Decoding first tax return

Personal Finance

February 06, 2007|By Eileen Ambrose | Eileen Ambrose,Sun Columnist

The financial freedom that comes with that first real job can be exhilarating. Your own money. Your own apartment. Your own schedule. Your own tax return. Tax return?

Yes, at some point you'll face the task of filing your first income tax return, embarking on a lifelong relationship with the IRS.

If you're single and a newbie to taxes, here's what you need to know:

First, you must file a return if your gross income last year was $8,450 or higher. Your employer by now should have mailed a W-2 form that states your wages and the taxes withheld from your paycheck.

If you make less than that, you still have good reason to file. You can get a refund for federal income taxes taken out of your paycheck last year. And, if you've been paying your own phone bills, you may claim a one-time, $30 refund for federal taxes paid on long-distance calls. (The IRS created a new form - 1040EZ-T - just for those who don't need to file a return but want the phone tax refund.)

The type of return you'll file depends on the complexity of your finances. The simplest is the 1040EZ for those with taxable income under $100,000.

Once you start taking deductions or claiming investment income, you'll need to file a Form 1040A or 1040, says David Bergstein, an analyst with CCH Inc., a provider of tax information. A deduction basically reduces the amount of income subject to tax.

"If you're doing the tax return for the first time, what you really want to have off the bat is your Social Security number and all of your income information that you receive from anybody," Bergstein says.

Besides a W-2, you'll get a 1099 form if you had investment income. College grads will get a 1098T form on tuition and fees paid last year, plus a 1098E form spelling out student loan interest paid, says Jeff Lawson, an accountant with Stoy, Malone & Co. in Towson.

Tax breaks for younger filers:

You can deduct up to $2,500 in student loan interest if your adjusted gross income is less than $65,000.

You may also be able to deduct up to $4,000 in college tuition and fees paid last year if your adjusted gross income is $65,000 or less. Up to $2,000 can be deducted if your income is higher, but not more than $80,000.

Claiming the tuition deduction is more complicated this year because there's no line on the tax returns for it. Congress extended this tax break after returns were printed. You can claim the deduction on line 35 of the 1040. Put a "T" to the left of your entry to show that this is for tuition.

You also may get a credit for contributing to an IRA, 401(k) or similar plan if your adjusted income is $25,000 or less. The maximum credit for an individual is $1,000. A credit is better than a deduction; it reduces your bottom-line tax bill dollar-for-dollar.

By filing electronically, the software program will steer you toward the appropriate deductions and forms, Bergstein says.

If your adjusted income is $52,000 or less, you can file electronically for free using the IRS Free File program at www.irs.gov.

Congratulations if you get a refund. But if it's more than $1,000, go to your human resources department to adjust the amount of taxes withheld so Uncle Sam gets less and you take home more, Bergstein says.

And Bergstein's last tax tip: "Keep Mom and Dad's phone number close by."

Questions? Comments? Write personal.finance@baltsun.com.

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