Charles Davidson, owner of Redding, California-based Accelerated Education Systems, says that most first-time filers he’s run across have more than one Form W-2, the form prepared by an employer that shows the employee's gross and net wages along with federal, state, Social Security and Medicare taxes withheld.
Davidson says it’s important that first-timers know they may not file until they have the W-2 from each employer.
“Some first-timers are surprised to learn that they have been contributing to a 401(k) or retirement plan through their employers,” he points out. “Contributions to a retirement plan may result in the taxpayer being able to claim the Retirement Savings Contribution Credit.”
You must also consider filing status -- such as single, married filing jointly or head of household. Identifying the proper filing status can be tricky in today’s array of nontraditional living arrangements, Davidson noted, adding that some people misunderstand what claiming "Head of Household" means.
“Many will try to claim head of household even when there is not a qualifying dependent living in the home," Davidson said. “It means a larger standard deduction, so it’s advantageous to file head of household, but if you can’t legitimately file that way, it could mean an audit.” The focus on "Line 4" in the instructions for Form 1040 explains the conditions that must be met in order for the filer to claim "Head of Household" status.
Filing statuses and dependent claims can be confusing even for tax professionals, Davidson notes, and he encourages first-timer filers to research the stipulations carefully.
And you know all that miscellaneous income you earned last year on the side? Yeah, you have to claim that, too. You might or might not receive a Form 1099 from the company for which you performed work as a self-employed person -- an independent contractor.
“Companies are not required to issue a 1099 if the income is less than $600,” Davidson said. “(But) taxpayers must report all income for all sources worldwide. This includes from online activities like eBay or affiliate programs.”
Even if you did earn a little money on the side but didn’t receive a Form 1099, that does not exempt you from reporting that income to the IRS.
“I call these taxpayers ‘accidental business owners’ because they don’t realize that miscellaneous income essentially sets them up in a business,” Davidson says. “They can legally deduct any expenses that enabled them to earn that money. It also means they have to file a Schedule C, which can be much more intimidating.”