The first year I ever filed taxes I tried to do it by hand. Let’s just say, I’m extremely lucky that I did not get audited. Since then, I’ve been filing my taxes more or less for nearly twenty years, and here is what I have learned. I know this email is long, but it may help you save thousands each year (or at least prevent headaches).
- Any time you make money, the government probably wants a piece of it. This includes bank interest, money I make from selling stocks in a taxable brokerage account, and most surprisingly… side hustle income. Yeah, who knew I needed to report side hustle income?
- Set aside about 33% of business profits for taxes and pay them quarterly. This a pretty good starting point when you’re a new business owner. Save that money and then at the end of every quarter, make those payments to both the federal government, as well as your state and local government if applicable.
- If you saw an increase in income, you may owe more taxes. This happens a lot to married households where one person or both receive significant pay bumps. While payroll software may be taking out the correct amount of tax for each person, collectively, the married couple may end up under-paying. You are most likely to see this result in a tax bill, in which case you can use the tax bill to guide your withholdings in the next year.
- If you moved, or added / subtracted members of the household, chances are, your taxes are likely changing. Some of the trickiest years I’ve had in tax filing are when I moved states during the year. You’ll likely have to fill out multiple state tax returns, so be prepared to set aside extra time to do so.
- There are legal ways to pay less taxes… don’t be actively missing out on them. There are many ways to exploit the tax code to lower your tax bill and this is how the rich get richer. Don’t hate the player, join in the game, and even while you don’t think of yourself as “rich” you’d want to learn about this stuff so you don’t miss out on them later on when you can. When you’re just starting, this could mean traditional / tax-deferred contribution to an IRA before April 15, for the previous calendar year, and more. As you get more advanced, this could include a Backdoor Roth IRA, Megabackdoor Roth IRA, donating to charity, donating appreciated stocks, paying your children through your own business, and more. The Save My Retirement Masterclass covers a lot of this.
- Business owners have more ways to lower taxes than W-2 workers. While I often miss the stability of a W-2 paycheck, as a business owner I have so many more ways to reduce my taxable income. I am set up as an S-Corp, which splits my income into two streams, and one of them I do not have to pay self employment taxes. I can deduct business use of the home I rent, business use of the car I drive, and any travel I utilize to get to business meetings and conferences! If you’re a W-2, your employer claims these deductions, but they don’t necessarily get passed to you.
- There is a difference between a bookkeeper, accountant, and experienced CPA. For someone who truly knows taxes, you need a CPA. Good CPAs are likely very booked up at this point. When I was in my early 20s I hired a tax preparer who was not very good. I caught a lot of mistakes and ended up just filing myself. Always ask your CPA what are some of the highest earning clients or most complex clients they’ve been working with – you don’t want to be their wealthiest client.
- Use tax season to do other financial check-ups. Even for my husband and I, we still heavily rely on filing a tax return to truly know how much we owe in taxes because laws and situations change. And then we use it to create a final analysis of our previous year’s budget, and then it helps us forecast our current year’s. We also use this time to check our investing portfolios to see if we need to do any rebalancing (a concept taught in the Save My Retirement Masterclass!)
- You’re never going to have a perfect tax return. Most of the time I’ve seen people go from owing a few thousand to receiving a refund of a few thousand. I would say, I would not sweat anything that is less than +/-2% of your household income. So for example, for a household earning $100K, if you owed $2000 or less, you’re pretty close to the mark. However, if you’re owing high 4 figures or above, then that is time for you to examine what is happening!
- File early to protect your data. There are a lot of scammers out there who take advantage of people who take a long time to file their tax returns and may even attempt to steal your money. So get on it and file early if you’re able!
