Do you remember that feeling of getting your first paycheck? Oh, the happiness in knowing you now have your own money to do whatever you want! But then, that smile gradually turns when you realize that the amount paid to you is lower than what you actually earned.
That’s the result of taxes and other compulsory deductions taken out from your gross pay.
As an earning adult, you’re responsible for paying taxes because:
- As long as you have an income above a specified threshold, you have to pay taxes.
- Income taxes are paid through deductions from your paycheck.
- You also need to find an annual tax return with the IRS by April 15 of each year.
- You need to keep detailed accounts of your expenses and income.
Your first few tax returns will be straightforward, provided your financial situation isn’t complex yet. For young adults, this is the best way to improve financial and tax literacy and learn ways to minimize the tax owed.
Firstly, it helps to stay organized and to start working on your taxes early, especially if you don’t know much about them, and it’s your first time.
Here are some basics to keep in mind:
1. Pay as you go.
The most straightforward way of all is to pay your taxes as you go. Your employer is required by law to deduct a specific amount of federal and state income taxes. They will also need to deduct a specific amount for your Social Security. When starting a job, you’d be required to fill out a Form W-4, which provides the information your employer needs to deduct the amount for taxes. You’ll also be given a paystub that lists the mandatory deductions your employer has taken out for taxes, any bonuses, allowances, etc.
2. Use technology to your advantage.
We definitely live in interesting times when we can use technology to our full advantage. While tax regulations are complicated, filing can be made easy, thanks to tools and programs such as https://taxfyle.com. Income taxes are based on the calendar year from January 1 to December 31. You’d be given a Form W-2 at the end of January with your last year’s total earnings, interest reports from your bank, taxes paid, and other contributions, as well as investment accounts. Note that you must save your annual tax records for at least three years. Make sure to also look into state requirements for tax filing.
3. Identifying tax breaks
Tax literacy also includes knowing what filing status you fall under and the tax deductions you’re applicable for. In the US, specific deductions are given for being married, having children, owning special tools, charity contributions, and homeownership. Remember to check if you qualify, and if you do, claim it and document these deductions on your tax return. They can save you hundreds or thousands of dollars, which you can channel to building your retirement and investment accounts.
4. Planning ahead
As long as you earn, you’ll be filing taxes. Keep all your tax-related documents and receipts in a convenient place, so you can retrieve them easily. Starting early always helps at the end of the day.