Ready, Set, Deduct! How to Prepare for Tax Season 2017.
Wait, tax season? Aren’t taxes due on April 15th? Do I really have to start thinking about this now—or can it wait till, like, April 15th?
No. It really can’t.
If you’re self-filing your taxes, it can be easy to let it wait till the last moment. After all, there are so many things that seem more pressing: taking your kid to basketball practice, plugging that leak in the basement, doing literally anything other than your taxes. We get it. You’re super busy, life is hectic, and taxes are just going to have to wait.
Except that they shouldn’t. Taxes are an important legal requirement and—oh yeah—you can end up with a nice refund check when it’s over. So let’s take a deep breath and get started together. You’ll be glad you did!
Your Tax Forms
First thing’s first: Getting your paperwork together. But which documents are important and why?
“Generally, taxpayers should collect their W-2 and 1099 Forms,” says Brian Thompson, a Chicago CPA and attorney whose practice includes tax prep and tax advice.
A W-2 form is a document that all employers are required to send to their employees. It lists how much money the employee made that year and how much the employer withheld from their taxes. Hopefully, your employer withheld more than you actually owe, because that means you’ll be entitled to a tax refund. Cha-ching!
But what if you’re an independent contractor or freelancer and your employer (or more likely employers) doesn’t withhold taxes from your paycheck? Well, then you’ll be receiving a 1099 from every business that you worked for. The 1099 will detail how much that employer paid you. It will be up to you to determine how much tax you owe on that income.
For homeowners, Thompson says that they “should collect Form 1098 Mortgage Interest Statement and real property tax payment receipts if they want to itemize their deductions rather than claim the standard deduction or simply want to analyze both scenarios.”
Interest that you pay on a home mortgage is tax-deductible, so you should request a 1098 from the company that is servicing your loan. The document tells you how much you paid in interest on your loan over the previous year. We’ll get into how deductions work later on.
Your Financial Records
Once you’ve received all the proper forms from your employers, clients, and lenders, it’ll be time to assemble all of your own financial records. Harinne Freeman (@harrine), the CEO and owner of H.E. Freeman Enterprises, a financial services company has some great tips for what kinds of documents you should gather and how you should keep them organized:
- Gather all receipts, daily, monthly, quarterly and yearly statements, medical bills, student loans, credit card statements, prescriptions, financial statements, etc. and place them in one easy-to-find location. You can also scan the documents and store the documents on your computer.
- Categorize all receipts such as medical, loans, financial statements, purchases, business expenses, income, etc.
- Use an automated tool to track your spending and deductions or use a piece of paper, or software such as Word, Excel or Access to enter your data.
- Use a software package like Quicken or Quick Books to record all of your deductions. Use basic column headings: Item, Date Purchased or Sold, Cost, Quantity, Total Cost.
- Identify all items that can be used as itemized deductions and put them in one folder, or create a spreadsheet, or use an accounting software and save the data on your computer. Determine if the standard deduction for your tax bracket is greater than your itemized deductions. If not, calculate your itemized deductions.
What is a tax deduction?
While it’s important that everyone pay their taxes in full, you also don’t want to overpay. That’s where those sweet, sweet deductions come in.
Deductions let you subtract certain expenses from your taxable income. The less income you have to be taxed, the less tax you’re going to owe. And the less tax you owe, the more likely you are to get a bigger tax return.
Let’s say you have to drive fifty miles one day for your job. Normally, you would have to take a company car, but today you make the trip in your own vehicle. The money that you spent on gas for that trip is something that you could deduct from your taxable income. After all, you made that trip for work, not for personal reasons. Why should you have to pay for it?
(However, if your job reimbursed you for the gas you spent on the trip, you wouldn’t be able to deduct the cost on your taxes.)
Standard vs Itemized Deductions
There are basically two routes that you can go in order to maximize your income tax deductions. If you want to keep your tax deductions simple, you can claim the standard deduction on your taxes. It doesn’t require sorting through your receipts, and you can claim it even if you don’t have any expenses to deduct!
The standard deduction amounts are:
- For single people or for married couples who are filing separately—$6,300
- For married couples who are filing jointly or for qualifying widows and widowers—$12,600
- For the head of a household—$9,300
You can also choose to itemize your deductions—meaning that you will list out all the expenses that you would like to deduct from your total taxable income.
It’s a lot more time intensive than the standard deduction, but it is quite possible that your expenses add up to more than you could claim through the standard deduction. If that’s the case, then itemizing your expenses will mean saving more money which is never a bad thing.
However, choosing to itemize your deductions means that keeping track of your receipts and expenses is going to be critical! So it’s important to get and stay organized throughout the year.
What Can You Deduct?
Not all of your expenses can be deducted from your taxable income. That hotel room you stayed in while out of town on business? That’s tax deductible. The Netflix subscription that helps you “unwind” after a long day at the office? Not so much.
Harrine Freeman provided us with a partial list of what kinds of expenses can be deducted on your taxes:
- Volunteer Work. If you volunteer, your time and services to help a charity you can deduct on your taxes, costs for hosting a party or fundraiser for an organization, supplies purchases that are required to perform volunteer work, cost of a uniform, telephone expenses, and travel expenses such as parking, tools, gas, miles traveled, etc.
