Doing your taxes can seem so expensive and complicated, it's easy to understand why George Washington and friends revolted against the British.
Before you dump tea into a harbor and declare yourself independent from the United States, take a deep breath and take a look of this basic primer on filing your taxes, which was prepared by Amy Wang, a technical manager on staff at the American Institute of CPAs.
The deadline to file your taxes is April 15th - that's two weeks away for those of you who are still in denial.
1. What's the difference between a 1099 and a W-2?
Both Form W-2 and the 1099 forms are information reporting forms that the taxpayer files with his or her tax return. W-2 forms report an employee’s wages for the year and are provided by the employer to the employee. If the taxpayer worked for more than one employer, he or she will receive a W-2 Form from each employer. The IRS will also receive the information and check it against the taxpayer’s return. Conversely, the IRS checks the taxpayer's 1099 against the business's records.
There are a series of 1099 forms that are used to report information about income to the taxpayer and to the IRS. Some of the most common 1099 forms include Form 1099-DIV, which reports interest and dividend income, and Form 1099-MISC, which reports miscellaneous income such as prizes and awards.
2. Who should file as a dependent?
Strict rules govern who can be claimed as a dependent. The IRS has answers to frequently asked questions about dependents on its website and more detailed information is provided in the Dependents section of “Who Must File” in IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.
For example, there are a set of tests that taxpayer’s child must meet in order for them to claim a dependency exemption for the child:
- Qualifying child or qualifying relative test
- Dependent taxpayer test
- Citizen or resident test, and
- Joint return test
The IRS provides a step by step online questionnaire to help taxpayers determine who they can claim as a dependent.
3. What are the deductions that college students can claim? What about graduates?
Taxpayers should remember that tax credits are more valuable than deductions because a credit reduces the amount of the tax that is owed. A deduction reduces the amount of taxable income that is subject to the income tax rate.
Several tax breaks are available for college students and their parents. These benefits include, but are not limited to, the American Opportunity Credit, the Lifetime Learning Credit, and the tuition and fees deduction.
The American Opportunity Tax credit can only be used for the first four years of college. The Lifetime Learning Credit can be used for all post-secondary education including undergraduate, graduate or professional training and does not have to be associated with a degree program; there is no limit on the number of years it can be used.
The tuition and fees deduction often is used if the American Opportunity Tax Credit cannot be used. Taxpayers can use the Lifetime Learning Credit in conjunction with the tuition and fees deduction. The tuition and fees deduction is not available to taxpayers using the American Opportunity Credit. These tax breaks have different phase outs and income limitations. Taxpayers should also know that it is not necessary to itemize to take the tuition and fees deduction.
4. Should young people file their taxes themselves or have an accountant do them? What software or apps are available?
Whether a taxpayer needs professional help to prepare his or her return is more a function of the individual’s situation than age. Does the taxpayer know the tax rules or is he or she willing to learn them and keep up with the changes? Does the taxpayer have the time to prepare the return? What is the source of income – is it wages that are reported on a Form W-2 or is the person self-employed? Is there significant income from interest or dividends? Did the person have a life-changing event – a marriage or divorce, the birth or adoption of a child, start or sell a business, or move from one area of the country to another to take a new job?
If the taxpayer is a college student, professional assistance can be beneficial because the variety of education tax breaks is confusing and the rules are complex. For example, taxpayers may not know that the American Opportunity Tax Credit is refundable up to $1,000, which means that a student or their family could get a refund even if they don’t owe any federal taxes.
The IRS offers taxpayers the option to file electronically using brand-name software through its Free File program. The program also offers free fillable forms. Manufacturers of brand-name software also offer apps.