Happy new year! With the turn of the calendar comes tax season. For most folks this is their least favorite time of the year. Sorting through financial documents pertinent to completing your taxes can feel overwhelming. I put together a handful of tips and tricks, and will dispel some common myths, to make this easier.
I have been working professionally in the tax industry for over sixteen years, including over seven years in tax law, so I have seen a lot! These suggestions can help you whether you prepare your own taxes or hire a professional to remove tax season stress:
Tips and Tricks
Gathering information
The most difficult part of tax preparation is actually gathering all the necessary documents. Fortunately, this is also an easy hurdle to overcome. You will receive a large influx of documents, both electronically and by regular mail, throughout January and February. Make a plan right now—yes, literally right now—for organizing and storing them. It is as simple as checking your mail regularly and placing any tax-related documents in a designated location.
Check out our 2023 Tax Planning Guide to see which documents you need! You can access the 2023 Tax Planning Guide for free by subscribing to our weekly newsletter on our website. Folks often do not know what to expect each tax season, and this eliminates surprises.
For those that purchased, sold, or refinanced their real estate, you will need a settlement statement from the transaction when completing your taxes. If you do not have a copy readily available, your agent or lender can send you one via e-mail! Get this before preparing your taxes or working with a professional.
Receive a year-end brokerage statement? Just file it in your “tax” folder that stays on top of your dresser. Social Security statement arrive? Tax folder. Some document that you are not sure whether it is tax-related? Yep, you guessed it: tax folder.
The same principle applies to electronic documents. Designate a folder on your computer as the electronic deposit repository. When your company makes your W-2 available in your human resources portal, save a copy to the tax folder on your computer. If you are a dinosaur, you can print a hard copy and save it in your physical tax folder.
I receive all my documents electronically. In the rare instance that a tax statement arrives for which I do not already have an electronic copy, it gets scanned upon arrival.
Now, when you are ready, you have all the documents in one or two places. The key to making this work is to filter and sort as the documents arrive. If you let the mail pile up, you will get overwhelmed, procrastinate, and may lose some important documents in the shuffle.
If you want to take it up a notch, now is an ideal time to review your 2022 tax return and make a list of all the inputs. This list will be your guide for which documents to expect. Add any major financial events (including energy-related home improvements or a new vehicle purchase) and other life changes over the past year to your list, since these will often impact your taxes.
Access IRS records
Tax return preparation often requires accessing IRS records, such as payment history from a previous year or your current-year Identity Protection PIN (or obtaining it in the first place). Now is the perfect time to make sure you can access your online account with the IRS. If you are not signed up for access, do it today. The identity verification process is a bit cumbersome, but once you get through it you have ready access to your IRS records.
Reporting income and expenses
For self-employed folks, reporting income and expenses is a hassle. Similar to having a designated place to store all the tax information as it comes in, have a system for tracking income and expenses. If your business has a lot of activity, then perhaps software like Quickbooks Online is for you. But if your business has a relatively low level of activity, then a simple spreadsheet might do the trick.
If you do not yet have a spreadsheet to organize your small business finances, you can purchase our Bookkeeping Template for Small Businesses.
Using a designated bank account, and perhaps a designated credit card—so you can get travel rewards!—is a best practice for business owners. (If you run your business via a separate entity such as an LLC, it is a must.) All the transactions are in one place, so it is easy to compile them.
Even if your income and expenses are spread among multiple accounts, you can compile the information in stages. Start by tallying up your income. Just look through your accounts (bank statements, Venmo history, etc.) for deposits, make a list, and add it up. Simple. Then for expenses, do the same for one account or one month at a time. The trick here is to break it up into small intervals. Do just a little bit at a time, and then tackle the next interval the following day, to avoid burnout. Before you know it, you will be done.
Do not rely on incoming 1099s to tally up your income. Your income is reportable regardless of whether you receive a 1099 (more on that below!), your 1099 may be inaccurate, or your 1099 may not ever arrive for a host of legitimate reasons.
I work with many entrepreneurs that get overwhelmed by having to pull together their information come tax time. They often put it off until the October extension deadline, and sometimes miss the deadline altogether. This adds stress and anxiety, and ultimately costs more in the long run. Do not fall into this trap. Prepare in advance, and consistently improve the organization of your business.
