Tax season can be stressful if you’ve never filed for taxes before or you’re a business owner. If you’re an employee of a business, filing your taxes is easy; all you have to do is upload your W-2 using a tax filing app like TurboTax, and the software will calculate and file your taxes for you. Unfortunately, self-employed individuals and business owners have more paperwork and expenses to track, so filing can be stressful. Luckily, making preparations can help ease the stress of taxes. Here are useful tips to help you prepare for tax season.
Decide How to Prepare & File Your Taxes
If you’re a small business owner or a freelancer who pays quarterly taxes and tracks expenses, then you might want to consider having an accountant that can help you keep your tax burden down. However, you can also use professional tax software to help you prepare and file your taxes.
If you’re a regular employee, you might only need to use an app to file your taxes. However, your taxes can get slightly more complicated if you’ve had a major life change, such as unemployment or getting married. Remember, tax filing apps make it convenient for you to file your taxes, but you don’t know if the numbers you see at the end of the process are correct until they’re reviewed by a professional.
Tax software typically works best for those individuals who can take deductions from their taxes for buying work-related equipment and supplies because you can track every expense. However, both business owners and employees can benefit from working with a CPA who can help you get a higher refund or lower your overall burden if you owe.
Unfortunately, accountants get busy during tax season; you’ll need to hire one well beforehand so you don’t miss the opportunity to correctly file your taxes. In addition, you may be subject to hefty fines if you incorrectly file your taxes.
Contribute to Your Retirement Plan
It can be difficult to contribute the max amount to your employer-sponsored retirement account throughout the year, but increasing your contributions as tax season approaches can help reduce your income for the year. While contributing to your plan won’t reduce your income, it reduces your taxable income, ultimately reducing your tax bill because funds in a retirement account aren’t taxed until you withdraw them. It’s important to note if you invest in bitcoin or stocks as a financial investment for your retirement plan you must report it within your tax documents.
You can also contribute to an IRA through a bank and get the same benefits. If you can’t make the maximum contribution, try to contribute the amount your employer will match. Employer match is an immediate return on your investment, so it’s essentially free money for your retirement.
You might also want to consider contributing more to your health savings account (HSA). HSAs are triple-tax advanced, so you’ll get a deduction on your taxes for contributing. Not only that, but the money in your HSA, along with withdrawals, is tax-free if used for your health expenses.
Avoid Tax Scams and Fraud
The closer we get to tax season, the more phone calls, texts, and emails you might receive from people and robots claiming to be from the IRS. The IRS doesn’t typically call people as their preferred method of communication is snail-mail, so you can disregard these calls or even report them as a scam.
You should also avoid working with a tax preparer who tells you they can get you a bigger refund. As long as you hire a certified tax professional or accountant, you should still receive the same refund since there are only so many legal deductions you can take. While it’s true that accountants can make an error resulting in a larger tax burden, this is rarely the case. Any tax professional who promises to lower your burden or get you a bigger return can get you into trouble with the IRS.
The standard deduction for an individual is $12,550, almost double what it used to be, which makes it difficult to itemize deductions if you’re a freelancer. However, if you have expenses over that amount, you should always keep the receipts and itemize your deductions on your taxes.
Bunching deductions are when you plan and time your expenses before the end of the calendar year so they can be deducted on the same taxes. For example, if you donate to charity every January, consider donating a few weeks before in December so you can deduct it from that year’s taxes.
Bunching might allow you to itemize your deductions every other year while using the standard deduction in between. You can also deduct property taxes or large medical expenses, if possible.
Know What’s Deductible
Employees can usually deduct some workplace expenses, but self-employed individuals and business owners can deduct all expenses that relate to their businesses. If you plan on itemizing your deduction, then you’ll need to save every receipt and track your business spending, which you can do manually or using tax software. Tax software already knows what expenses are considered deductible, so as long as you label these expenses correctly, they will automatically be deducted from your taxes when you file. Here are a few examples of common tax deductions:
- Car insurance
- Health insurance
- Office supplies
However, you must review your expenses before you file your taxes. Professional tax software might make a mistake and put a personal expense in with your business expenses. Even CPAs make mistakes, so you should always review your tax forms before filing.
Don’t Ignore Taxes
If you’re expecting a refund, then tax season can be exciting, and you’ll probably want to file as soon as possible. However, if you’re a business owner or self-employed, then tax season can be daunting as you know you’ll soon owe the IRS thousands of dollars.
You should never ignore your financial responsibility to pay taxes. If you don’t file your taxes and you owe the IRS, you will be faced with penalties, such as fees. If the IRS sends you a letter because they found an error on your tax return or claims you owe back tax, immediately remedy the issue.
Preparing your taxes doesn’t have to be complicated, time-consuming, or disorganized. By planning, you can ensure you’re ready with all of the necessary information and documents by the time tax season rolls around this year.