How To Do Your Taxes (Or: How To Decide If Someone Should Do Them For You)

You've likely heard this for the thousandth time, but: It's tax season. Just what the heck should you do? Well, young adult worker of the world, we're going to level with you (because you are an adult) it can get complicated. Which is fine! We're going to walk through it all, and in the span of a coffee break you'll have this tax thing mostly figured out.

The first thing to know about paying your income tax is that it's all done with Form 1040. You can, for the cost of a stamp, fill out this form and send it to the IRS, and you will have "filed your taxes." Easy right? No, of course it isn't easy. This is a government form inexplicably named "Form 1040" and not "Federal Income Tax Filing Form."¹

The good news is if you held down a steady job — or even jobs — in 2015 and earned less than $62,000 you can file your taxes online, for free, with a popular Internet tax filing service. If that sounds good, then head on over to the IRS and they'll point you in the right direction. It's a perfectly fine way to file your taxes.²

That said, the tax prep industry thrives on tax illiteracy. They don't want you to file your own taxes. So if you want to just do your taxes yourself — which, if you're a young person with a single income stream and a single life³ it's about as straightforward as it gets — or if you just want to understand the logic behind the whole process, then please do read on.

If you're confused at any point, we highly recommend this insanely useful interactive and annotated 1040 form from the Tax Policy Center.⁴

Figure Out How Much You Made

If you have (or had) a job in 2015, and made money from that job, you should have, by now, received a piece of paper from that job informing you how much you earned. For most young adults, this is some combination of a W-2 (if you've held a regular-ass job) and/or a 1099-MISC (if you've taken contracting or freelance gigs). They both should be easy to recognize: It's that piece of mail that looks like a big fat check but isn't.

Once you've collected them all, add up all the reported income and now you're left with how much money you literally made in 2015. That's your taxable income. Great job, making money is cool.

Calculate How Much Of That Is Actually Taxable

Ah yes, so now comes the real fun: Adjusted Gross Income. You see, over the course of a year you might spend money on things that are "tax deductible." For most young people this usually means a charitable donation, paying interest on a student loan, or paying tuition. As the name implies, any money you spend that is tax deductible is deducted from your total taxable income, thus lowering the amount of tax you need to pay.

On top of those deductions is also the standard deduction — which, if you're filing as a young single person is a cool $6,300 off your taxable income. You also have the option to not take this standard deduction, and instead itemize your deduction. The logic here being if you have a lot of miscellaneous deductions you can claim on the terribly-named Form 1040 Schedule A, then you should maybe do that because it might be a larger than the standard deduction. Again, the Tax Policy Center's annotated version goes a long way towards decoding this, explaining what each deduction means and what forms you should have to prove you deserve those deductions.

Some might bemoan the standard deduction because it is easy to take — you literally tick a box and you're done — and thus considered the "easy way out." But if you're single and your only source of income is from a W-2, then you should just take it. Don't sweat it. You could itemize your deductions but then there's consideration of how valuable your time is⁵ and whether or not you want to risk an audit.⁶ Here's US News And World Reports explaining the why-fors and the what-haves:

Unlike standard deductions, itemizing is a manual process. You have to be able to document every itemized deduction. Depending on how good your records are and the amount of your deductions, this time-consuming process might not reduce your taxable income enough to make it worth the effort. You'll also need to be a bit more tax-savvy to properly fill out Form 1040 and Schedule A.

[US News And World Reports]

If you're a freelancer or are self-employed — which is very likely for young people! — then yes, it's worth considering itemizing your deductions and thus also considering seeing a tax preparer, but more on that later. Otherwise, take the standard deduction and be glad you don't have to hunt down crumpled receipts from last April.

Determine What You Owe Uncle Sam

Once you've figured out how much you've earned and how much you can deduct from that — again, great job, you're doing this tax thing — the next step is to figure out how much you owe. You could just use the IRS's tax table, which substitutes math and an understanding of the tax brackets for squinting and searching through a big table of numbers, or you can just use an online calculator. Better yet, you can watch this Khan Academy video explainer on how the tax brackets work, because it's always better to understand how something works instead of relying on a calculator.

Consider Your Filing Status

Although most young people will be filing as single, if you're married and you and your spouse make around the same amount, you might be better off filing separately. The fine folks at TurboTax explain:

A couple may pay the IRS less by filing separately when both spouses work and earn about the same amount. When they compare the tax due amount under both joint and separate filing statuses, they may discover that combining their earnings puts them into a higher tax bracket.

[TurboTax]

Aren't you glad you took the time to understand how tax brackets work? Of course, there are handful of other caveats to the debate over whether you should file together or separately. In which case let us now move on to:

Deciding If You Should Get Someone To Do This For You

Like we mentioned earlier, for most young people with a job and little much outside of that, filing for free online or by yourself is the best course of action. But if you're looking to itemize your deductions — you might be freelancer with a lot of unreimbursed expenses, or a very financially savy person with dividends, retirement contributions, large charitable donations and so on — or perform some financial gymnastics with your filing status it's best to see a qualified professional. But who exactly? According to Bloomberg, there are some sharks out there:

Almost anyone can claim to be a tax preparer; no CPA, law degree, or formal education is required. Pretty much the only thing you need to open up shop is a tax identification number, which the IRS gives out for a $50 fee.

[Bloomberg]

Luckily, Big Government has a database of certified tax preparers who, in addition to registering with the IRS, have also voluntarily provided proof of their credentials. That'd be a good place to start.

How Should You Pay (If Required)

At the end of all this, you might owe money. In all likelihood, this happened because there was a discrepancy between the deductions you claimed in your withholding form, known as a W-4, and your itemized deductions on your tax return.⁷ Or, you earned some freelance income with those pesky 1099 forms, where taxes aren't withheld. (To avoid this next year, the Billfold has a handy guide to navigating tax withholding with 1099-based income.)

That doesn't mean you have to cut the IRS a fat check right this second. Being the understanding, monolithic government entity they are, you can work out a deal. Depending on how much you make, you can pay in installments or even have next year's refund apply to this year's tax debt.

You can also pay with a credit card. Normally, this is a bad idea because the services you do this through charge a fee and you're also racking up much more interest-heavy credit card debt but there are times when it might make sense:

1) When you can write off the cost of the processing fees as a business expense.
2) You need to hit a spend threshold on your credit card and the additional benefits you receive outweigh the cost of making the charge.

[The Points Guy]

In other words, if your tax bill is a little hard to swallow, work it out with the IRS.

What Should You Do If You're Getting Money Back

The very same people that poo-poo the standard deduction will probably also scold you for getting a refund, or even worse, getting a big refund. While, yes, that refund is technically an interest-free loan you gave the government, for young people it's also a rare financial windfall. So, what should you do with it? NerdWallet outlines a few reasonable uses, but most important is using that money to pay off nagging debts:

There's no bigger drag on your bottom line than lugging around high-interest debt (typically credit card debt) with interest compounding against you month after month.

If you have credit card debt, paying it off is the best investment you can make with your tax refund. Doing so delivers a guaranteed return on your money equal to the interest rate you were paying your lender.

[NerdWallet]

It might not be the most flashy use of your money, but hey being debt-free is a pretty fun feeling! And if you already are debt-free, you probably already know the most responsible use of that money — stash it away in a savings account, put it towards a big purchase you've been eyeing. It's your money now!​

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