April 18 marks the 2017 tax day. Those who put off prepping and filing their tax return until the last minute especially feel the pressure of the annual tax deadline. With tax season in full swing, here's some ideas to help make next year easier.
If you need to make tax payments, failing to prepare and set aside funds can cause a serious problem. You could end up having no choice but to dig into savings that you'd put away for another long-term goal, like buying a new car or putting an addition on your house. Let's look into some strategies that can help you avoid such a turn of events.
Freelancers: Be especially prepared
Self-employed contractors, freelance writers and designers, small-business owners and other workers classified under the 1099 category of the Internal Revenue Service's (IRS’s) filing guidelines can encounter potential tax troubles. The inherent structure of freelance moneymaking ─ earning all gross income as net income but paying federal, state and municipal taxes later on as an ultimately greater financial burden ─ requires a great deal of careful maneuvering to meet the demands of paying tax liability when tax day comes around.
One approach is to set aside a portion of each payment you receive throughout the year and not to touch those funds. When you set aside funds regularly, you can be better equipped to pay income tax and the IRS's 15.8% self-employment tax rate, noted tax solutions provider Intuit.
Understand your deductions eligibility
Almost every taxpayer in the U.S. can claim some expenses as deductibles, but expenses are particularly important for freelancers to recognize. Knowing which ones you're eligible for well before you actually file your tax return ─ and keeping the records required for proving that eligibility ─ is an essential aspect of tax preparation.
According to the Freelancer's Union, a nonprofit advocacy group for freelancers in all trades, itemizing and recording business expenses should be done throughout the year, not all at once before you file. Doing so can help show how much you'll expect to pay in taxes and how much you can deduct in expenses. Other possible write-offs freelancers might have include a portion of rent or mortgage payments, utility bills, insurance premiums and the cost of essential items for a home office.
All employees should be aware of potential deductions, but you'll have fewer of them if you're a salaried worker who receives a W-2 statement from your employer. Depending on your state’s tax code, such deductions may include public transportation expenses if you regularly ride subways or buses managed by a state or municipal transit service, interest paid on student loans overseen by the federal government and donations to federally recognized charitable organizations. Don't expect any of these to be too high, though, and be sure to have savings at the ready in case of unexpected tax burdens.
Consider saving in IRAs
It's wise to keep money intended for tax payments in an account separate from your regular savings. According to U.S News & World Report, a national magazine, an individual retirement account (IRA) could be the ideal place for such funds. You can claim IRA contributions up to $5,500 as tax deductions, and if you need it down the line, you'll have the money in there to pay a tax bill. If you do withdraw, you'll be taxed for the funds as income unless you're 59 1/2 years old or older.
Not all taxpayers are eligible to make a tax-deductible IRA contribution. U.S. News & World Report also notes that as of 2016, if you were eligible for your workplace's 401(k) plan and made between $61,000 and $71,000 as an individual or in the $98,000-$118,000 range when filing as a couple, you can't write off IRA contributions. Nor can those 70 1/2 years of age or older who are still working. Conversely, if your employer doesn't offer a 401(k), IRA contributions up to the $5,500 limit are tax-deductible regardless of your income, and couples filing jointly can write off double the individual limit.
If you need to make tax payments, failing to prepare and set aside funds can cause a serious problem. You could end up having no choice but to dig into savings that you'd put away for another long-term goal, like buying a new car or putting an addition on your house. Let's look into some strategies that can help you avoid such a turn of events.
Freelancers: Be especially prepared
Self-employed contractors, freelance writers and designers, small-business owners and other workers classified under the 1099 category of the Internal Revenue Service's (IRS’s) filing guidelines can encounter potential tax troubles. The inherent structure of freelance moneymaking ─ earning all gross income as net income but paying federal, state and municipal taxes later on as an ultimately greater financial burden ─ requires a great deal of careful maneuvering to meet the demands of paying tax liability when tax day comes around.
One approach is to set aside a portion of each payment you receive throughout the year and not to touch those funds. When you set aside funds regularly, you can be better equipped to pay income tax and the IRS's 15.8% self-employment tax rate, noted tax solutions provider Intuit.
Understand your deductions eligibility
Almost every taxpayer in the U.S. can claim some expenses as deductibles, but expenses are particularly important for freelancers to recognize. Knowing which ones you're eligible for well before you actually file your tax return ─ and keeping the records required for proving that eligibility ─ is an essential aspect of tax preparation.
According to the Freelancer's Union, a nonprofit advocacy group for freelancers in all trades, itemizing and recording business expenses should be done throughout the year, not all at once before you file. Doing so can help show how much you'll expect to pay in taxes and how much you can deduct in expenses. Other possible write-offs freelancers might have include a portion of rent or mortgage payments, utility bills, insurance premiums and the cost of essential items for a home office.
All employees should be aware of potential deductions, but you'll have fewer of them if you're a salaried worker who receives a W-2 statement from your employer. Depending on your state’s tax code, such deductions may include public transportation expenses if you regularly ride subways or buses managed by a state or municipal transit service, interest paid on student loans overseen by the federal government and donations to federally recognized charitable organizations. Don't expect any of these to be too high, though, and be sure to have savings at the ready in case of unexpected tax burdens.
Consider saving in IRAs
It's wise to keep money intended for tax payments in an account separate from your regular savings. According to U.S News & World Report, a national magazine, an individual retirement account (IRA) could be the ideal place for such funds. You can claim IRA contributions up to $5,500 as tax deductions, and if you need it down the line, you'll have the money in there to pay a tax bill. If you do withdraw, you'll be taxed for the funds as income unless you're 59 1/2 years old or older.
Not all taxpayers are eligible to make a tax-deductible IRA contribution. U.S. News & World Report also notes that as of 2016, if you were eligible for your workplace's 401(k) plan and made between $61,000 and $71,000 as an individual or in the $98,000-$118,000 range when filing as a couple, you can't write off IRA contributions. Nor can those 70 1/2 years of age or older who are still working. Conversely, if your employer doesn't offer a 401(k), IRA contributions up to the $5,500 limit are tax-deductible regardless of your income, and couples filing jointly can write off double the individual limit.
