If Taxes Absolutely Messed You Up This Year, Here’s What You Need To Know for Next Year

Very few things are certain in life, but taxes are one of them. Dealing with tax season alone can cause some unwanted and unnecessary stress—not to mention when you add in the fact that the IRS frequently changes tax rates, deductions, and credits. Plus, for those who are self-employed, are business owners, do freelance or contract work, or have a side hustle, filing taxes only gets more complex. When you factor everything in, it’s really unsurprising how easily you can royally screw up your taxes without meaning to. If that was you this year, you’ve come to the right place.

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Thankfully, you don’t have to make the same mistakes twice, and there are some tax tips and tricks that you can take with you into next year to better prepare and avoid making the same mistakes again. So if taxes absolutely messed you up this year, keep on reading to learn what you need to know for next year.

 

The best ways to avoid overpaying

All taxpayers have the option to choose between a standard deduction or itemized deduction on their taxes, and both will lower the amount of money they’re taxed on. A standard deduction lowers your income by one fixed amount, and that amount will vary depending on filing status and tax bracket. An itemized deduction is a list of eligible expenses, or tax write-offs, that deduct from their taxable income.

 

Which one should I take?

It’s recommended that you take whichever one will benefit you the most, which all depends on how many things you can actually write off. Your eligibility for certain write-offs depends on your individual tax situation, but you can check updates and eligibility right from the IRS website.

Opting for an itemized deduction is widely favored amongst those who are self-employed and responsible for their own taxes. This is more popular because unlike employees on a payroll, money is not being withheld from your paychecks for income tax, so come tax time, it’s more likely than not that you’ll owe the government money. However, since you’re responsible for everything—the overhead, materials, etc.—all the money from your paycheck usually isn’t going directly into your pocket; it often gets reinvested in your business or work expenses, and you shouldn’t be taxed on that. As someone who’s self-employed and spent a lot of time around others who are as well, I’ve personally found that this is the best way to ensure you don’t overpay on your taxes. I personally recommend that everyone who’s solely responsible for their taxes do this.

Although not everyone is eligible for certain write-offs, everyone is eligible for a standard deduction. If this is you or your standard deduction is higher than the total amount of write-offs you qualify for, this may be the better option for you. Plus, it will save you a lot of time and energy. However, it’s important to note that should you choose to take a standard deduction, you cannot claim any other deductions or credits on your taxes.

 

Source: Mikhail Nilov | Pexels

 

3 write-offs you should know about

Although there are many write-offs available, these are a few key ones you should be aware of:

  • Student Loan Interest Deduction: If you paid interest on your student loans, you may be eligible for this. For 2022, you can claim a deduction of $2,500 from your taxable income, depending on eligibility.
  • Charitable Contributions/Donations: Qualified donations can be written off on your taxes as long as they are on the IRS’s list of approved charities, like Salvation Army or Goodwill. For 2021 taxes, you’re allowed to donate up to 100% of your adjusted gross income (AGI) and get refunded for the total amount, though it’s unclear whether or not this will still hold true for 2022 taxes. To keep track of how much money you’re donating, be sure to tally up the total value of your donations by creating an itemized list and keep a copy of it for your personal records. You can do this electronically, with a spreadsheet or template, or by hand. After you donate, make sure you are doing the proper record keeping that is required in order to meet the tax exemptions.
  • Traditional IRA Contributions: Any contributions you make to a traditional IRA can be written off on your taxes. In a traditional IRA, you’re allowed to contribute up to $6,000 a year, plus another $1,000 for people who are ages 50 or over. This is really a win-win for you because you get to plan for retirement and receive a deduction on your taxes.

 

If you’re self-employed, expense everything you can

The IRS doesn’t see what goes into making your business or job happen; all they see is the total amount of money you’ve made. However, when you’re self-employed, work-related expenses cut into your profit. For that reason, the money you spend specifically for work should be viewed as an expense, and you shouldn’t be taxed on expenses because they take away from your profit.

Let’s say you have to pay for an editing software in order to be profitable, like Canva or Adobe Lightroom. The cost for that would be considered an expense. If you have an online store and need to pay a shipping fee to get your products delivered to customers, the shipping fee would be considered an expense. Of course, all expenses need to be legal—you cannot write off the shipping fee of a birthday delivery you sent to your BFF—and directly apply to your business, but expensing everything you can is going to help you write off more and ultimately save you money. Some common expenses include:

  • Office Space: Even if you work from home, you cannot write off all expenses in your home simply because you work from it. You can, however, designate one room in your home to use as your office or business space. From there, you can figure out the square footage of that space and include a portion of your rent/mortgage and utilities such as electricity, heat, wifi, etc. in your business expenses. Other things you can include are office supplies such as desks, chairs, laptops/computers, and so on and so forth.
  • Food and Drink: For 2021, you’re allowed to write off 100% of food or drink you pay for during working hours or that relates directly to your business (think meeting a client or videographer, etc.). Be sure to keep detailed receipts of everything.
  • Travel and Lodging: Like food and drink, any travel or lodging you pay for that directly relates to your business—like a work trip—is considered a business expense. It’s important to keep itemized receipts for this as well.
  • Car and Gas: If you use your vehicle for business, you can partially write off gas and car expenses. For this, it’s important to track every mile you drive for business specifically. If you have a clothing business and need to drive to a port to get a shipment of clothing, the miles you drove would fall under this category. There are various apps designed to keep track of your mileage that can make this a lot easier come tax season. Additionally, you can partially write off maintenance done on your car or a car payment if it’s being used for business. Be sure to keep all gas receipts that you accrue on any work trips.

