7 Tax Tips to Avoid Headaches and Costly Mistakes
Oh, fuck. It’s almost tax day again. Don’t panic. Luckily, this year we get until April 18th to submit our returns. Here are seven tips on how to make your broke-ass taxes as pain-free as possible:
1.Understand the difference between 1099 and W-2 income and how to use them to your advantage.
Most broke-asses work multiple jobs. For some you may be classified as an employee (W-2) and others as an independent contractor or self-employed (1099). Always ask when you start a new job!
If you are an employee, you will be required to fill out a W-4 form indicating the amount of taxes that will be withheld. If you are 1099, no taxes will be withheld. That means that if you earn more the $600 at any one place, your earnings will be reported to the IRS and you will be on the hook for an additional 12.5% tax for Social Security and Medicare that the employer usually pays over your regular tax rate.
If you are working gigs for a “sharing economy” company like Taskrabbit or driving for Uber you are a 1099 worker. If you are lucky enough to have both W-2 and 1099 income, you can withhold additional taxes at your W-2 job to compensate for the extra taxes on your 1099 income by raising the amount you have withheld at your W-2 job. Just mark your withholdings on your W-4 as “single” in box 3 and “0” in box 5 (it doesn’t matter if you are actually single or have dependents), it will put you at the highest standard withholding rate.
You can even put in an additional amount to withhold each paycheck above that rate in box 6. This will reduce your tax payment at the end of the year. If you only have 1099 income and you are not good at saving consider making quarterly estimated tax payments. It’s a lot easier to deal with paying 4 payments of $500 throughout the year than coming up with $2000 at once in April.
2. Know when you should be receiving your statements
The most common forms like W-2s, 1099s, student loan and tuition statements, and health care statements must be sent out by February 1 each year. There are a few less common ones that are due March 1. Do not wait until April 1st to try and track these down. You will be frantic trying to track them down in two weeks, and good luck getting anyone in HR or at the IRS to respond to you. Put a recurring reminder in your calendar for February 1 each year to start keeping an eye out for them. Some companies send them printed and snail-mailed and others electronically.
If you haven’t received one in the mail you were expecting, check your email and log into online accounts (banks, employer HR portals) to see if you got notified of your statements there. If you still can’t find it, contact your employer or issuer and ask about it. If you can’t track them down by Feb 15th, contact the IRS at 1.800.829.1040 and they will contact the issuer or give you a substitute form.
3. Double check other people’s work
I once worked a job where HR made a typo on my state of residence and put “VA” instead of “CA”. When I was doing my taxes I couldn’t figure out why I had no California tax withholdings. Turns out they were being sent to Virginia.
Had I just looked carefully at my paystub once I would have caught the mistake and saved myself and the company a massive hassle. It is incredibly common for typos to happen and when it comes to social security numbers and tax withholdings, the sooner you catch the errors the easier it is to fix.
When you start a new job, change your withholdings, or open a new account always double check the information that gets input. A lot of places still require paper forms so they have signatures on file and then someone inputs all your data into management software.
4. Don’t use a mass-market tax service
Tax service companies that pop up a store front only for tax season rarely make sense for most people. They charge way more than their services are worth and target lower-income people who can get their taxes done for free.
If your income is below $62,000 a year and you have uncomplicated taxes, there are an array of free online filing options provided by the IRS. If you don’t meet the eligibility for those, for anything other than highly complicated taxes, using tax prep software like Turbo Tax is significantly cheaper, helps you see how different choices affect how much you pay in taxes, and will help you make better decisions each year.
Even if you think your finances are complicated, in the world of taxes they probably aren’t. If you do have a complex issue like exercising stock-options, family trusts or significant business or investment holdings, get a recommendation for a full time tax accountant. The tax service companies scramble to file as many returns as possible with different advisors working for them each year. They won’t spend enough time on yours or take the time to understand your financial situation to make sure you are getting the maximum write offs. You will save far more in taxes than you will pay extra for a full-time tax professional.
5. Know what you can write off
Write offs are how you reduce your taxable income and pay less.
For W-2 income, there are a variety of standard write-offs like children, school tuition, mortgage payments, your car registration fees, and charitable giving.
If you have 1099 income you are able to write off a lot of additional items but you have to keep accurate records. It includes additional stuff like medical expenses (including insurance premiums), home office expenses, vehicle use, and all sorts of expenses that are related to your work. This is again why I recommend tax software, which will help you learn all of the possible write-offs and reduce your tax burden the next year.
6. Start keeping records now
The worst is when you are clicking through Turbo Tax and it asks “did you have over $x in medical expenses” and you find yourself sorting through 12 months of bank statements and credit card bills to try and figure it out. It’s a pain in the broke-ass, but start tracking now. No, really. Now.
I start each January with two folders I keep on my desk year-round. One for medical expenses and another for general tax related receipts. That way every time I get a receipt from my doctor or a charitable donation I can easily toss it in the file. And I keep records of anything and everything that could possibly be written -off even if I ultimately don’t need it. I never worry about tracking down that receipt from Goodwill I know I got when I donated clothes or missing a write-off because I forgot to keep a receipt.
Make sure you know where you hold accounts also. You don’t know how many times I have discovered an old account someone forgot they had or one that was opened jointly years ago with their parents and they don’t have the password.
7. Open a retirement account
If you have an employer who offers a 401(k) or 403(b) retirement account, take advantage of it! There could be free money you’re missing out on.
Lots of employers even will match your contributions and you are leaving money on the table. If you think you can’t afford it, start with a small amount like $10-20/month. With what you save in taxes your take home pay will only go down by about 2/3 of the amount you contribute. You can contribute a maximum of $17,000 year.
If you don’t have access to an employer sponsored account, open an IRA, if you are self-employed open a SEP-IRA. You can contribute up to $5500 a year into an IRA and up to $53,000 a year into a SEP-IRA. This is income you won’t have to pay any taxes on. Pretty much every major bank and brokerage company offers them and they take about 20 minutes to open. You can even still contribute money until April 18th to reduce your taxes for 2015. If you are worried about the locking up the money ask yourself, would you rather pay senior citizen you or the IRS?
If all else fails open an offshore account in a tax haven
If we’ve learned anything from the Panama Papers leak, it’s that the billionaires may be onto something …
You Might Also Like
 and others as an independent contractor or self-employed (1099). Always ask when you start a new job!){kind=link}
