It’s tax time, it’s tax time, it’s tax time. Right around the corner is April 15th, the day when your taxes are due. Even if you’ve filed your taxes a thousand times, it still can be a day that you dread.
All About The Pay
First, a little disclaimer. I am not a CPA. I’m a certified financial planner, and I know a lot about taxes, rules and regulations, but I am not the woman who files your tax returns. So, I encourage you to take this advice, research it yourself and always ask a CPA or accountant if you have a tricky question…capeesh?
Let’s set the stage a bit here. You’ve got essentially two ways to get paid- W-2 and 1099.
If you work for a company, most likely you are paid W-2 style, meaning that when you get your paycheck every 2 weeks or month the company has already taken out your taxes (federal, state, social security, etc.) When you go to file your tax return, chances are likely that you will get some money back. That is what you want, right?
Let me ask you another question. Would you rather the IRS hold your money all year-long and earn interest off your money, or would you? Maybe you are fine with that and you enjoy a big refund. That is cool. Those of you that paused when I asked you that question need to know that there is way to get more money in your pocket.
You are allowed to adjust something called your Federal Tax withholding. Put this podcast on hold and go grab your most recent pay-stub. Take a look at the number of federal tax withholding you have. My guess is 0 or 1. The higher that number is, the more money you get each month.
There are lots of ways to figure out just what that number should be for you. The IRS has a withholding calculator you can use, there are all sorts of manual deductions or you could use the good ole guess it technique. Most people stay around the 2-6 personal exemption range, but that depends on the person.
The goal you see is to get you to $0 tax refund. Yes, you heard that right. You know why though…it’s because you are getting more money each paycheck. So you really haven’t lost anything, in fact if you take that extra money and invest it month after month you could have a lot more.
If this is something you feel really nervous about, there are tons of articles online you can read, you can always call the IRS or ask your HR department for guidance. The best way is to speak with an accountant or CPA though.
Now for those 1099ers. If you are paid with a 1099 that means that you are essentially self-employed and you don’t have taxes taken out of your paychecks. Yes, the IRS will still want their money. It’s likely that if you are paid with a 1099 that you will be required to file quarterly taxes, so 4 times a year, instead of one big payment at tax time.
If you are 1099 though, you might also be able to deduct certain expenses from your income like self-employed health insurance, business travel, car payment, gas for your car, entertainment, business meals up to 50%, computers, phones, internet, books, magazines and so much more. This of course depends on what type of business you are in, and yes, the deduction has to be legitimate. You can’t deduct the cost of flying 4 friends to the Bahamas for your birthday, unless there is a legitimate business reason why you all need to be in the same place sipping Pina Coladas.
Here’s my rule of thumb: if you are paid 1099, you really should use an accountant or CPA. They know all the current tax laws and what are legitimate business deductions. If you were audited (that’s when the tax police come and want to look at all your receipts and statements to make sure you were hones with your taxes) I’d rather have a CPA to back me up then just me.
Remember though we learned that you could negotiate almost anything, so I would definitely try to negotiate a price with your CPA to do your return. There are a lot of great apps you can use to keep track of your receipts like Certify, Shoeboxed, Neat receipts.
Most of these apps let you scan a copy of your receipt in and categorize it. The app does the work for you, then you can print out all sorts of reports to hand to your CPA. This will save them time and money, which means you have room to negotiate their fee a bit.
You’ve got to keep impeccable records if you are a 1099 employee, and you should keep them for 7 years. Yes, the IRS can audit a few years back if they want. With cloud storage you can save these documents so much easier than even a few years ago.
So DIY with your taxes if you are w-2 and your taxes are fairly vanilla. If you make under $60K you can file your taxes for free on the IRS website. If your income is over that, then use software like TurboTax. They make your life really easy and all you have to do is follow along and plug-in numbers. Always double-check your taxes though before you hit the last send to the IRS.
If you are 1099, get an accountant or CPA. It will cost you money, probably a couple hundred of dollars, but they might also be able to save you a couple of hundred dollars with deductions that you didn’t think about. It’s just better to leave it in the hands of a professional. Think of it as one of the joys of being a business owner.
Can You Claim It?
There are two tax credits- American Opportunity Credit, and Lifetime Learning Credit (you want tax credits because you don’t earn income to qualify. They are called refundable tax credits.)
One deduction- Student Loan Deduction
The American Opportunity Tax Credit. Eligible taxpayers may qualify for a maximum annual credit of $2,500 per student. To be eligible, the student must be enrolled at least half-time in a degree or other recognized educational credential, and cannot have completed the first four years of postsecondary education before 2014. The credit can be applied to course-related books and supplies, in addition to tuition and fees. The American Opportunity Tax Credit is available to taxpayers with a joint adjusted gross income as high as $180,000.
The Lifetime Learning Credit. Eligible taxpayers may qualify for up to $2,000 per tax return to help pay for undergraduate, graduate and professional degree courses – including courses designed to improve job skills. There is no limit on the number of years an individual can claim the Lifetime Learning Credit. The Lifetime Learning Credit is available to taxpayers with modified adjusted gross income less than $64,000 or $128,000 if filing jointly. A family may not claim more than one credit for the same student in any one year.
Student Loan Interest Deduction. Student loan borrowers are eligible for up to $2,500 in student loan interest deductions to offset income subject to tax. Available for both federal and private education loans in repayment, those with a joint modified adjusted gross income less than $160,000 qualify for this deduction. In 2012, 10.8 million taxpayers deducted $10.7 billion in student loan interest, generating about $1.7 billion in tax savings.
Your student loan company will send you a statement each year before tax time (the 1098T), and you will need that for this deduction and fill out form 8863 from the IRS. If you use Turbo Tax, or the IRS software to file your taxes, questions will prompt you for this information and then it will be filed out with your return that they prepare.
Before you get all excited, you can only claim one tax credit per student per year. So it’s an either or situation.
That was a lot of information! Thanks for hanging in there. We talked about the difference between W-2 and 1099, so make sure you know which you are. If you’re W-2, feel free to file your taxes DIY style, but if you’re 1099 think about getting an accountant in your corner. If you haven’t heard of these deductions or credits before, take a serious look and see if you might qualify. You can even go back and look at earlier years and re-file if you think you are owed more money. Whatever you do, make sure enjoy a nice relaxing night on April 15th knowing that you’ve tackled another season.