While graduating from college and starting a new job is exciting, navigating adult responsibilities, such as taxes, can be challenging. Most students depend on their parents to pay taxes while they're in college, so many students feel unprepared to file their own taxes after graduation.
Filing tax returns can be particularly overwhelming for young Americans, many of whom graduate from high school or college without having had a formal financial literacy education. Only 12% of K-12 teachers incorporate personal finance in their classes, according to a 2016 study from PwC. And even when they do, it doesn't always include taxes.
Jen Trujillo, who graduated from Colgate University in 2022 and works in tech sales, recalls her high school teaching students about "savings accounts, budgeting, and other financial knowledge. Taxes," she said, "were not covered."
Kaitlyn Foster graduated from Pace University in 2022 and currently works as a teacher's aide. "I've never been told or really explained to what taxes [are]."
Although you may not feel prepared for it, paying taxes is something that, by law, we all have to do. Tax forms may initially seem complicated and intimidating, but it is important to take the time to understand them, whether that be by researching taxes on your own, turning to a family member for help, or seeking the assistance of an accountant or tax preparation service.
"With the right planning, support, and education it doesn't have to be as scary as you might think," said Nia Gillett, a paraplanner (similar to a paralegal) at Gen Y Planning, a financial planning firm for millennials.
Before you begin the tax filing process, it is important to know some basics.
Tax Day is usually April 15, although it may be rescheduled for a different day if April 15 falls on a weekend or public holiday. The IRS hasn't officially released the date for 2023, but April 15 falls on a Saturday, so it will likely be pushed to the following week. The taxes that are due on Tax Day are the taxes for the prior calendar year ending on Dec. 31.
Your W-2 and other important tax documents you will need to file your tax return start arriving by mail, or become available online, in January.
If you are expecting a refund, you should file your tax return as early as possible so you can get your money back as soon as you can. If you owe money, you have until the deadline to pay it.
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Often you won't know in advance if you are due a refund or have to pay taxes, and how much — your income, tax laws and other factors are constantly changing. So, even if you got a refund last year, it doesn't mean you'll definitely get one this year. And there's no guarantee your refund or taxes due will be an amount similar to last year's. You might get back less or owe more. So, you should:
- Keep a cushion of money so you can afford to pay your taxes, even if you owe more than you initially expected.
- Never assume you're getting a refund.
- Never spend a refund before you get the money.
The tax deadline is normally in April, but Trujillo, who missed her tax deadline in 2022, warns: "Don't wait for deadlines to come around to gather your materials."
Lauryn Williams is a certified financial planner, the founder of Worth Winning, an online service that helps young professionals with their personal finances, and a four-time Olympian. She recommends starting your taxes in January to ensure you're prepared when Tax Day comes around.
The reason is that there are a lot of pieces involved in filing your taxes — forms you have to have, numbers you need to know. So, by starting early, when your forms come in, that gives you time to find all the pieces, seek professional help if you need it and get your taxes in on time.
Gillett said you might even want to start looking at your taxes earlier, in the last few months of the previous year. That gives you "the ability to take advantage of certain tax benefits, like charitable deductions and business expenses, before the deadline of 12/31."
If you owe and are unsure whether you can pay your full amount, the IRS recommends filing a return as quickly as you can and paying as much as you can to reduce potential penalties and interest. And, you can contact the IRS about setting up a payment plan.
Keep in mind that you are responsible for reporting all sources of income, including money you made from part-time jobs, side hustles, and investments.
The tax-reporting process is different for employees and independent contractors, so it is important to understand which category you fall under.
If you are an employee, you will fill out a W-4 form when you start the job and receive a W-2 later in the year. That W-4 tells your employer how much income tax to withhold from your paid wages and send to the IRS and your state, if applicable, on your behalf.
However, if you are paid as a 1099 independent contractor, subcontractor, freelancer, gig worker, or sole proprietor, you will be responsible for reporting and paying your own self-employment taxes. You will need to fill out a W-9 and get a 1099 at the end of the year. Because taxes are not taken out of your paycheck, you'll need to manage those payments yourself. Typically, that means making quarterly estimated payments for federal and state taxes.
Your parents may be claiming you as a dependent this year if you are still in college, still live with them or they offer you substantial financial support. In doing so, your parents will receive certain tax benefits.
Before filing your tax return, make sure to ask your parents if they are claiming you as a dependent. If this is the case, you will need to indicate that you will be claimed as a dependent on somebody else's returns when you file your return.
If you live in a state that has state taxes, you will also have to file a state tax return in addition to your federal tax return.
Some states have a flat income tax rate for the whole state. Some have graduated rates. A few states have taxes only on investments, such as dividends and interest, and several states have no income tax. And, your income may fall into a different tax bracket depending on whether you are married or single. So, it's important to note that, while your parents have experience with paying taxes and can give you some advice, you will likely not be paying the same tax rate your parents are.
Just to give you an idea of how varied tax rates can be, here's a look at state tax rates across the country for 2022 from the Tax Foundation.
You might also have to file tax returns in more than one state if you moved to another state during the tax year or if you work in one state but live in another. In addition, some cities, including New York, charge city taxes. So, you can see how your taxes could get complicated, even if you don't make a lot of money or own property.
Make sure you know everywhere you are required to file a tax return. If you work for a company, you can ask someone in the human resources department.
