check out the receipts. If you rely on more than just the tax documents you get in the mail to compile your tax return, make sure you keep all of your receipts and any other pertinent data to justify the income you declared and the deductions you claimed.
Congratulations again, graduate. Remember that taxes will now be a big part of your financial life. If you are not inclined toward numbers, get a professional to help you. Learn as much as you can on the subject so that you can get through this life with more money in your pocket and without overpaying the tax man.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know, available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.