- Pro Bono Work. If you donate time and services for an event but ask for payment to cover traveling expenses—the time and services are considered donated and can be deducted. However, the services must benefit the public.
- Job-Related Expenses. You can deduct “ordinary” and “necessary” expenses associated with—or necessary for—your job, especially for a trade. Ordinary expenses are common expenses for your trade or profession. Necessary expenses are those that are helpful for you to perform your job and apply to full-time or self-employed employees.
- Business Meetings. If you attend conferences or business meetings for your job, you can deduct travel expenses including the cost to drive to the event if you are not reimbursed by your job.
- Car Mileage. If you use your car for your job or business and use it for that reason only, you can deduct the entire operation costs. If your car is used for your job and business, you can only deduct the cost for business use.
- Uniforms, job supplies, job related training and job search costs.
- Higher education expenses.
- Tax preparation fees.
- Mortgage refinance fees, mortgage interest, points and real property taxes.
- Foreclosure tax relief.
Does that sound like a lot? Well you’re right. It is a lot. And like we said, that’s only a partial list.
Don’t Forget These Lesser Known Deductions
The US tax code is complicated. Very complicated. There are lots of deductions you can claim that you might never would have even guessed were eligible.
Brian Thompson says that “business owners should be aware of the section 179 expense deduction which allows taxpayers to elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service.” Basically, if you buy something for your business (and used it) in 2016, then you can deduct the cost of that item from your taxes.
Thompson says that “generally, the section 179 deduction is limited to $500,000 with some exceptions. Taxpayers can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions over a period of years.”
According to Deborah Sweeney, CEO of MyCorporation.com (@MyCorporation), “One standard deduction that anyone working out of their home should know about when filing their taxes this year is the home office deduction. To qualify, you need to use that specific part of your home as a principal place of business exclusively and regularly.”
She says that “there are two options available in determining the home deduction percentage: Regular Method which determines actual home office expenses including mortgage interest, insurance, utilities, and repairs on Form 8829. And Simplified Option for Home Office Deduction that allows for a standard deduction of five dollars per square foot of home used for business, up to 300 square feet.”
Dayan says that if “Your home, household items or car are damaged in an earthquake, destroyed in a flood or stolen, you can deduct the value of the loss that isn’t covered by your homeowner’s or auto insurance. So if you were affected by a catastrophic event in 2016, start documenting your cost basis and complete IRS form 4684 to claim this deduction.”
Avoid these common mistakes
“Self-filing taxpayers make all kinds of mistakes,” says Thompson, “from failure to deduct all ordinary and necessary business expenses on Form 1040, Schedule C to failure to attach W-2 forms to tax returns that are filed on paper.”
A common mistake that Sweeney sees is “waiting to request an extension. If you know that you need one, I highly recommend requesting for it as soon as possible and reading up on any changes in these requests for 2017.”
For people who have donated to charity, Freeman emphasizes that they need to “make sure they get a receipt. If the donation value or cash value is over $250, you need to have a receipt or letter from the charitable organization to prove you made the donation.”
Some other common mistakes that Freeman has seen include:
- Not signing and dating the tax forms
- Not completing the tax forms
- Not entering (or entering an incorrect routing number and account number) for direct deposit
- Not itemizing medical expenses (so long as they exceed 10% of your income)
- Entering an incorrect social security number
- Entering incorrect calculations
- Not attaching a copy of your W-2 to the tax forms
- Not attaching all the appropriate schedules to the tax forms
- Mailing tax forms to an incorrect mailing address
- Not entering accurate data on the correct lines
- Entering the wrong filing status
- Not entering additional income
Most of those mistakes are really just common errors, but they can add up to big headache. Luckily, starting your taxes now instead of on April 14th will give many more chances to double check! And you can learn more about filing your taxes in the eBook Tax Season 101: An OppLoans Explainer.
Also, you can check out more tax-related info from the OppLoans blog like:
About the Contributors:
Jacob Dayan is partner and co-founder of Chicago-based Community Tax, a national provider of tax resolution, tax preparation, bookkeeping and accounting services. He previously worked on Wall Street as an options analyst and as a foreign exchange trader. Jacob holds a Bachelor’s degree in Business Administration from the University of Michigan’s Ross School of Business.
Harrine Freeman is a financial expert, speaker, counselor, writer, CEO and owner of H.E. Freeman Enterprises, a financial services company that provides personal finance consulting services such as credit repair, debt reduction, budgeting, saving, planning for retirement and financial literacy education. Harrine is also the best-selling author of “How to Get out of Debt: Get An “A” Credit Rating for Free.” She has made over 150 media appearances as a featured financial expert.
Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @deborahsweeney and @
Chicago business lawyer and CPA Brian J. Thompson has been an Illinois CPA since 1992 and an attorney since 2000. He is a graduate of the University of Illinois at Urbana-Champaign and the University of North Carolina-Chapel Hill. You can learn more about his practice at BrianThompsonLaw.com.
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