Many people fault our school system for not teaching students how to file taxes. Everyone must do it eventually- yet most of us don’t really know what we are doing when it comes to filing our taxes. So, if you’re wondering where to get started this tax season, you’re not alone. Cecilia Li, student in the Master of Science in Taxation program at the Foster School of Business, and former tax site manager of the United Way King County free tax campaign program, helped us answer some important questions about getting started with your taxes.
Why do I need to file taxes?
We need to pay taxes so that the government can invest in things like health care, education, and security. However, filing taxes is also important because you may have paid the government too much tax throughout the year. Your employer is required to take money out of your paycheck and send it to the IRS. This amount is not perfect and is often overstated. This means, after filing your taxes, the government may give some of your money back in the form of a return. In some cases, it is understated and then you owe the government money.
How do I know if I need to file taxes?
Generally, if your gross income (total amount you earned) is not more than certain thresholds (this changes year to year), then you may not need to file a federal tax return. If you have different types of earned and unearned income, however, you should file your tax return depending on your age, filing status, and other circumstances if applicable. The Economic Impact Payments and Recovery Rebate Credit may affect your filing eligibility as well. Check out this IRS online tax assistant tool to help determine if you are required to file a federal tax return or if you should file to receive a refund.
If you are a foreign student and/or scholar, and you have been to the U.S. for a certain number of years, you might need to file a federal return depending on your visa type, income type, years of residency in the U.S., immigration status (if applicable), and nationality (the U.S. has different tax treaty benefits with certain foreign countries). This IRS site can help you know if you must or should file your tax return as foreign students, scholars, teachers, and exchange visitors.
Low-income families and individuals would benefit from different types of credits such as earned income taxes, education credits, child tax credit, etc. when circumstances are met.
How do I get started?
First, gather your tax documents like W2s, 1099-DIV, INT, 1099-NEC, Form 1099-R, Form SSA-1099, etc. and sort through all your income. Normally, your W2 is sent out by your employer and you will receive it in the mail by the end of January. You might also be able to log into your online pay account and print out your W2. If for some reason you do not have your W2 by late March, you may go onto the IRS website to request a salary and wage transcript where they estimate your wages. This is a last resort if you have absolutely no way to get your W2. Other items such as a 1098-T or Form 1042-S may be important to get tax credits for domestic or foreign students that are paying for college.
How do I know if I’m a dependent?
If all the following statements are true, you generally qualify as a dependent:
- You are under the age of 19 OR you are a full-time student under the age of 24
- You live with your parents for more than half of the tax year (unless a full-time student, this requirement is might be waived because of temporary absences)
- You do not provide more than half of your support
Whether you believe you are dependent or not, it is always a good idea to check in with your guardians. If your parents are eligible to claim you as a dependent on their tax returns by law, and they have submitted their tax return and it has been accepted by the IRS before you have filed yours, it is likely your tax return would be rejected by the IRS system- especially if you would be e-filling your tax return.
Are there any deductions or credits I should know about?
Deductions allow you to reduce the amount of taxes you need to pay, and there are two major deduction types: standard and itemized. The standard deduction amount adjusts on an annual basis, and it depends on your filing status, age, dependency, and other circumstances if applicable. For example, generally, if your filing status is married filing jointly, and neither you nor your spouse will be claimed as a dependent by other taxpayers, your standard deduction amount for the tax year of 2020 would be $24,800.
Though standard deductions are more common, you may benefit more by itemizing deductions. Itemizing makes sense if you have state and local income sales taxes, real estate and personal property taxes, mortgage interest, mortgage insurance premiums, unreimbursed medical and dental expenses. etc. This link offers more details on determining your applicable deduction amounts.
For college students or parents who are eligible to claim their college children as dependents, there are two important education tax credits you may want to know about. First, the American Opportunity credit allows you to reduce the total amount of taxes you pay. It is available to undergraduate students and is 40% refundable. Lifetime learning credit is another education credit that may reduce a taxpayer’s tax liability but is not refundable. Low-income families and individuals might be entitled to different types of credits such as Earned Income Tax Credits, Child Tax Credit, Additional Child Tax Credit, Recovery Rebate Credit etc. when circumstances are met.
Do I need to consider any stimulus I might get from the government?
If you are eligible for an Economic Impact Payment (for example, you file as a single and make less than $75,000 annually and are not claimed as a dependent) but have not received the full amount, you must file a tax return to claim the recovery rebate credit. The first payment is $1,200 per person and $500 per qualifying child, and the second payment is $600 per person and $600 per qualifying child. And, don’t worry about adding this payment to your overall income–it is not taxable.
When are taxes due?
Taxes are normally due on April 15. If needed, you could file an extension to get your due date moved to October 15. However, this is not recommended. Even though your tax return due date will be extended to October. Please be aware the extension to file your tax return does not mean an extension to pay your taxes if you have an outstanding balance due. It is a good idea to estimate and pay your tax liability by April 15th of 2021 to avoid potential penalties and interests although your tax return would be extended to be filed in October. Link to details and steps to this request an extension here.
Any other advice you have for first time tax filers?
There are always people available to help you with your taxes. First, check to see if the United Way can help. For simple tax returns, the United Way’s VITA program can often help prepare your taxes for free. The MS Tax students here at the Foster School of Business help volunteer at the local UW VITA program. The MS Tax students are volunteering Mondays and Wednesdays from 5 pm – 8 pm this season to help out with your returns virtually via United Way’s VITA site.
Myfreetaxes.org is another site that offers free services to people with simple returns. If you’ve got more complex tax returns (made income from selling a home or stocks, for example), it may be better to consult a CPA or experienced tax accountant for more complex tax issues. If you feel more comfortable filing your tax return on your own, feel free to consider adopting the free tax preparation tools offered through the IRS.
Learn more about the Master of Science in Taxation at the University of Washington’s Foster School of Business.