Myths
Not reporting income
A common misconception is that you do not have to report income if you do not receive a W-2 or 1099. That is not true. All income is taxable (and must be reported), from whatever source derived, unless it is specifically excluded by law.
Two areas where this pops up the most are bank interest and freelance/ad-hoc work. Banks are required to send 1099-INT forms if you earn at least $10.00 in interest. Some banks send a 1099-INT regardless of the amount. But your receipt of the interest itself, not the receipt of a form from the bank, makes that income taxable. You should report it, regardless of the amount.
Will the IRS make a stink over $3 in taxes on $9 of unreported interest income? Probably not, but actually being honest will help you get the benefit of the doubt during an audit that could go either way. Yes, I have seen it happen.
More likely, this comes up with non-W-2 income from freelance work. Cash tips received while bartending are taxable. A cash payment received for repairing a fence is taxable. The Venmo payment you received from a person who purchased your used gym equipment is taxable. If the IRS catches wind of unreported income later, you will be liable for the back taxes plus penalties and interest. Not reporting income could even become a criminal matter if the amount is high enough. You do not want to be looking over your shoulder wondering when the IRS will catch up to you. The easiest way to get caught is if the issuer files a 1099 late, or perhaps files it with the IRS but fails to send you a copy. (This could easily happen if you have an outdated address.) It can also come up during an audit.
Unreported income also comes up in the context of bartering. If a wedding photographer trades services with a mechanic, then both the mechanic and the photographer have reportable income equal to the value of services received. Reasonable estimates are usually sufficient here, but you must provide a bona fide assessment and be able to show supporting documentation.
Not filing a return
Another common misunderstanding is there is no requirement to file a tax return if you make below the standard deduction amount. (The standard deduction amount for an unmarried individual in 2023 is $13,850.) This is true for folks who are strictly W-2 wage earners, but it does not apply to self-employment. Anyone with at least $400 in gross income (before expenses!) from self-employment must file a tax return.
If your child works a summer job at the local burger joint, receives a W-2 for that work showing $3,000 of income, and has no other income during the year, then they do not need to file a tax return. But if they also earn $600 in cash mowing lawns—or even if their only income over the summer is that $600 cash from mowing lawns—then they have a tax return filing requirement, and may even owe some self-employment tax on that income (even if there is no income tax liability). The good news is that by filing a tax return to report the earned income, they can contribute to a Roth IRA.
Someone without a filing requirement can still choose to file a tax return, and should do so to get a refund if any income taxes were withheld.
Also, pay attention to your state filing requirements. Many states have lower filing-requirement thresholds than the IRS. You, or a family member, might not need to file a federal tax return but may still need to file a state tax return. (In that scenario, you might as well file both.)
Wages count when paid
For many folks, the new year means a new job. If that is you, congratulations! Keep in mind, though, that wages count for tax purposes in the year they are paid, not the year they are earned. This is one of the largest stress points I see every year.
If you work a job throughout December, chances are you will not get paid for that work until the following January. For instance, if you left a job in December 2022 but did not receive your final paycheck until January 2023, expect a W-2 from that job for 2023. (Make sure your former employer has your current address!)
This happened to me in 2023 because I left the Department of Justice Tax Division in December 2022 and received my final paycheck in January 2023.
Double dipping
Unless the law provides an explicit exception, you cannot use the same expense for multiple benefits. A good example comes in the form of higher education expenses. Tuition paid by nontaxable scholarships or VA benefits cannot be used to claim any educational benefits on your taxes. Broadly speaking, think of each dollar of tuition as being sorted into one, and only one, of multiple buckets (some of which may be empty):
Tax-free scholarships and grants, regardless of source;
Tax-free benefits from Veterans Affairs or the Department of Defense, whether provided as reimbursements or direct payments to the school;
Tax-free employer-provided educational assistance;
Reimbursements from a qualified tuition program (i.e., 529 plan); and
Out-of-pocket payments.
Only your out-of-pocket payments—including amounts paid with loan proceeds, since they must be repaid—can be used for purposes of claiming any education credits.
Perhaps the biggest myth of all is that taxes have to be stressful and overwhelming. The trick is that they do not have to be. My tip? Offload the responsibility of preparing your taxes onto a qualified professional, and let them handle it.
Comments