OBG b&b94 How to make tax season easier for you NEXT year
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Listen to Oldie-but-Goodie episode 94 below.
We are right in the middle of tax season and many of us find ourselves in the same place we do every year – scrambling on April 14th, trying to get all our numbers to our accountant who can’t make any promises that it will go through in time.
What about if next year was different? There’s nothing we can do about last year’s taxes, so in this week’s show, we talk about what we can do to help make next year’s tax season a breeze. It’s all about preparation and maintenance and it’s not as time consuming or hard as you think. Tune in for tips on how to make tax season go smoothly for you next year!
Highlights from the episode:
You know in your head, these are all the things that I have together, whatever. But, it’s hard to get all this stuff together and think about next year, ‘cause right now you’re scrambling to put together this years because you were like “oh, crap, I didn’t do it last year!” And now, once you’re done with tax season, you don’t wanna think about taxes again until next year because it was such an awful experience. That is a cycle.
Leading indicators are certain numbers and trends that show where the economy is going. It’s not necessarily accurate, especially when you only look at one of them, but it does show and it can help predict movements in terms of whether things are gonna go up or gonna go down.
Lagging indicators will tell you when we’re actually out of a recession, or actually really in a recession. A lagging indicator is a change that has happened when the economy has changed over all. So, a big thing is the unemployment rate…it’s that indicator of how willing people are to take on risk…it’s a sign of whether we’re in something or out of something.
The first thing you need to do is decide if you need to hire an accountant. Now, here’s when you don’t need to hire an accountant: you don’t need to hire an accountant if you only have W2 income and you’re taking the standard deduction. So that means you’re not deducting student loan interest, or charitable deductions, or mortgage interest or anything like that….you can do it yourself. It’s super easy….the other side is you maybe wanna hire an accountant if you only have W2 income but you wanna itemize your deductions. So if you have big deductions, like a lot of student loan interest and you wanna make sure it’s done right, or mortgage deductions, of you donated a lot to charity last year, you may wanna hire an accountant to make sure you’re actually filling all that in right….because the other thing they can do is let you know if it’s better for you to file with a standard deduction or to itemize….if you have self employment income, you need to itemize, you’re gonna need advice, and you should hire an accountant. It’s gonna be worth the money. They’re gonna be able to tell you and send you a list of everything you need to collect, and they are going to take all of that paperwork and all of those attachments that you’ve sent them, and they are going to fill out your return for you. Believe me, they will do it much faster than you ever will, and it will most likely be more accurate than yours. Most accountants for something like this will charge between $100 and $300.
Here’s the scary thing about being a tax preparer: you actually don’t have to have a license to be a tax preparer, you just have to apply for a tax preparer ID number. So the two things you wanna look out for in terms of designations for an accountant are: are they an enrolled agent, and EA, or are they a CPA, a certified public accountant?
The best time to start a relationship with an accountant is right after tax season, because you will have their 100% attention.
The penalties are much bigger if you don’t file than if you don’t pay. You’re penalized 0.5% interest if you don’t pay, and you’re penalized 5% interest if you don’t file.
A lot of people already have an idea of what they’re going to do with their refund and it’s not “I’m gonna save it.”
If you are not on a savings plan right now and you feel like you have no money to save, then this might be a good experience for you to do and see what it’s like to feel like you have money to save for the whole year.
An IRA contribution really makes sense right now if you are in a very high tax bracket right now and you need to take a deduction because you’re afraid you’re going to owe some money, because the way and IRA works is you don’t pay money now but you pay when you take the money out. So if your tax bracket is high, and you think it might be lower when you take the money out, it might make sense to take the savings now.
Another situation where you might want an accountant is if you’re making above six figures, because then your tax situation might be a little more complicated in general.
Designate one credit card and one checking account for business expenses…if you only have one checking account I actually recommend opening another checking account and putting all your business income in there, putting all your self-employment income into a separate checking account. If you also wanna use that checking account with the debit card to pay for business stuff, that’s the best way to go…and the other thing that you should do is to get on Mint.com, or any other expense tracking or categorizing app that exports to Excel and just maintain it. Look at it once a month…..have a place to keep your receipts….have a way to track the cash that you spend on your business….track your gigs, especially if you do a lot of small jobs throughout the year. The worst part is not knowing if you’re done receiving all the W2s and 1099s that you were owed…if you’re issued a 1099 or W2 the IRS also got a copy. So they already know that you have that income, and if you don’t claim it and they check against it, you’re in trouble.
If you are self-employed or you make a significant amount of side income, pay your taxes along the way, and you can actually pay them online at eftps.gov…one way to calculate is to take what you paid [the year before], take 100% of that, and divide it by four, and you have your quarterly tax payment! …do your best. If you pay something, then your penalty will be less than if you paid nothing.