It’s just about May and you already filed your taxes—so why (groan) should you keep thinking about them? The reason is simple: You get a clearer picture of where you stand financially now, and what you should do to improve that standing in the future when you prepare to file your tax return. Consider it a secret bonus rewarding you for the time spent sifting through paperwork and electronic documents to satisfy the IRS.
Before you file all of your tax documents away neatly for another year, scan your return with the following questions in mind to help you decide if you need to make some adjustments:
Are You Paying Enough (Or Too Much) Tax?
Once you are done filing your taxes, the answer to this question becomes pretty obvious. If you find yourself in the position of writing a large, unexpected to check to the IRS you know that you need to make your estimated tax payments larger. If, on the other hand, you are receiving a sizeable return you may want to consider reducing your estimated tax payments to give yourself some financial breathing room throughout the year, or to allow you to invest in an eligible tax-sheltered retirement savings plan.
Did You Take Advantage of all Tax Deductions and Credits?
This one may require taking the time to review your tax return with a tax professional so you can become more enlightened about all of the options you have available to you to lower your tax obligations in the coming year beyond the commonly known deductions for travel, meals, equipment, healthcare, and home office space.
Are You Raising Red Flags for an IRS Audit?
As you look at your tax return, you may see some red flags that can draw extra IRS attention. In and of itself, the fact that you are running a freelance business means that you may be subject to more intense scrutiny, so be sure to claim all of the income that you have made throughout the year, and be prepared to substantiate it with proper records. In addition, for future reference, taking deductions such as claiming 100 percent business use of a vehicle are also worth a second thought. (From the IRS’ perspective, it is rare for an individual to use a vehicle 100 percent of the time for business, especially if no other vehicle is available for personal use.) Also, writing-off big dollar amounts for business expenses that could also be personal entertainment such as dining out and travel can cause the IRS to take another look at your return, especially if the deduction amounts seem too high for the type of business that is claiming them.
How Healthy is Your Retirement Nest Egg?
Your tax return will also make it clear as to whether you made the maximum allowable contribution to tax-advantaged retirement saving options. If you didn’t this year, you may want to consider a setting up a traditional or Roth IRA (Individual Retirement Account) to build retirement savings and protect up to 20% of your earnings from taxes.
Was the Filing Process Too Painful?
While few freelancers would peg tax preparation at the top of their list of fun things to do (unless you are a CPA, of course), ask yourself if you are making things harder for yourself than it really needs to be. If gathering all of the documentation and receipts you need to file your taxes or support the deductions that you are claiming is pushing you to the edge you may want consider overhauling your record-keeping system for the coming tax year and enlisting the help of a CPA specializing in freelance taxes to help you get everything in order, minimize your tax obligations, and make the process considerably less painful and time-consuming.
Your tax return provides you with a snapshot of your current financial picture. Use this important bonus to take control of your finances and ensure that you live comfortably now—and in the future, while still honoring your tax obligations.
Jonathan Medows is a certified public accountant licensed in New York, New Jersey, Maryland, and Pennsylvania. He is also a recognized expert in taxation for freelancers and the self-employed—often tapped for his expert knowledge and perspective on self-employment taxation by national and regional publications such as The New York Post, BusinessWeek, Forbes taxation blog, WebCPA, CPA Practice Advisor, and others. You can read some of Jonathan’s press coverage here.
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