Budgeting, taxes

Did you owe taxes this year?

Many people in the U.S. were frustrated this year by the amount they owed to the IRS. The Tax Cuts & Jobs Act was supposed to save taxes not increase them. First of all, it will help to understand payroll withholding and then how your balance due or refund is calculated.

Payroll withholding is how much your employer holds out of each paycheck and sends to the government to help pay your taxes for the year. Your employer looks at your paycheck amount and calculates how much your tax liability will be if you make the same amount all year. They withhold that amount from the paycheck. That’s why when your paychecks are large, your withholding might be really high.

Balance due or refund is calculated by your actual tax liability minus your payroll withholding for the year. At the end of the year, we add up what you actually made for the year, and then calculate the taxes on that amount of income. This is your tax liability. We then subtract your withholding amount from your tax liability to calculate the balance or refund.

The Tax Cuts & Jobs Act changed the withholding tables. When the tax laws were changed, the employers were given new withholding tables to hold out more or less of each paycheck. So, the idea was to enjoy more of your money during the year. I actually agree that getting a big refund isn’t ideal. I would rather use my money during the year. The government doesn’t pay you any interest. So, they get to use your money all year without paying you for it. Here are two options:

  1. Leave your withholding as is, and save the money to pay your balance due. Divide your balance due from 2018 by how many paychecks you have left in the year, and save that money from each paycheck. Then, when you get your taxes done, you’ll be prepared to pay the money. Having the money planned and set aside empowers you to go get your taxes done early, and be able to say “I’m prepared.”
  2. Change your withholding. The IRS offers a paycheck checkup on their website. You can go here and enter your information to know what to tell your employer to withhold from your paychecks. You calculate the exemption amounts. If you don’t think it will fix your amounts enough, talk to your employer about other options. You can claim less exemptions, you can withhold at the higher single rate, and/or ask your employer to withhold an extra percentage or amount from each paycheck.

Give yourself the power to understand taxes and you will feel better at tax time. Nobody really likes taxes but it is so much easier when you are prepared. Without getting too political, our taxes do pay for many incredible things like education, roads, and safety.

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This guy says thank you.

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Budgeting, taxes

Big Refund? How to spend it?

Some people really enjoy tax time. They want their big refund from the government. This year, instead of rushing out to buy something you really want, I want you to consider some other great options.

1. Pay off some debt. Whenever I get a refund, this is my first option. If you pay an extra payment on a loan, it reduces the interest you pay by just a little. It also gets you one payment ahead. Then, if an emergency comes up later in the year, you might be able to skip a payment on this debt. Also, I think the best way to pay down your debt, is to spend extra money on it. Even ten or twenty dollars here or there, could pay off big at the end of a loan.

2. Start emergency savings. It is always a good idea to have 2-3 months of income in your emergency savings. However, start small. Don’t get overwhelmed. $1,000 of savings is a lot better than none. Whenever something comes up during the year, don’t hesitate to use this account. But, put the money back in as quick as you can. This should be a top priority to keep this at a consistent amount throughout the year.

3. Plan for the year. If your savings is good and you’ve been working hard on your debt, you could look forward to the year. If your insurance bill is due in the summer and you save money by paying it in full instead of monthly installments, start saving now. If you have needs that are coming this year, why not start a separate savings account for those items?

It is always tempting to run out and spend your tax refund. But, if your goals this year include getting your budget on track, receiving your tax refund is a great time to start. Budgeting doesn’t need to be overwhelming. Start with one goal at a time.

Bookkeeping, expenses, income, taxes, Tips

Business Tax Organizer-Get Taxes Prepared

Do you have a business and need to claim the income and expenses on your return? I will file a Schedule C for you. If you already have a system of tracking your income, get me a copy of that. But, if you just keep your receipts, please fill out this form and the filing of the Schedule C will go quicker which will save you money on preparation.

The PDF Version is found at:

business-tax-organizer

The Excel Version is found at:

business-tax-organizer

 

income, taxes

Tax Organizer

Here is a copy of the tax organizer I give to my clients. The form helps clients go through a list of all of the items you might need and make sure you have all the paperwork. It is also helpful for me to make sure that I didn’t miss any of the paperwork in your packet.

I included a PDF version. You can print it out and write in the information.

I also included an Excel Version. You can download it to your own computer and then fill in the information before printing it out. Caution: Your computer or version of Excel may change the formatting. If you don’t know Excel that well, this option is not recommended.

I will be sharing a Business Tax Organizer next week.

