Tax season: A beginner’s guide for teens
This just in! The Internal Revenue Service (commonly known as the IRS) has extended the tax deadline to May 17th.
If you’re one of the 55 million Americans who have already submitted your tax return, go ahead and give yourself a pat on the back. But, if you’re like me and have been putting it off, now’s a great time to get started. The sooner you submit your tax return, the sooner you could get some money back in your pocket.
And, if this is your first time submitting a tax return, don’t worry. We know taxes can be a complicated topic. That’s why Step’s got your back. Below, we’re breaking down everything you need to know about tax season.
Whether you realize it or not, taxes are a part of your everyday life - from the sales tax you pay when shopping or eating out, to the income tax that is deducted from each of your paychecks. Americans are typically required to pay two types of taxes - state and federal. Wondering what each of these tax returns are used for?
State: These funds help make improvements to things like schools, parks and public transit.
Federal: These tax dollars are put towards things like healthcare, the military and your social security (money to help cover your retirement costs).
Each spring, the IRS asks Americans to file a tax return (commonly known as a 1040), summing up all the money you’ve made in the past calendar year. This may include money earned from a job, receiving a large gift, or even selling bitcoin for a profit.
Now let’s walk through all the key components of this form, which ultimately determines if you owe the government money or if they in fact owe you money.
While most Americans will need to submit a tax return, there are some exceptions. Let’s start by answering a few simple questions to help determine whether or not you need to submit a return:
Are you considered a dependent? This is typically defined as a child or family member who receives a significant amount of financial support from the person filing and often lives with them. If you are unsure about your status as a dependent, ask your parent, guardian or a tax professional for guidance.
How much income did you make in the past year? If your income meets or exceeds $12,400 (the standard deduction for the 2020 tax season), you’ll need to submit a tax return. What is a deduction you ask? It’s the amount of money removed from your taxable income, otherwise known as adjusted gross income (AGI).
Important note: If your employer withheld taxes from your paycheck, you’ll want to submit a return (even if you don’t meet the standard deduction amount) to obtain a refund.
Now, for those that do need to fill out a tax return or are just curious about how the process works, we’re going to walk you through each section of the 1040. Before we get started, consider pulling up a tax tool like Credit Karma or TurboTax, which will help you track your tax return and do all the math for you!
Filing status & basic information. In the first section, you’ll be asked whether you are filing as single, married (filing jointly or separately), head of household or qualifying widow(er). Most teens will select ‘single’ and you will also be asked to include other basic information like your full name, age, mailing address, social security number and more.
Income to report. Now it’s time to whip out all of your paperwork. In addition to paystubs and receipts you might have handy, your employer will typically mail a W2 form which reports all of your wages and tax withheld over the past 12 months. Additionally, if you have any investments or other sources of income (like interest from a savings account) your bank will also mail you a 1099 form with this information listed.
Selecting your deduction. Once you’ve determined your filing status and all the income you have to report, it’s time to choose your deduction - lowering the amount of taxable income you owe. Most people opt to take the standard deduction, but if your qualifying deductions are higher than the standard amount, you have the option to itemize your deduction and adjust your gross income. While itemized deductions are more work, they can end up saving you a lot of money!
Claiming your tax credits. Tax credits are great because they enable you to make a dollar-for-dollar reduction on the overall taxes you owe, instead of a percentage like with deductions. These credits are often seen as things that benefit the economy or environment such as charitable donations, education bills and more.
Finalizing your return. Congratulations, all the heavy lifting is done and it’s almost time to submit your return! Take a few minutes to review all of the information and verify its accuracy. Once your return is complete, you can send it off electronically or via snail mail. While times may vary based on demand, the IRS typically takes about 21 days to process and issue a return.
We know tax season isn’t the sexiest of topics, but learning how to submit a tax return is an important life skill and you’ll be doing them once a year throughout your adult life! And, learning the ins and outs of tax filings now will help you optimize your return.
Disclaimer: As Step launched in late 2020, we do not need to provide any tax forms to customers for 2020 filings.