If you’re a Gen Z young adult, you might be wondering how to deal with taxes for the first time. Maybe you just got your first job, started a side hustle, or received some income from investments. Whatever the case, you need to know how to file your first 1040 form and claim all the tax benefits that you deserve. {How to Slay Your First 1040 as a Gen Z Young Adult}
In this blog post, I’ll share with you some tips and tricks on how to slay your taxes as a Gen Z young adult. I’ll cover topics such as:
- When and why you need to file a tax return
- How to choose the right tax filing status and deductions
- How to take advantage of tax credits for education, work, and family
- How to avoid common tax mistakes and pitfalls
- How to plan ahead for next year’s taxes
By the end of this post, you’ll have a better understanding of how to handle your taxes like a pro. So let’s get started!
When and Why You Need to File a Tax Return
The first question you might have is: do I even need to file a tax return? The answer depends on how much money you earned in the year and what kind of income it was.
In general, when you’re under age 65 and single, the IRS expects you to file if you earn more than the standard deduction amount that year. For 2021, the standard deduction is $12,550. To keep it simple, you can use this IRS tool to see if you’re required to file your own tax return.
But even if you don’t have to file, you might want to do it anyway. Why? Because you might be eligible for some tax refunds or credits that could lower your tax bill or increase your refund. For example, if you had taxes withheld from your paycheck, you might get some or all of it back. Or if you paid for college tuition, you might qualify for the American Opportunity Tax Credit or the Lifetime Learning Credit, which could reduce your tax liability or give you a refundable credit.
So, unless you’re absolutely sure that you don’t owe any taxes and you’re not eligible for any refunds or credits, it’s a good idea to file a tax return. You don’t want to leave any money on the table, right?
How to Choose the Right Tax Filing Status and Deductions
The next step is to choose the right tax filing status and deductions for your situation. Your tax filing status determines your tax rates, your standard deduction amount, and your eligibility for certain tax benefits. Your deductions reduce your taxable income, which means you pay less taxes. So question again arises How to Slay Your First 1040?
There are five tax filing statuses to choose from: single, married filing jointly, married filing separately, head of household, and qualifying widow(er). The best one for you depends on your marital status, your dependents, and your living situation. You can use this IRS tool to help you determine your filing status.
Your deductions can be either standard or itemized. The standard deduction is a fixed amount that you can subtract from your income, no questions asked. The itemized deductions are specific expenses that you can deduct, such as mortgage interest, state and local taxes, charitable contributions, and medical expenses. You can choose whichever one gives you the bigger deduction, but you can’t take both. You can use this IRS tool to help you decide whether to itemize or not.
How to Take Advantage of Tax Credits for Education, Work, and Family
One of the best ways to slay your taxes is to take advantage of tax credits that you qualify for. Tax credits are different from deductions, because they directly reduce your tax liability, dollar for dollar. Some tax credits are even refundable, which means you can get money back even if you don’t owe any taxes.
There are many tax credits available for different purposes, but here are some of the most common ones for Gen Z young adults:
- The Child Tax Credit (CTC) is worth up to $3,600 per child under age 6 and $3,000 per child between ages 6 and 17 for 2021. You can claim this credit if you have a qualifying child who lives with you for more than half the year and meets other requirements. The CTC is fully refundable, which means you can get the full amount even if you don’t owe any taxes. You might also qualify for the Child and Dependent Care Credit (CDCC) if you paid for child care or dependent care expenses while you worked or looked for work.
- The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) are available to you if you paid for qualified education expenses for yourself or a dependent. The AOTC is worth up to $2,500 per student for the first four years of college, and 40% of it is refundable. The LLC is worth up to $2,000 per tax return for any level of education, but it is not refundable. You can only claim one of these credits per student per year, and there are income limits and other rules to follow.
- The Earned Income Tax Credit (EITC) is available to you if you have low to moderate income from work. The amount of the credit depends on your income, your filing status, and the number of qualifying children you have. The EITC is fully refundable, and it can be worth up to $6,728 for 2021. You can use this IRS tool to see if you qualify for the EITC.
These are just some of the tax credits that you might be eligible for. There are others, such as the Premium Tax Credit for health insurance, the Saver’s Credit for retirement savings, and the Recovery Rebate Credit for stimulus payments. You can check out this IRS page for a complete list of tax credits and deductions.
How to Avoid Common Tax Mistakes and Pitfalls
Now that you know how to claim all the tax benefits that you deserve, you need to avoid some common tax mistakes and pitfalls that could cost you money or cause you trouble. Here are some tips to keep in mind:
- File your tax return on time. The deadline to file your federal tax return is usually April 15, unless it falls on a weekend or a holiday, in which case it is the next business day. If you can’t file by the deadline, you can request an extension until October 15, but you still have to pay any taxes you owe by April 15 to avoid penalties and interest. You can file your tax return online, by mail, or through a tax professional.
- Report all your income. You need to report all your income from all sources, whether it’s from a job, a gig, a hobby, an investment, or a gift. You should receive a form from your employer or payer that shows how much you earned, such as a W-2, a 1099, or a K-1. You need to include these forms with your tax return, and make sure the amounts match what you report. If you don’t receive a form, or if you receive cash or other non-reportable income, you still have to report it on your tax return.
- Choose the right tax preparer. If you decide to hire a tax professional to help you with your taxes, make sure you choose someone who is qualified, reputable, and trustworthy. You can check the IRS directory to find a credentialed tax preparer near you, or ask for referrals from friends or family. You should avoid anyone who promises you a bigger refund than others, charges a percentage of your refund, or asks you to sign a blank or incomplete return. Remember, you are ultimately responsible for your own tax return, even if someone else prepares it for you.
- Keep good records. You should keep all your tax-related documents, such as forms, receipts, invoices, statements, and bills, for at least three years after you file your tax return. You might need them to prove your income, deductions, credits, or payments in case of an audit, a mistake, or a dispute. You can store your records electronically or on paper, as long as they are organized, accessible, and secure.
How to Plan Ahead for Next Year’s Taxes
Finally, you can slay your taxes even more by planning ahead for next year’s taxes. Here are some ways to do that:
- Adjust your withholding or estimated taxes. If you received a large refund or owed a lot of money when you filed your tax return, you might want to adjust your withholding or estimated taxes for the next year. Withholding is the amount of taxes that your employer takes out of your paycheck, and estimated taxes are the payments that you make yourself if you have income that is not subject to withholding, such as self-employment income. You can use this IRS tool to help you figure out how much you should withhold or pay in estimated taxes, and fill out a new Form W-4 to give to your employer or make quarterly payments to the IRS using Form 1040-ES.
- Contribute to a retirement account. One of the best ways to save money on taxes and secure your future is to contribute to a retirement account, such as a 401(k), an IRA, or a Roth IRA. Depending on the type of account, you can either deduct your contributions from your income now, or enjoy tax-free withdrawals later. Either way, you can benefit from the power of compound interest and grow