 

Source: Color Joy Stock

 

I ended up owing a lot of money. What should I do for next year?

Our tax system is essentially “pay-as-you-go,” but for those who don’t have money being withheld from their paycheck—the self-employed, business owners, freelancers or contractors, and those who have a side hustle—come tax season, it’s time to pay up. And the more money you make, the more you have to pay.

 

Make estimated quarterly payments

The government actually prefers this, especially if you owe over $1,000, and they reward you by not giving you a fine for paying it all in one lump-sum. All in all, this option is way more favorable to your bank account and the federal government.

To make estimated quarterly payments, take the total amount you expect to owe after accounting for write-offs and business expenses and divide it by four. You can refer to prior years or your records of income (invoices, receipts, etc.) to get this estimate. For example, if you paid $10,000 last year and expect to owe the same amount this year because your income has remained the same, you would then pay the IRS $2,500 every three months. By the end of the year, if your estimation was correct, you’re all set; your taxes are paid. If you end up making less than your estimation, you’ll get a tax return, and if you end up making more, then you will simply have to pay the difference come tax season. You are allowed to pay some quarterly payments and miss others, which can be helpful if money ever becomes tight or you experience a decrease or loss in income. Should you choose to do this, you’ll just have to pay the remainder come tax season.

 

Set aside a percentage of your income ahead of time

Set aside money for taxes as you get paid. It’s easy to lose track of every dollar you earn and spend, and many business owners and entrepreneurs often reinvest their income back into their business. This isn’t a bad thing, but it can be problematic come tax time, especially if you don’t have the funds to pay what you owe. To avoid this, set aside about 20% to 35% of whatever you get paid, every time you get paid, into a separate bank account. Having an idea of which tax bracket you’ll fall under will help give you a better idea of what percentage of every paycheck you should be setting aside. As an added bonus, try to get a bank account that has a good interest rate.

 

Open an account and line of credit for business expenses

In addition to having a designated bank account to pay for your taxes, you should also open a designated account and get a debit or credit card strictly for business expenses. Not only will this make your life easier when it comes to keeping track of what you’re spending for your job and what you can write off, but it will also help you better manage your finances. You can try setting aside a percentage of each paycheck for taxes and living expenses, and put whatever’s left over into your business expense account.

 

Source: Color Joy Stock

 

How you can prepare better

Regardless of your individual situation, it’s always a good idea to keep all of your tax-related documents in one organized place. This will save you a lot of time and unnecessary stress come tax season and make the process of filing taxes a little bit more enjoyable and easier.

If you’re responsible for your own taxes or are planning on doing an itemized deduction, it’s vital that you create and implement a record-keeping system for all your business expenses, write-offs, and work-related finances. This is the only way you can avoid spending hours and hours trying to find every receipt or bank slip from within the last year once tax season rolls around. You’re also more liable to forget what you’ve expensed and the total amount of your expenses throughout the year.

You can keep track of everything electronically through apps, templates, or spreadsheets, or you can do it by hand and keep everything in a folder. There’s no right or wrong, so long as it works for you and makes your life easier. Doing this will also show you more clearly what you can write off or mark as a business expense and what your profit and loss were for the year. Some important documents and things to include in your records are:

Detailed receipts—these are receipts that are itemized and show what you’ve purchased rather than just the total amount.

  • Bank statements
  • Invoices or paychecks
  • Business expenses
  • Charitable contributions
  • A record or receipt for anything you plan to write off—it’s important to have these in case you ever get audited

 

Additional tips you should know

In addition to everything mentioned above, to make your tax journey a little easier and less stressful next year, here are some final, additional tips you should know:

  • Make sure your W-4 is correct and up to date if you’re an employee on a payroll. I know someone who accidentally marked something on their W-4 incorrectly and no income tax was withheld from their paychecks throughout the year. Needless to say, they got a very big, unpleasant surprise when they received their W-2 and found out they owed the government money.
  • If you experience any major life changes such as getting married or divorced, an addition to the family, or changes in income from a side hustle, it’s important that you update your W-4 to reflect those changes. By law, you’re allowed to change your W-4 at any time throughout the year, however many times you want or need to.
  • Try to hold on to capital assets for at least a year. Any profit you make from selling a capital asset, such as stocks, ETFs, artwork, or real estate, is considered a capital gain, and you’re taxed on that profit. If you buy and sell in under a year, your profit is taxed as regular income. If you wait at least a year, your profit then becomes long-term capital gains and is taxed at a much lower rate.
    • For 2022, long-term capital gains are taxed at a rate of 0%, 15%, or 20%. That’s a whole lot better than the ordinary rate you could be paying—which could be as high as 37%.
  • The IRS has already released the capital gains tax rate thresholds for 2022, so if you have any assets you’re thinking about selling, you can start planning ahead now.
  • If you’re feeling unsure about handling your taxes or have any questions regarding them, it’s never a bad idea to consult a professional. This is especially helpful for first-time filers, people who are newly self-employed and solely responsible for their taxes, and people who have a long list of eligible write-offs. However, if hiring a professional isn’t feasible for you, there’s tons of information and tools available for free on the internet.

 

 

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