Dealing with taxes sucks. It sucks even more when you work at home. Here are some tips to make it suck a little less.
1. Are You Self-Employed?
In some areas, you’re only considered self-employed if you work for multiple clients. If you have just one source of freelance work, you might not have to file as self-employed.
So, this way, you won’t earn as much as you need probably, given you only have one client, but you would, however, avoid taxes. On the other hand, whatever is your job, you can manipulate the situation if you choose one client but with significant amount of work in order to earn more.
If you’re freelancing in copywriter arena, for example, you can easily find a client who needs the whole website created or recreated, which will be time-consuming, but also very profitable.
This way, you avoid taxes by working for only one client, and you won’t be tempted to take on more work than you can actually handle.
Self-employed people generally find their own work rather than being provided with work by an employer, they earn income from a business that they operate. In some countries governments (the United States and UK, for example) are placing more emphasis on clarifying whether an individual is self-employed or engaged in disguised employment.
In the real world the critical issue for the taxing authorities is not that the person is trading alone but whether the person is profitable, and hence potentially taxable.
In other words, the activity of trading is likely to be ignored if no profit is present, so occasional and hobby- or enthusiast-based activity with economic potential is generally ignored by authorities because it’s not taxable enough to be important.
2. Consider the Home Office Deduction
If your home is your primary place of business, you may qualify for a home office deduction which will really come in handy next April. Regardless of the method chosen, there are two basic requirements for your home to qualify as a deduction, regular and exclusive use.
For the first, you must regularly use part of your home exclusively for your business. For example, if you use an extra room to run your business, you can take a home office deduction for only that extra room.
You must show that you use your home as your principal place of work. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.
For example, if you have in-person meetings in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business.
You can deduct expenses for a separate free-standing place, such as a studio, or garage, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients or clients.
Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a room or part of a room for conducting business, you need to figure out the percentage of your home used for your business activities.
3. You Almost Always Want to Hire a Pro
In more cases than not, you’re going to save a lot more money than you’ll spend hiring a tax pro to get you through the headaches. According to Denver CPA Carl Wehner, accountants pay around $1,000 to $6,000 for their software, which is more sophisticated than the products sold to consumers.
These more advanced programs have the ability to quickly scan your information and organize items and forms correctly. By automating the data entry and organization, there’s less chance for human error to hurt your tax return.
On the other hand, like a good family doctor who knows your medical history, you can develop a relationship with an accountant so that he or she understands your family’s financial situation and joint goals.
According to Wehner, who has been working with taxes for more than 45 years now, “A tax professional is often able to make valuable tax savings suggestions that a software program just can’t anticipate.”
The value of this advice can easily exceed the additional cost of consulting with a professional. For example, a tax accountant can provide you advice on tax-friendly ways to save for your children’s education, or how to reduce taxes on your capital gains.
Additionally, as a trusted professional, a professional accountant will be able to answer important questions that arise not just during your annual consultation, but at other times during the year.
4. Everything’s a Write-off
Well, not everything, but a lot more than you think. Your pens, your computer, your gas money, anything that is there to facilitate your work may qualify as a write-off.
Bu the definition, a reduction in the value of an asset or earnings by the amount of an expense or loss is called a write-off. Companies can write off certain expenses that are required to run the business, or have been incurred in the operation of the business and detract them from retained revenues.
For example, if you spend money on dinner to take out a client, that meal is a possible write-off towards your income because you have previously discussed business opportunities during the dinner.
Suppose, for another example, you made a sale on credit to a customer, but two weeks later the client’s business declared bankruptcy and became completely unable to pay off the credit account with you. This uncollectible debt would then be written-off by your company and recorded as an expense by accountants.
If you own a home, you can deduct what you pay in property taxes, interest paid on a home equity loan, any points you paid when you bought your home, premiums paid for Private Mortgage Insurance, and any home improvements made for medical care.
If you’re self-employed you’ve got a bag of deductions to pull from. You can also deduct expenses from your home office (including pro-rated rent/mortgage, energy bill and insurance for that part of the house).
And don’t forget whichever books, subscriptions, technology and office supplies you bought to keep your business going.
In addition, you can deduct your health insurance, as well as 50% of your self-employment tax. Visit the IRS’ self-employed tax center to learn more and save more.
5. Keep Track of Mileage/Gas/Everything
You can only claim those deductions if you keep track of this sort of thing. Don’t be lazy about keeping tabs. If you happened to have made your home more energy efficient last year, you may qualify for a tax credit.
For example, you may be able to demand a credit of 10% of the cost for qualified energy efficient insulation, windows, doors and roof for your home, as well as 30% of the cost for installing alternative energy equipment in your home (such as solar hot water heaters or wind turbines). These credits are claimed on IRS Form 5695.
