Tax day is April 15, 2020 and we’re doing all we can to work ahead of time and avoid that last-minute scramble. You may have been there before: it’s 11pm on April 14 and you’re desperately trying to make TurboTax online make sense. You owe state taxes, does that seem right? You donated to a political campaign, can you deduct that? There are often more questions than answers, and a Google search for tax advice can turn up 10 different results taking you in 10 different directions.
In order to reduce tax season stress and avoid mistakes, this year, we’re preparing for Tax Day in advance—and we’ve got 14 tips to help you do the same.
1. Make sure you have accounted for all income
If you work one job, this is simple: a W2 should have you covered. However, if you bring in other income through other sources, such as side-hustle work, rental income, interest income, or capital gains, these will also need to be included.
2. Develop a filing system that works for you
Whether you use envelopes dedicated to donations, retirement account info, income statements, or prefer to manage it all electronically, the key is staying organized beginning January 1. That way you don’t have to track things down or remember where you stashed something on April 14.
A note for those with side-hustles: as a freelance writer, I use a Google Sheets document with tabs for expenses, payments, and deductions. I keep it updated religiously so I don’t need to spend my spring digging through old receipts and credit card statements.
3. Explore all available deductions
From health insurance premiums to charitable giving to interest paid on student loans to homeowner expenses, there’s a long list of deductions that you may qualify for. Don’t just breeze through deductions assuming you don’t qualify—explore any area where you could help reduce your tax burden.
It’s worth noting that your political donations are not necessarily deductible. “Unfortunately, donations to political campaigns are not deductible on your federal tax return, but a few states (Arkansas, Ohio, Oregon, and Virginia) offer tax credits for these donations,” Amy Northard, a certified public accountant, said.
4. Assess the best retirement savings option for your tax situation
This is a decision that’s often made before tax season, but it should be made with tax liability in mind. If you plan on landing in a higher tax bracket in retirement than you are currently in, you may want to choose a Roth IRA, which is taxed now. If you would prefer a tax-deferred option, choose a 401(k) or traditional IRA. Not sure? Experts (and IRS rules) can help you figure out which way to go.
5. Don’t have many deductions? Choose the standard deduction.
Experts advise that you should only itemize deductions if you come in over the standard deduction. For those who come in under, the standard deduction is the best option to lower your tax bill.
6. Determine whether you’ve had a life event that changes your status
Whether you tied the knot on January 1 or December 31, if you got married in 2019, you will need to file married (either jointly or separately) for this year (talk to an accountant to make sure this is the most advantageous choice for you—some married couples continue to file separately!). Similarly, if you had a child at any point during the year, you will likely qualify for the child tax credit.
7. If everything is straightforward, take a stab at DIY
If your finances are straightforward, it doesn’t hurt to run your taxes through an online tax program to learn a bit more about the deductions that exist and what you may owe. You can still go to an accountant at the end of the day, but play around online—you may even save yourself some significant money if you realize you can do it yourself! And, if your household income is under $66,000, you may qualify to file free!
8. Make sure you’re on time!
Unless you want to pay a fine, make sure you’re on time! Even if you file for an extension, you still need to pay estimated taxes to avoid penalties.
9. Have a plan to use your refund wisely
If you expect to get a refund, don’t just let it disappear on lunches and afternoon coffee. Go into tax season with a plan to utilize that money to help pay off your student loans, your mortgage, or to help build your emergency fund.
Tips for side-hustlers and small-business owners:
For the side-hustlers: yes, you may have to pay taxes on that extra income! Here are a few tips for the creatives, the gig workers, the small-business owners, and more:
10. If your side-hustle earned over $400, you have to pay taxes on it
You’ll pay self-employment taxes on all income over $400 if you worked as a contractor.
11. Know your deductions and utilize them
As a self-employed contractor, you may be able to take advantage of deductions, including home office space, necessary equipment, internet, mileage, and more.
12. Consider hiring an accountant that specializes in small businesses
While I’ve figured it out myself in the past, paying self-employment taxes can be an intimidating process. I was often left wondering, “Am I doing this right? Is the IRS going to come looking for me?” That’s exactly why there are accountants who work specifically with small businesses and side-hustlers. They know how to get you the most deductions possible and make sure you pay the correct amount so you can avoid fines later on.
13. Don’t forget to pay quarterly taxes!
If you will owe at least $1,000 in taxes as a self-employed contractor, you might have to file quarterly estimated taxes. The first payment for the 2020 tax year is due April 15. “Keep in mind that when it comes to quarterly taxes, you’ll want to think of these payments like you’re sending in deposits towards your year-end tax due,” Northard, who specializes in work with creatives, added. “You aren’t actually sending any tax information to the IRS or your state each quarter.”
14. Know when you’re in the clear to toss documents
Don’t throw away any tax-related documents for at least six years! Six is generally the magic number. Although there are exceptions, after that period of time, you’re unlikely to be audited by the IRS and you can say goodbye to receipts, 1099s, and W2s—but you may want to keep your returns.
Save it for later: