Interest in last week’s tip was high, so expect something in the future talking about comparing cars and when to buy new or used. This week I wanted to share a few short thoughts on taxes from my client experiences this tax season.
A great question to ask before you prepare your taxes: Do I have all my paperwork?
- Before you prepare your taxes, make sure that you have all your paperwork. This may seem like a simplistic tip, but reporting a forgotten form after filing is the main reason I help people file amended returns.
- Do you have a W2 from EVERY location worked in the prior year? Even if you worked somewhere for a day, you will get a W2 (I have seen 1 day W2s).
- You may have relationships with several financial institutions. Someone services your mortgage, another pays interest on your checking/savings, and maybe you have an investment account with a brokerage firm. While firms are supposed to have the tax paperwork sent to you by certain deadlines, some firms do get extensions. Make a list of all the firms you interact with and determine if you have something from each.
- If you think a form or action you took during the tax year might be remotely related to taxes, bring the form or other documentation to your tax preparer. It is extremely easy to look at a form and determine that it will not affect your taxes. Without the form, may end up making an unnecessary second trip.
Don’t use last year’s last paystub as a substitute for a W2
- W2s have important information that may not be on your paystub, or you may not know how to relate that information to the appropriate place on your tax return.
If something was not reported to the IRS, you should still report it.
- Many clients will ask me, “if this income was not reported to the IRS, do I have to claim it?” When I usually respond in the affirmative, some clients stare at me in disbelief. I then explain my reasoning: this tiny bit of income was not reported because it was so small. It is likely cheaper to report this small slice of income than to take a chance that the IRS will never catch the omission. Plus, you will sleep better at night; I will too.
If you do not have taxes taken out of your paycheck, you may be considered an independent contractor.
- Independent contracting happens when an employer gives a contractor a task, but the employer allows more latitude in how the task is performed than what is normally given to a regular employee. The IRS has detailed examples about who is an independent contractor, but the easiest way to determine if you’re being treated as a contractor is if taxes are being withheld from your paycheck; if they are not being withheld, than you are likely an independent contractor. Also, if your employer does not require you to fill out a W4 to determine your withholding, then you are likely an independent contractor.
- Being an independent contractor means that you are operating your own small business as employer and employee. For this reason, you have to pay both the employer and employee’s share of the Social Security and Medicare taxes (13.3% (lowered by the payroll tax cut extension; 15.3 normally)) on your net profits. This can be a benefit because you determine your net profit by deducting your expenses from your revenue. However, if you haven’t kept track of your expenses or had most of your expenses reimbursed, then the taxes can be substantial. See the IRS for more information about being self employed vs an employee.
Mo allows for a public pension exemption and a military pension exemption.
- Make sure that you are taking advantage of the exemption for public pensions or military pensions if you are eligible. The public pension exemption applies to any federal, state, or local government pension. These exemptions are being phased in over time. In 2011, the military exemption was 30% and is slated to rise to 100% by 2016. Public pensions are 100% exempt for 2012 onward. Note that there are income phaseouts for these exemptions. See MO Department of Revenue’s helpful website for more info.
Finally, think about using a VITA site if you qualify.
- Volunteer Income Tax Assistance sites are a great way to prepare your taxes. Volunteers are knowledgeable about tax law, can efile your tax return, provide both direct deposit/direct debit, and the services are free! There are income restrictions and limits on the complexity of a return, so make sure that they can help you before you show up at the site. Some sites also require appointments. To find a VITA site near you, call 1-800-906-9887 or visit the IRS website.
We would like to hear from you! If you have a tax tip to share or would like to comment on this post, please visit our blog at http://mufinancialtip.blogspot.com/ or send us an email.