How To File Taxes in Your 20s

Once you enter the workforce, you'll most likely have to know how to file and pay taxes, unless your income is less than the standard deduction that year and you're not listed as a dependent on someone else's tax return.

What You'll Need To File Taxes

Taxes are all about paperwork, digital records, and information, which you should receive from your employer or clients early in the year—usually in January of the year you'll be filing a tax return. For example, you should receive most information statements or forms in January 2023 for the 2022 tax return you'll file in the spring of 2023.

Forms you might receive include:

• Form W-2 detailing how much you earned as an employee.
• Form 1099-DIV for investment dividends and distributions.
• Form 1099-INT showing interest income.
• Form 1099-MISC showing miscellaneous income.
• Form 1099-NEC showing any income you might have received as an independent contractor, as long as the client paid you at least $600.
• Form 1099-G for government payments, such as unemployment compensation.

The forms mentioned above should contain all the information you'll need to file your tax return, displayed in various labeled boxes. They'll tell you how much money you received and any taxes that were withheld from your payments each year and forwarded to the government on your behalf. This includes Social Security and Medicare taxes The IRS also receives copies of these forms.

You'll also need bank records, credit card statements, and receipts if you're planning to claim any tax credits or itemized deductions, such as charitable donations and medical expenses. If you're filing as an independent contractor, you'll need records of business expenses.

Form 1099-G

You'll receive Form 1099-G from your state government if you received unemployment compensation. Unemployment compensation is still taxable income. Your unemployment benefits may also be subject to state or local taxes, depending on the laws in your state.

Your Filing Status

If you're filing a tax return for the first time, you'll have to determine your filing status. The five options are: single, head of household, married filing separately, married filing jointly, and qualifying widow(er). If you've never been married and have no dependents, you are most likely a single filer.

The differences between the five statuses can be significant. They determine not only your tax brackets and tax rates but the amount of your standard deduction as well. Your standard deduction—a dollar amount some taxpayers may subtract from their income before income tax is applied—more or less determines if you even have to file a tax return in the first place.

It's almost always necessary to file a return if your gross or total income exceeds the amount of the standard deduction for your filing status.

The standard deduction for 2022, the tax return you'll file in 2023, is:

• $12,950 if you're single or married filing separately.
• $19,400 if you qualify as head of household.
• $25,900 if you're married and you and your spouse are filing a joint tax return.

Why You Should File a Tax Return

If you have to file a tax return, you should, because otherwise you could be subject to penalties from the IRS. If you received a W-2 form from your employer but you didn't make enough to have to file a return, you should still file. It's the only way you can receive a refund.

You might have paid more in taxes than you owe. You might also be eligible for one or more refundable tax credits, which can also help you get money back. But you'll never see that money if you don't file a tax return to claim it.

Are You a Dependent?

For most individuals filing for the first time, your parents have been adding you as a dependent since you were born. Be sure to check if anyone else is claiming you as a dependent, as this will change the rules and income limits.

Tax Filing Assistance

If you're just starting out in your career, you might not make enough money to hire a tax professional. However, if you have a complicated tax situation and can afford to pay for one, you should.

Many taxpayers have relatively simple tax returns that can be easily done with software or IRS assistance.

Free File

The IRS will assist you in preparing and e-filing your tax return for free—or, technically, one of its Free File Alliance software providers will—if your adjusted gross income (AGI) was $73,000 or less. You can access available software providers, take part in guided preparation, and choose the one that best fits your needs on the Free File website.

VITA

The Volunteer Income Tax Assistance Program (VITA), managed by the IRS, will also help you prepare your tax return for free, but you'll have to show up at a site in person, and the income requirement is a bit stricter: $60,000 a year or less. You'll also qualify if you're disabled or English is your second language.

Tax Preparation Software

The IRS recommends using tax prep software because it pretty much guarantees an easy and accurate tax return if you don't qualify for one of the free programs. It may cost you a little, but it most likely won't deplete your savings. The cost depends on your tax situation. Unless your tax situation is incredibly complicated, you should be able to find many options under $100.

Some companies offer to prepare your tax return for free, but in most cases, features will be left out. In the case of H&R Block's free offering, for example, an upgrade is required for self-employment or small business income support.

Other Free Assistance

There's a "Let Us Help You" page on the IRS website, complete with various tools, resources, and guidance. You can install the IRS2Go app on your phone so that you can ask questions on the fly. You can also check the USA.gov website for guidance and even contact a live agent via phone or web chat.

Filing Taxes as an Independent Contractor

The IRS says that you're self-employed if you carry on a trade or business, even part-time. Maybe you repair computers in addition to your regular job or babysit on the side, and you're paid directly, or maybe you sell products. All these scenarios make you an independent contractor or a sole proprietor, and this can open you up to a whole host of additional filing and payment requirements.

Self-Employment Tax

Self-employment tax is the equivalent of the Social Security and Medicare taxes that are deducted from your paychecks when you work for someone else. You pay half, and your employer pays the other half if you're employed.

However, you have to foot the entire bill yourself for the income you earn as an independent contractor. This requires you to file Schedule SE with your tax return. The form includes step-by-step instructions for calculations.

You Probably Have To Make Quarterly Tax Payments

You must voluntarily send the IRS your estimated taxes due on this money four times a year because an employer isn't withholding the amounts and sending them in for you. These payments go toward any income tax you would owe, as well as the Self-Employment Tax. The IRS provides Form 1040-ES, Estimated Tax for Individuals, that you should file with the payments. It includes a worksheet to help you figure out what you owe.

File Schedule C With Your Tax Return

These requirements and calculations are based on your net business income—what remains after you've subtracted your legitimate business expenses from the gross, overall income you earned as an independent contractor.

The IRS will need to know how you arrived at this number, so you have to file another form: Schedule C. The total from Schedule C transfers to your Form 1040 tax return as reportable, taxable income. It should be less than your gross income.

Common Tax Breaks for People in Their 20s

There are numerous tax credits and tax deductions that you can claim to reduce your tax liability. Tax deductions come off your taxable income, so you only pay taxes on what's left. Tax credits are dollar-for-dollar subtractions from your tax bill—whatever you would owe the IRS if you hadn't claimed them.

Some common deductions you might be able to claim include:

• Student loan interest
• Medical and dental expenses
• Income taxes or property taxes you paid to your state
• Gambling losses, up to certain limits
• Charitable contributions
• Home mortgage interest
• Expenses related to a home office if you're an independent contractor

Some of the more popular tax credits include:

• Earned Income Tax Credit for low-income and low-middle income workers
• American opportunity tax credit for education-related expenses
• Lifetime learning credit for education-related expenses
• Child and dependent care credit if you must pay someone to watch your kids or dependents while you work or look for work
• Child tax credit if you have qualifying child dependents

The rules for these deductions, and particularly for the tax credits, can be complicated, so you might want to check with a tax professional to make sure you qualify before you claim them.

Frequently Asked Questions (FAQs)