Like many recent college grads, I’ve discovered how important — and challenging — it can be to live on a budget. One simple way to save a little bit of money is to do your own taxes. This will help save you a little money up front, and can also help with money management in the long run.
The deadline for filing federal taxes each year is April 15, so this is a time when many of us are getting our W-2, 1099-INT, 1099-MISC (and for some of us, even the 1099-DIV) forms ready to bring to an accountant to do our taxes for us. But despite all the jargon and acronyms, taxes are really not so difficult to do on your own. Besides the benefit of saving the money that would otherwise go to a tax preparer, doing your own taxes can help you learn how to manage money, work with budgets, and make smart financial decisions.
The W-4 form
When you start a new job, your employer gives you a W-4 form to fill out. Until 2020, this form was a little complicated. It contained spaces to fill in how many allowances or dependents you are claiming, among other things.
But now the form is much simpler. Essentially all you need to do is identify how you want the government to treat you as a taxpayer — as a single person, a married person, head of household, and if you have any dependents. This is the baseline for how you are taxed.
This form helps your employer know how much money to withhold from your paycheck so that when it comes time to pay taxes, you have that money already put away. For most people in their 20s, that amount covers what you owe — which means you’ll get a refund from whatever is left over.
One thing to think about, though: if you are getting a large refund at the end of the year, it means that this money could have otherwise been in your pocket, rather than sitting in some government account somewhere waiting for your taxes to be filed. Essentially, you gave the government an interest-free loan as Uncle Sam held your money for you. If you have a substantial refund and your financial situation isn’t changing very much in the year ahead, maybe it is worth thinking about lowering the amount that is withheld from your paycheck.
The W-2 form
By January 31st, employers need to mail W-2 forms to their employees. These forms detail the total wages you earned, the amount of federal and state income tax that was withheld, as well as what you paid into social security, etc.
All these numbers in boxes tend to intimidate, but for most of us, the basic information of total wages earned and taxes withheld are all that is necessary to complete your taxes. But even if you need to do more than that, don’t worry. Since last year, another change has made things even easier: the standard deduction was increased to $12,000 for those filing as a single person, and $24,000 for married couples filing jointly. This essentially means that the government sees $12,000 of your total earnings as non-taxable income, which lowers how much you owe. That makes filing taxes really simple if you don’t have many business-related expenses.
If you do have business-related expenses (more than $12,000), you might want to think about itemizing your deductions. Deductions are simply expenses you itemize so that the government can see how much you really earned. For example, deductions can help you prove that you didn’t really earn $60,000 if you spent $15,000 to do your job — in reality, you earned $45,000. The list of what you can deduct includes charitable gifts, mortgage insurance, student loan interest, and medical expenses, so it’s worth investigating.
But whether you are filing with a standard deduction or itemizing your deductions, there are plenty of resources out there to walk you through your tax preparation.
I used TurboTax for a few years during and after college, including while starting my own business, doing privately contracted work, and even beginning to invest in the stock market. The software walked me through the whole process — from showing potential tax breaks and credits available to me to to itemizing deductions.
Utilizing something like TurboTax is a great first step in doing your own taxes. The filing fees for federal taxes is free with the software and there is a low fee to file your state taxes. There are also small costs if you need to use the service to claim personal income from owning your own business or writing off large business expenses.
Although a software system like TurboTax is a great first step, you can do even better if you’re feeling ambitious. Anyone can file taxes on their own with the proper forms. It’s not impossible — the government intends for ordinary citizens to be able to do this — and will save you the fees and cost of using TurboTax.
Doing your own taxes has many benefits, and isn’t as difficult as it seems — it will help you to take ownership of your financial future while teaching you the ins and outs of finance, tax, and organization. And having first-hand exposure to these things will help you when you encounter other financial decisions in the future.