Let’s dig deeper. Did you have a lot of medical and dental expenses last year? If your medical expenses exceeded 10% of your gross income for 2013, you can claim a deduction with your itemized deductions.
Potential deductible costs include preventative care, surgeries, fertility treatments, doctor’s visits psychologist and psychiatrist visits, prescription medication, glasses, contact lenses and the cost of travel for medical care.
You can’t deduct non-prescription drugs, your health club dues or anything that was reimbursed by insurance.
You also cannot include your health insurance premiums (although self-employed people can deduct their health insurance costs separately).
6. Do You Need to File?
If you were just starting out last year, you might not need to file as self-employed. Unfortunately, the bar is pretty low: $400. If you made more than that, you need to file. Let’s learn more about this.
You might think a kid doesn’t have to file his first federal tax return until he’s finally launched and holds his first job. Unfortunately, that’s wrong. The rules stating who must file a return are surprisingly complicated, and a teen might have to file if he has earned as little as $400 from babysitting or even mowing lawns.
For the high-school lawn-mower or dog-walker, for example, the duty to file in as soon as he or she earns $400. That’s because Social Security and Medicare must be reported and paid as “self-employment” taxes on Schedule SE of the Form 1040 income tax return, even if no income tax is due.
True, if a kid is paid in cash the IRS is unlikely to know about the income, and most dog-walkers, babysitters and lawn-mowers probably don’t report. But if a teen works for someone else (say a lawn service) and gets paid $600 or more as an independent contractor, both he and the IRS will be sent 1099s reporting his earnings. Either way, whether a 1099 is issued or not–self-employed folks need to report what they earn on Schedule C of the 1040.
If you or your paid-in-cash teen is reluctant to comply, remember that he can deduct expenses (say, printing flyers to advertise his lawn business, or getting the mower repaired) against the gross revenue he takes in, which will reduce his taxable net. Consider it a learning experience.
7. Set Aside Some Time
Setting aside a few hours a week to deal with your taxes means that you won’t have to pull an all-nighter at the last second. It is important that you take preventative measures and attempt to reduce your tax so you won’t have any troubles in the future. For instance, you can adjust your federal income tax withholding allowances, and set up a budget for your tax bill well in advance of the payment due date.
Adjust your withholdings by filling out a new W-4, and begin diverting funds each month into a savings account so that you’ll have enough funds available at tax time. But you need to start on time and stay organized.
Before you consider an installment agreement or any of the other repayment programs, review your options to see if you can drum up the cash to pay off your tax bill on time.
Maybe you can sell your assets. Do you have anyone who would offer you a loan? If so, you may find that it’s much easier dealing with someone you know, rather than owing money to the Federal Government. They are nasty.
Also, paying at least a portion of the amount can benefit you, as it reduces the interest that will grow on the unpaid balance. You may even pay your taxes with a credit card to avoid paying penalties and interest to the government. For every month your taxes go unpaid (if you file your return on time), the IRS assesses a 0.5% penalty on the unpaid amount not to exceed 25%.
8. Save Your Receipts
If you buy a pack of gum and they hand you a receipt, the deduction you’re going to get on that is about a fraction of a cent, so that might be overkill. But, every lunch with a client, every hotel credit card receipt, every slip of paper that proves that you spent a few bucks for work is worth keeping.
The length of time you should keep a document depends on the action, expense, or even the document records. Preferably, you should keep your records that support an item of income or deductions on a tax return until the period of limitations for that return runs out.
The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or that the IRS can assess additional tax costs. Important note: keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.
So, keep parking fees, tolls, transportation, and mileage for the trip to and from appointments with any of these medical professionals, transportation via ambulance to a medical facility, and the cost of overnight hotel stays for treatment that is received out of town. You probably never even thought about them.
When your records are no longer needed for tax purposes, do not throw them away until you check to see if you have to keep them longer for some other purposes. For example, your insurance company may require you to keep them longer than the IRS does.
9. Claim Every Credit
Even if you think Uncle Sam could use your help, you need that money more than they do. Let’s say you ended up owing income taxes and had to write a huge check, you may have even had to pay a penalty.
Make sure you have enough money withheld from your paycheck to avoid that problem next year. If you are self-employed, make sure your estimated tax payments are high enough to avoid a penalty next year.
On the other hand, if you received a big refund, which means you’ve been loaning money to the government at zero interest. You’ll likely want to adjust your withholding amount so that you can keep those funds for yourself, through larger paychecks, rather than loaning the money to the government during the year and getting it back the following April.
