Filing taxes. It’s unavoidable and intimidating, especially for those less experienced in doing it. In fact, 80 percent of millennials worry about making a mistake, according to a new survey by NerdWallet.
Here are some tips on how to get organized for tax season from BetterMoneyHabits.com, a free financial resource by Bank of America and Khan Academy.
Five essential steps to tackle taxes:
1. Know your tax bracket. Each bracket of your income is taxed at a different rate. As you make more money, a higher percentage may be owed in taxes. Check out this infographic on decoding your tax bracket to see how it works.
2. Know your timeline. The regular tax return filing deadline is April 15. In general, experts recommend filing tax returns earlier rather than later. The earlier you file, the better your chances of avoiding tax-related identity theft, a crime that’s on the rise. Plus, if you’re owed a refund, you will get it sooner.
Additional tip: If you think you need extra time, you can file an extension giving you until Oct. 15. But, if you owe the government money, you still need to pay your estimated taxes in full by April 15 to avoid penalties and interest.
3. Get familiar with the terms and paperwork.
Check out this guide to key tax terms, then start collecting all of the essential information you'll need, including:
· W-2s: Sometime in January or February, you should have received a W-2 form from your employer(s). With information on your wages, tips and tax withholdings, this form may contain much of what you need to complete the bulk of your tax return. Watch this video on the anatomy of a W-2 to gain a better understanding of what the form includes.
· 1099s: If you earned interest on a savings account or you have income from an investment account, you should also have received a 1099 form from your bank or your broker showing just how much interest, dividends, or capital gains or losses your account has accrued over the past year.
The three main personal income tax forms are the 1040, 1040A and 1040EZ. The simplest of these and a good option if you have a fairly simple financial picture is the 1040EZ. The 1040 and 1040A forms are a bit more complex but offer additional tax credit options if you qualify. Watch this video to find out if the 1040EZ is right for you.
4. Decide how to file. The easiest way to prepare and file your tax return (and to process your refund) is through IRS e-file. E-filing is easily available for those who file on their own or use online programs or tax professionals to prepare their returns. If your adjusted gross income is $60,000 or less, you may be eligible for free online tax-filing services.
5. Plan year-round. Whether you're filing independently or working with a tax professional, staying on top of related paperwork all year long will make your life easier during tax season. If you plan to itemize deductions, you probably want to keep receipts for things like charitable donations, job expenses and medical bills. You should keep your paperwork after you file, too. The IRS recommends keeping records for three years.
Also, having a sense of which credits and deductions you may be eligible for can help you save the proper documentation all year and avoid a last-minute scramble. Here are a few to consider: saver’s credit, student loan interest, moving expenses, job search expenses, charitable deductions, freelance expenses, and homeowner’s benefits.
Additional tip: If you think you may qualify for additional credits or deductions, check the IRS website.
Tips courtesy of Bank of America.