Excel Version: personal-tax-organizer

PDF Version:   personal-tax-organizer

 

expenses, taxes

Hobby Loss

If you don’t make a profit, the IRS can determine your business is a hobby. If this happens, you will not be allowed to use your loss from the hobby to offset other income. This is usually an unfavorable result, so here are the ways to keep this from happening.

If you make a profit three of the last five years, you are considered to be carrying on the business for a profit. The IRS prefers your business to make income every year. If you lose money sometimes you are allowed to use the loss to lessen the taxes you pay on your other income.

Even if you are losing money, the IRS will still allow you to claim the income as business income if you meet the following tests. As always, keep good,organized records and these will help you if you get audited.

– Does your time and effort indicate an intention to make a profit?
– Do you depend on income from the activity?
– When losses occur, is it due to circumstances beyond your control or in the start-up phase?
– Have you changed methods of operation to improve profitability?
– Do you or your advisers have the knowledge to carry on the activity as a successful business?
– Have you made a profit in similar activities in the past?
– Have you made a profit in some years?
– Can you expect to make a profit in the future?

Generally, you must be carrying on the activity expecting to make income. Bloggers need to be careful because the IRS will try to classify your business as a hobby if you are not making money. So, you should be carrying on as a business. If your expenses exceed your income, maybe you should look at your intentions and see if you are carrying on as a hobby. If this is the case, it is best to start classifying your income and expenses this way to avoid penalties and interest.

Hobby income is entered on line 21 of the 1040. Then, you can deduct hobby expenses on your Schedule A. If you don’t have other items that make itemizing greater than the standard deduction, then you won’t get to claim any of your hobby expenses. And, you won’t ever be able to claim more expenses than income if your activity is a hobby.

This year, the Tax Court sided with the owner of a hair salon that claimed business losses instead of hobby loss. (Delia, TC Memo 2016-71, 4/20/16) The owner never reported a profit in the eight years she was in business. The IRS determined it to be a hobby and didn’t allow her to take expenses except on the Schedule A. She went to court and won. The taxpayer had very meticulous records of all income and expenses. The Tax Court determined the taxpayer had carried on her activity with the objective of making a profit. They also determined that she had taken reasonable steps to grow the business. The salon was also not a source of personal pleasure or a hobby.

If your business is not making a profit, it is important to evaluate your motives. Keep good records, make efforts to make a profit and keep your personal expenses separate. These are the best tips for continuing to be able to claim all of your expenses even when they are greater than your income.

Every taxpayer has a unique situation. So, it is always a good idea to seek help from a tax adviser whenever you have questions.

income, taxes, Tips, Uncategorized

3 Ways to Make Tax Time Easier

Everybody talks about taxes for two or three months every year. And, it’s usually negative. Accountants talk about taxes all year long. Working on your taxes a little at a time throughout the year will help you organize at the end of the year. I’m going to give you some tips to make your taxes a little easier for next year.

Track Income

I will talk about this in another post. But, start thinking about income. If you write a blog, sometimes you receive gifts and merchandise instead of payments. The IRS classifies these items as income. So, if you try to go back through your records for the whole year, it can be difficult to track income. Instead if you spend a little time each month or even as soon as you receive things, you will spend less time sorting through your records.

Track Expenses

Many small businesses use their personal checking accounts to pay for all expenses. Then, at the end of the year, you need to go through your checking account and pull out the items that include business expenses. If you use the same account for personal and business expenses, even if you use an accountant, they will expect you to send them a list of the business only expenses. Additionally, the IRS can require receipts in an audit. So, each month you should start organizing the receipts in a system that works for you. You can organize them by month, alphabetically or keep all similar items together.  Waiting until the end of the year could make it so receipts are lost, not organized or difficult to read.

Track Other Items

Here are some other items to track throughout the year. Mileage tracking and business use of home should also be tracked through the year.

First of all, it is easy to see why tracking mileage throughout the year is much easier. Some people that go to the same places regularly can easily write down the location and date. Then at the end of the year, you can look up the mileage for those places and then add up the mileage. If you go different places all of the time, you should track mileage every time you use your car for business purposes. Depending on how many miles you travel, you might want to add up your mileage each month.

If you use a portion of your home for business, you need to track your utilities and rent or mortgage interest. These are items that aren’t had to find at the end of the year but it is still easier to track throughout the year.

Tracking these items throughout the year will help make your life a little easier at tax time. So, decide now to spend a little time once a week, month or quarter in order to keep all of your tax items organized.