"They're seeing these documents all the time; they fill them out all the time," Williams said. "It is their job to know these documents, because they're handing them over to employees. So don't be afraid to look that information up but also to ask someone for help."
Co-workers can be another great resource — not only do they likely have experience in filing tax returns but many of them specifically in filing returns for income from your company.
For more guidance on tax forms and filing returns, check out the IRS website and your state's tax website. You can search "[state or state abbreviation] tax guide."
Before you can file your tax returns, you must gather all the relevant documents. The documentation required varies from person to person. Here are some key documents and information that you may need to file your taxes. Don't be daunted by the length of the list — you won't need every one of these the first time you file your taxes. Just be aware of which ones apply to you to make sure you have everything you need.
- Social security number
- Bank account number: Be prepared to provide the number of the bank account you would like your refund to go to.
- W-2 form: If you are an employee, you should receive a W-2 form from your employer.
- 1099 form: Independent contractors, subcontractors, and sole proprietors will also need to provide some form of income statement, which can include but is not limited to form 1099-K and 1099-Misc.
- Income from investments: You may need income records and documents that report your cryptocurrency, virtual transactions, and investments. These can include but are not limited to 1099-INT, 1099-B and 1099-DIV.
- Receipts: You should be prepared to provide receipts for donations. Independent contractors should save all their receipts related to business expenses.
- 1099-G form: If you have received unemployment payments during the year, you will get a 1099-G form.
- 1098-E form: This reports the amount of interest you paid on your student loans during the year.
- 1098 mortgage interest form: If you own your home, be prepared to submit forms, such as a 1098, that show how much you paid in interest on your home loan during the year.
- Property tax records
- Health-care coverage tax form: If you or anyone in your household signed up for health care coverage through an Affordable Care Act marketplace, you will get a health care tax form such as a 1095-A, -B or -C.
There are several ways to file your tax return: directly using IRS tax forms, using tax filing software or through an accountant.
Filing directly yourself may be a little overwhelming — especially the first time you file.
"Tax filing softwares or tax intake questionnaires from accountants simplify questions, making it easier to understand what's being asked," Gillett said.
Trujillo used TurboTax to file her taxes. "I had no idea what I was doing, but the software literally walks you through everything," she said.
There are also free basic tax-preparation services offered through the IRS, Volunteer Income Tax Assistance and Tax Counseling for the Elderly, where tax experts volunteer to help low-income families and the elderly prepare and file their tax returns.
Filing on your own is doable, but it can be time-consuming. How much free time you have, whether you can afford to hire a tax professional, how complicated your taxes are to file, and the number of accounts you have to manage all may influence whether you choose to invest in a tax professional.
"Hiring a tax professional right out of college could be the best thing you do for your finances, because they can help you understand what's going on," Williams said.
She recommends seeking out either an enrolled agent or a certified public accountant. In addition to being required to undergo more extensive training than other tax professionals, EAs and CPAs "can act on your behalf," she said, if you are audited.
Gillett recommends asking a family member if they have an accountant you can use. They've already been vetted by your family member, and they might also offer a discount.
"A lot of tax accountants offer to file their clients' children's first returns at a discounted rate," she said.
Everyone likes to get a refund, right? Free money!
Actually, it's not free money at all — that was your money, and you just overpaid. You gave more of it to the government than you needed to, and now they are giving it back. This typically happens when employers withhold more money than necessary from an employee's paycheck. That's why it's important to pay attention to your choice of withholding when you start working for a company.
And, while it's tempting to splurge on something when you get a refund, Williams recommends "using [a refund] to finance your actual financial goals," such as paying off credit card debt and building your emergency fund.
She also advises that you then adjust your withholding so that you "have more money coming home on a monthly basis to be able to take care of things." Williams says adjusting your withholding can help with financial challenges such as credit card debt. Additionally, keeping your money rather than allowing the IRS to hold on to it for a few months gives you the opportunity to put it in a savings account or invest it so it can be making money for you.
If you owe taxes but can't afford to pay them, the IRS recommends that you still file your tax return before the deadline and pay as much as you can. It is important to file your tax return on time, even if you can't pay in full, to avoid the late filing penalty.
If you would like to use an installment payment plan, attach Form 9465 to the front of your tax return to see if you qualify. Qualifications include owing less than $25,000 and the ability to pay off the amount in less than five years. On the form, you indicate your proposed monthly payment and the date you wish to make your payment every month.
If you cannot pay your taxes, even with an installment payment plan, you may fill out Form 656 and Form 433A to apply for an "offer in compromise." This would allow you to settle your tax debt with the IRS for less than the amount you owe. The IRS will review your financial situation and your future income potential to determine if you are eligible.
Remember, it is your obligation to pay taxes. It is important to know ahead of time what to expect, make a plan for how you will file your tax return, be diligent about gathering your documents, and get started early. Although filing your tax return for the first time can be daunting, just remember you're not alone — we all have to do it. So, ask questions of family and friends or hire a professional — whatever you have to do to get it done.
″College Voices″ is a guide written by college students to help young people learn about important money issues such as student loans, budgeting and getting their first apartment. Macklin Fishman is an intern with CNBC's digital video team. In May 2023, she will graduate from Colgate University with a degree in English and Film & Media Studies. The guide is edited by Cindy Perman.
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