A Taxing Time of Year
Confused by all the tax season paperwork and jargon? Here are some hints to help you keep it straight:
-To verify what year you need to start filing a tax return, and what tax form to use, visit the IRS' website.
- Keep all of these items together in a folder: pay stubs, documentation of any deductions you may claim (such as cancelled checks and receipts), a copy of your W-2 form (which indicates the total amount of money earned and taxes withheld in a calendar year), and a Form 1099 if you have interest or dividends on investments that have to be reported to the IRS. Hang on to everything for at least 3 years.
- If you have any extra income from a source such as your own small business or freelance work, your record keeping should be especially detailed. Save receipts for everything.
- Determine if you owe the U.S. Treasury any money, or if the Treasury owes you a refund. During the year, your employer typically takes out a set amount from your paycheck to send to the federal, state, and local tax authorities. The amount is determined by the withholding information you provided on your W-4 form (on which you marked the number of personal exemptions or dependents you claim)when you were hired. If the amount taken out was too much, you'll get a refund.
-You must file your federal personal income tax return every year by mid-April, usually the 15th.
- It's easiest to figure out your federal return before your state return. These forms are available at your local post office, library, or tax office.
- Software tax programs such as TurboTax or TaxCut can help with your year-round tax organization and with filing your year-end return. This is a good option if your tax situation is not too complicated (it gets more complicated if you work in a different state than you live, or have more than one job).
-If you pay someone to do your taxes, make sure to organize your documents before you meet with them to minimize the cost of the appointment.
- Keep a copy of every tax return you file. They may be useful in helping you prepare future returns, and they are sometimes requested when applying for loans.
First Timer's Finance Plan
March 2009
Tina Pestalozzi
Author
Your first few years of financial independence are crucial in setting yourself up for a successful future. Make theses habits a must, and you'll be on your way!
Always pay yourself first.
No matter how much money you make starting out, put some aside from each paycheck. Consider setting up an automatic deposit from your checking to your savings account. The rule of thumb is to save at least ten percent of every paycheck. Adjust the amount, depending on what your personal goals are for not-too-distant future.
Be accountable for your spending habits. Are you an impulse shopper? An emotional shopper? The need to be aware of how you spend your money doesn't go away when you start making more. It may be hard to visualize how small changes can make a significant difference, but the little things do add up. Make tweaks to save, such as packing lunch instead of buying.
Establish an emergency fund.
Your car might break down. You may get sick and have to miss work. You might even lose your job. Having a safety net in place may mean the difference between being able to meet your rent or having to move back in with your parents. Keep from two to six months-worth of living expenses tucked away (including rent, utilities, food, gas, etc.).
Set up a long-term investment account.
You may want to divide the ten percent you save from each paycheck, so part of it goes into short-term savings, and the other part goes toward long-term savings. Educate yourself as to what types of investment opportunities are right for you. Investing may involve risk, depending on where you put your money. A savings account at a bank involves almost no risk; on the other hand, buying a hot stock is risky, but it also has the potential for the greatest return. Find an option that matches your comfort level. And, never commit to an investment that you do not completely understand.
Don't get caught in the "credit card trap."
It's easy to get in the habit of using a card instead of cash and spending more than you can afford. Only use the credit card if you can pay off the balance every month. If you cannot get by without charging, you are living beyond your means and need to make changes immediately.
Have an IRA ASAP.
The Roth IRA (Individual Retirement Account) allows you to put a certain amount of earned income away every year, with the benefit of being able to take the money out in the future, tax-free. You can also take your money out of a Roth IRA and use it for other things besides retirement, like buying your first home. You decide where you want to set it up--whether it's a bank, credit union, brokerage firm, or through your insurance company. Be aware of any fees that may be involved.
Adapted from Life Skills 101: A Practical Guide to Leaving Home and Living on Your Own by Tina Pestalozzi, Stonewood Publications. www.TheLifeSkillsBook.com.