There are two types of people in this world: those who prep for taxes and those who have extensions and stress about taxes.
I think we hear about the latter more often because their stress is more vocalized, whereas the former would not go around town talking about how they feel so great about prepping for taxes early.
Why doesn\’t everyone prep for taxes early? Well, you have to choose your hard. You can choose to procrastinate, take your time, and file an extension…. Or you can tackle the hard work now and make small improvements throughout the year to be ready for tax season. They are both hard steps. Don\’t want it to be hard?? I have the secret for you. If you don\’t want tax season to be difficult or stressful, don\’t own a business. Or our second best option: hire a professional WHO TAKES CARE OF YOU.
This tax professional should be someone who asks ALL the questions. There is not a financial section of information they do not know or have access to. This person cares about every, single deduction and credit, from installing new windows in your house, charitable contributions to your church, your business start-up costs, medical expenses, miles driven for personal vs business use, if your kids are in college or not and who’s paying that tuition, if you’re caring for another dependent who isn\’t your biological family, if you’re adopting, if you have dividends, etc. There are so, so so many more details that sound small but really add up to make a great difference in your tax return.
So what are the steps someone should take to prep for tax season?
Determine if you need to file your taxes:
All businesses need to file a tax return, but not all individuals. If you make less than a certain threshold and meet some other requirements then you may not have to file a federal tax return.
Determine what income needs to be filed:
Most businesses would need to file form 1040, 1120-S or 1120 depending on their entity type. Individuals will receive a W-2 or 1099 from their employer and the information on that will help the tax preparer know what income was received. Did you sell a house, land, or other asset? If you made a gain or loss on that sale it would need to go to your tax preparer as well.
Determine which expenses can be deducted:
These are nuggets of gold for which everyone is searching. What are specific ways to reduce tax liability? Keeping good track of your expenses (with receipts) throughout the year will increase how much you can reduce. Operating expenses, mileage, meals, software, and uniforms are just a few categories businesses can deduct, either entirely or in part.
Determine what credits you can claim:
Credits are dollar-for-dollar reductions for your tax liability, whereas a deduction is a percentage of an amount. Credits can include lifelong learning credit, energy credits, and child tax credits. Accurately filling out all the paperwork the tax preparer provides will help them understand which credits apply to you.
Instilling good bookkeeping habits throughout the year (or hiring a bookkeeper) will ease up the difficulty of finding receipts, categorizing transactions, and organizing income when you\’re ready to file taxes. When you are working with a tax professional or tax advisor, it’s a great idea to ask them about tax strategies. They may have suggestions as to whether you should defer income, what your business should be taxed as, how much you want to give to charitable organizations, and tax benefits of savings into a retirement account.
It’s good to do your own research and also ask questions of someone who regularly works with taxes and bookkeeping! Before the year is over, figure out what your budget should be and which areas of your business you should be saving or spending in for next year’s tax filing.
* This post is for educational purposes only. Tax laws and education change frequently so it’s good to double check with a professional if these suggestions are the right move for you.