It’s February 1st and while for most Americans, taxes are still a distant thought, my business taxes were filed last weekend and my personal taxes are “in the envelope,” so to speak.
I’m not trying to be an A+ student, I simply want my money back. ;)
While I strive for the $0 refund every year, I inevitably make some unexpected tax moves throughout the year. The good thing is that they usually bring down the amount of taxes I have to pay.
I personally do my taxes every year, relying on products like TurboTax for the necessary advice and paperwork. Every year, I manage to learn something new or develop 20/20 hindsight that will help me down the road, and this year was no different.
As a benefit to new readers, what follows is my list of the “top 10″ things I’ve learned about taxes since this blog began. For more in-depth coverage, head back to my tax lessons from 2009, 2010 and 2011.
- Marriage and kids will affect your tax bill in profound ways, usually for the better.
- Unless your taxes are ultra-simple, or your income is low, it’s unlikely that you will be able to file for free (unless you fill out the forms yourself).
- Keep immaculate records throughout the year.
- Simplify your accounting in any way possible, including fewer accounts.
- Input your (even rough) data as soon as you can to get an estimate of what you’ll owe or get back.
- Stay generally familiar with what’s changing in the tax world.
- Pick a tax software or system you like and try to stick with it. It makes tax season more seamless.
- Always double-check your W-4 at the start of the year.
- File in late February, unless you’re as ambitious as me to get your refund.
- Don’t get frustrated with working a bit to get the breaks you deserve. Case in point: my 2011 credits (it’s lesson #3 in the post).
New This Year
There are plenty of new things happening with my taxes for 2011. Last month, I revealed my 2011 decision to form a business that would handle all of my online income, which now comes with its own set of tax implications. We also made greater use of our Health Savings Account last year, which had a positive impact to our taxes.
I separated this year’s tips into my business taxes and personal taxes, since the business component won’t apply to everyone. However, since I’m encouraging everyone to diversify their income as best as they can, I hope that it will apply to most of you sooner or later.
What follows are my 2012 tax lessons–
(1) Simulate filing. My records for this year were not extensive, with probably 100-150 transactions to catalog in total. Nevertheless, getting a head start on what I needed for tax season would have saved a lot of time.
If you’re serious about your new business and your records will be any more complex than mine (very likely), invest in a copy of last year’s TurboTax and simulate filing your taxes, even if you only have a month of two of transactions under your belt.
If you’re like me, you’ll find that setting up your income and expense categories a bit differently will make your life much easier.
(2) Plan for the worst, hope for the best. Put away the maximum amount you expect Uncle Sam to demand at tax time (or for your estimated tax payments). The best-case scenario is that this savings becomes “extra money” at the end of the year if you don’t need it. The worst-case scenario won’t happen because you’ve prepared.
(3) Consider tax due AND tax prep when organizing your business. Most people (I hope, anyway) consider the tax implications of what form their business takes when they first organize it.
For example, LLCs are typically considered pass-through entities because the individuals owners end up paying all LLC taxes on their own tax returns. That is exactly how my business is set up.
However, equally important for small businesses are the costs and time involved in preparing your records throughout the year, and your tax return at the end of the year. Our little LLC had an impact both in cost (the money required to prepare and file a separate return), and time (to prepare said return, distribute all the required paperwork, transfer the data to our personal returns, etc.).
Be sure that both components are offset by the benefits that your chosen business structure gives you over a less complex structure.
(4) Give yourself plenty of time. Don’t wait until the last minute to make end-of-year tax moves that have to be in by December 31st. I did this with my HSA account, and had to make several phone calls to make sure the money would flow over in time. The same goes for any IRAs, 529s, 401(k)s, etc. that you have to open or fund by the end of the year.
Note: Many account types will allow you until April 15th of the following year to make last year’s contributions. Double-check!
(5) Don’t make assumptions about next year. For example, we have always and continue to use the “standard deduction” on our taxes, simply because we don’t have much to deduct at the end of the year that doesn’t already come off before taxes are calculated (e.g. student loan interest, HSA contributions).
However, that doesn’t mean that the same will apply this coming year, and we especially can’t predict that as early as January.
As a result, we’re keeping track of everything we donate this year as if we could itemize it, until further notice. Last year, keeping track of educational expenses helped us during tax season, even though we weren’t sure about the tax implications while we were doing the actual tracking!
(P.S. We use It’s Deductible by Intuit to track all donations–it’s a fantastic program and it links directly to TurboTax.)
Something New Every Year
We learn something new every year, so I encourage you to do the same. Think back to things that worked well or didn’t work at all this tax season, and put immediate changes and habits in place that fix those issues for 2012.
Try something unique like doing a boat donation to save on your taxes. This service makes it possible for you to donate an old boat to charity and receive tax deductions because of your generosity. The organizations that accept boats as a donation resell them to new customers and then donate the money to children’s charities. The charity can issue you a receipt based on market value or what the boat ends up selling for and you can send this receipt to the IRS to receive your deduction. Donating in this manner is a great way to acquire some deductions for your taxes, while helping those in need in the process.
As always, please please please consult a tax professional, or at least use TurboTax, since I’m a mere mortal with no formal financial training, and provide these tips only as a means of sharing what I have personally learned.
Finally, don’t forget that this year’s filing deadline is April 17, 2012 due to the weekend. Cheers!
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