Make sure you’re not providing other interest-free loans to the government, or to big businesses, too.
For example, right now there are billions of dollars in federal savings bonds in circulation that are no longer paying any interest whatsoever. That sounds odd, but considering that bonds can take up to 40 years to mature, it’s not hard to see how people forget all about them.
Saving bonds that no longer pay interest are at least 20 years old, and most are older. You can see which series are no longer paying interest at treasurydirect.gov.
10. Get Started Early
When you have self-employment taxes hanging over your head, every credit helps. This is why we recommend hiring a pro: they can help you find the tax breaks that you didn’t know about. Tax credits are even more powerful than deductions because they reduce the actual amount of tax you must pay.
For example, if you’re a single filer with gross income of $50,000, you pay about $8,000 in taxes. However, if you qualify for a $2,000 tax credit, you only have to pay $6,000. Some tax credits are refundable, which means they can lower your taxes below zero and allow you to get a tax refund. The Earned Income Tax Credit (EITC) was created to help low-income working individuals and families manage the taxes.
In general, if you earn less than about $51,000 this tax credit can give you a substantial tax refund. The IRS has a calculator called the EITC Assistant in English and Spanish to help you find out if you qualify. They also have tax credit calculators for previous years.
If you find out that you were eligible for the EITC, but didn’t demand it, you can file an amended return. To correct a tax return, you must file Form 1040X within 3 years after the due date of your original return.
11. Set Aside a Tax Fund
Starting your taxes on the first of January sounds like the kind of thing that only squares and sticks in the mud should be doing, but starting that far in advance will only help to save you headaches and money in the long run.
If you’re planning on claiming tax relief from your personal income taxes, don’t wait. In order to maximize deductions, to take advantage of all the available types of relief available to you and to pay as little in federal income taxes as possible, start working on it now.
It’s never too early to start taking necessary steps that will enable you to save money on your income taxes. There are many things that you can do every day that add up to significant savings when it comes time to file your tax return with the Internal Revenue Service. If you have children, you can take advantage of the earned income credit right away. You do not need to wait until it is time to file. The earned income credit makes it possible for you to enjoy tax savings right away.
In fact, depending on your payroll wages and other deductions you use, you may actually receive extra money included into your paycheck. Therefore, if you have children, ask your employer for further details how to claim the earned income credit at payroll time.
12. Play it Straight
You don’t want to be making payments to the IRS to the day that you’re retired, so throughout the year you may want to set aside some money to hire a professional and pay your taxes just to make everything less of a headache.
Maximize Your IRA and 401(k) Investments. Just as the power of compounding can help your savings grow exponentially over time, so too can taxes led to “negative compounding” by removing a portion of your investment gains each year.
As a result, the more money you can put into tax-deferred Individual Retirement Account (IRA), 401(k)s, or other retirement plans, the more you gain.
While you will eventually have to pay taxes when you begin to withdraw money from these accounts, the years of having your investments in a tax-deferred place allow you to maximize the impact of compounding over time.
You can also consider index funds rather than actively-managed funds. Index funds tend to be more tax efficient than actively managed funds. While active managers buy and sell securities on a frequent basis, index funds tend to be relatively stable since the indices themselves only change slowly from year to year. As a result, index funds will typically have only minimal capital gains each year.
However, keep in mind that an investor who holds an index fund for a period of time and experiences share price appreciation will have to pay a capital gains tax upon the sale of the fund.
13. Say “No” Where it Asks if You’d Like to Contribute Any Additional Money
There are a lot of breaks, credits and deductions out there if you know how to find them. It makes no sense to try and dodge the taxman when you consider that a smart tax professional can help you pay pennies on the dollar of what you expected to owe.
When you consider how you’d like to spend your hard-earned money, paying taxes probably doesn’t come to your mind. But did you know that they’re probably your largest expense, next to housing? It doesn’t sound great.
Since taxes take such a big bite out of your income, it’s smart to cut them in every way possible. This is what you can do to legally pay less taxes and save more money.
There’s federal income tax, state tax, sales tax, gasoline tax, capital gains tax, estate tax, gift tax, food tax, alcohol tax, property tax, and business tax, just to name a few. They are baked into just about every financial transaction, no matter if you’re earning or spending money.
Of course, you should never do anything illegal to avoid paying taxes. But there’s nothing wrong with making sure that you don’t overpay. Even the IRS encourages people not to pay more in taxes than the law requires. So, a tax deduction reduces how much taxable income you claim.
A tax credit reduces how much tax you owe dollar for dollar. In other words, having a $2,000 tax credit actually saves you $2,000, while having a $2,000 tax deduction only saves you a percentage of that amount based on your effective tax rate. You do the math.