05 Apr Beginners Guide To Tax Planning
If there’s one thing we love in the US, it’s paying taxes. So much that last year, 160 million Americans overpaid and had to receive refunds.
All jokes aside, getting your taxes right is essential to preventing overpaying or legal trouble. With so many Americans changing careers or becoming self-employed, diligent tax planning is more important than ever.
1. Tax Planning Starts With Understanding
Preparing taxes without knowing your tax bracket or structure is like running an obstacle course with a blindfold on. If you’re one of the 53% of Americans that made a career change in the last year, then you may be paying completely different taxes than you’re used to.
Out of that slight majority, a significant portion switched to the “gig economy” or freelance work. If that’s the case, you will be paying self-employment tax, as you are, legally speaking, operating a small business.
If you’re not used to that, it means that you will be paying taxes based on your net profits (revenue minus expenses). If you received a raise, pay cut, or a new job position, you may be in a new tax bracket. If you changed your tax forms at work or filled them out differently at your new job, your taxes are likely to change.
Also, with Covid-19 relief in 2021, there are all types of complications that are brand new to most Americans. If you’re unaware of your current situation, it’s best to get a headstart and find out as soon as possible. Talking to a CPA or checking your forms at work may help you.
2. Prepare Your Tax Documents
If you are an employee, you should receive a W2 form from your employer. W2s are very straightforward, so you can just input those into your tax prep software and file.
If you are self-employed, you may receive a 1099 form from any client you’ve performed more than $600 worth of work for in the previous year. 1099-K, 1099-Misc, and 1099-NEC forms may come from any non-employment arrangement you had with a business. You can easily file all of these the same way as you would with a W2, but remember you will owe taxes for these, assuming your income exceeds your deductions.
To make this simpler, if you use one paying system like PayPal, Venmo, or anything else, then you can use the 1099 document from that system and deduct any personal transactions from your income. For example, if you have $30,000 in income on Venmo but your sibling sent you $200 to reimburse you for purchasing presents for your parents, you won’t have to count that as income.
3. Understand Deductions
Yes, you can deduct plenty of expenses as a self-employed person, even if you use them in your personal life. However, you cannot write off anything you only use in your personal life, and there are many distinctions to be aware of.
For example, most self-employed people will need a cell phone service plan to operate their business, even if they would use it without that business. However, if you use your car 90% of the time for personal affairs and 10% of the time for business matters, then you can only write off a certain portion of your car-related expenses. There are plenty of deductions that are often overlooked, including:
- Child tax credit
- Student loan interest
- Capital loss (offset capital gains)
- Charitable donations
- Property taxes
- State sales taxes
- Home office expenses (including square footage)
- Business mileage
The list goes on. Take a look at industry-specific tax deductions before planning your taxes, or speak to a professional for more relevant information.
4. Set Yourself Up for Success Next Year
If you find that you didn’t receive a tax refund or received too big/little of one this year, consider changing your W4 form at work to prepare for next year’s taxes. A small refund is actually a good thing because it means that you got your money when you were supposed to. However, some people prefer to play it safe.
In that case, you can change your form to withhold more tax money throughout the year, which will lead to a bigger refund and act as a buffer to ensure you won’t owe anything next year.
As a self-employed person, consider adding yourself to your payroll and paying taxes throughout the year or consider paying quarterly. Preparing for large tax bills over the course of an entire year is stressful, so take the burden off of your shoulders.
Throughout the year, eliminate stress by keeping diligent track of your expenses and revenue so you don’t have to rely on forms at the end of the year. Once everything matches your records, you’ll know that you’re ready to file!
Regardless of your employment or tax status, always look for deductions to avoid overpaying, get your documents in order, and triple-check your forms before filing. Keep your paperwork handy for at least 6 years in case of an audit, contact a professional, and you’ll be fine.
Prepare now and contact DVF
Now that you know some tax planning tips, set yourself up for success this year. Everybody’s facing new challenges with their taxes this year, and if you’re changing careers, it’s best to set yourself up for long-term success. The best way to do that is to stay diligent with your tracking and talk to a tax professional.
Stay up to date with our latest tax news and feel free to contact us with any questions or for help with your tax prep!