The Tax Man and Ms Entrepreneur: Getting It Just Right

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Okay, you’re exhausted from fighting the crowds to capture your Black Friday loot.  And you’re strung out from flitting from store to store on Small Business Saturday.  Now your fingers are sore from Cyber Monday.

The Thanksgiving turkey leftovers are gone.  The gift-giving frenzy for year end is just beginning.

In the middle of all that, I’m going to ask you to think about taxes?

Yes, I am.

Because you have no obligation to pay more than your fair share, I’m going to suggest three quick topics you should check before year end.

Tax Brackets

Compared with 2012, bracket creep has shifted the lines around between one tax rate and another this year.  To see what that means for you, first do a rough calculation of where your taxable income will end up for 2013.  Then look at the 2013 tax brackets for your personal status (married, single, head of household, etc.).

If your income is anywhere near a tax bracket step-up, invest the extra time to get more precise about your numbers.

Then, particularly if your business income flows to your personal tax filing (that is, not through a C Corporation), think about making expenditures in 2013 that you had already planned for early 2014.  That way, you can deduct them and maybe get away from the next higher tax bracket.

If you run your business on a cash basis, and if you have income that you can legitimately postpone until next year, you might want to do that too.

Lastly, if you still have room to make pre-tax contributions to a traditional IRA or a Health Savings Account, it might make sense to do so.  That’s money right off the top of your income line and the most caring gift you can give yourself.

Remember, a taxpayer in the 25% tax bracket, for example, will save 25 cents in federal tax for every dollar spent on a tax-deductible expense.

Home Office Deductions

Do you work out of your home in your jammies?  Claiming a deduction for a home office has always been a little precarious.  Lots of people think it increases your risk of being audited.  But if you insist on doing so, it may have gotten easier.

In 2014, for your 2013 taxes, a new option will allow you to claim $5 per square foot of dedicated office space, up to 300 square feet. The deduction will be capped at $1,500 per year and the form for claiming it will be greatly simplified.

If you’re used to claiming much more, you can still do so using the old calculation techniques.  But by doing that you may miss out on some risk abatement:  some say the simplified form and process may actually lessen the chance of having your tax return red-flagged by the IRS.

Estimated Payments to the Tax Man

Any chance you haven’t paid the IRS enough money this year?  If so, you could end up with a big tax bill, plus being hit by significant interest and penalties.

That’s reason enough to do that estimated tax calculation mentioned above, to be sure that by December 31, 2013, you’ve paid in enough.  Check with your accountant to be certain, but you have to pay at least 100 percent of last year’s tax liability or 90 percent of this year’s tax.  Otherwise, you owe an underpayment penalty … which is like throwing money down the drain.

A Word of Warning

Most of all, be careful out there.

The IRS has proven that it’s perfectly capable of falling for scams in which people file fraudulent refund claims.  It says it has caught 12.6 million suspicious returns over the last two years, to the tune of $40 billion.  And it claims that it resolves all cases within 120 days.  But that’s not always the case.

A businessman I know waited and waited in 2012 for his 2011 refund.  Eventually he complained to the IRS and discovered that his refund had been paid out to someone else.  That started the nightmare of proving who he truly was and what he was owed.  It did not get resolved in 2012.  To make matters worse, the exact same thing happened to his 2012 filing … and he is just finished sorting things out now.  Just in time for 2013 …

So, do yourself one more favor:  be particularly careful about documenting your filing and stay on top of any refund that might be due.  It’s one thing to pay what you owe, no more, no less.  It’s another to have to fight for what is rightfully yours.

Let us know in the Comments section below how you feel when you think about having to deal with the IRS and with paying taxes.  Is it emotional?  Or is it “just numbers”?

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Bio: Sharon O’Day fixes financial lives. She is a tell-it-like-it-is money expert with a successful career in global finance, plus an MBA from the Wharton School. Today she specializes in getting entrepreneurial women over 50 back on their game so they can have more money, less stress and more joy. With her “Over Fifty and Financially Free” strategies, they take actions that lead to their ultimate goal: financial peace of mind.

  • GREAT article Sharon. This is one area that I’ve nailed well. In my first year of working from home I was audited. That experience was more daunting than anything I’ve ever experienced since. However, I learned several lessons: one, make sure the tax preparer you employ stands behind their work. Two, keep every receipt with written notes in pen on it to back up your expense. There were more lessons but the biggest one was turning the audit into an interview with me taking notes on how to take expenses they denied and legitimately turning them into write-offs per the I.R.S….funny how wording can make or break a deduction!

    • Carla, I had something similar happen: I was audited many years ago and, because I wasn’t hiding anything and had backup of everything, I ended up having a really nice discussion with the auditor. My CPA sat beside me saying, “I’m bringing Sharon along whenever I go with a client to an audit!” All I did was honor the auditor’s expertise, play it straight, ask questions and take copious notes, as you did!

  • Alexandra McAllister

    Such an important article, Sharon. We work so hard for our money, we should know all the tax deductions that are available to us. I’m lucky I’ve had the same accountant for years and he’s great. Thanks for sharing all these tips.

    • Like me, you ARE lucky to have the same accountant for a long time, Alexandra, as long as he’s serving you well … which it sounds as if he is!

  • Kung Phoo

    I have always been told that i cannot write off my home office, even if i work 80 hours a week in it.. but now i will investigate..

  • Roz

    I just sent the piece about home office deduction to my accountant. She probably knows but I’m covering my bases. Great article as always.

    • Thanks, Roz. I figured I’d share some timely tax information since so many of us run small businesses … and there is still a little time to make some beneficial moves.

  • Terri Lind Davis

    Great advice, as always. Particularly helpful are your guidelines on claiming home office expenses.

    • Glad it was helpful, Terri. I figured the timing was about right … right after the Thanksgiving/Black Friday distraction and with ample time before year-end!

  • Scott Glaze

    Very informative piece! Thanks for sharing your knowledge Sharon =)

    • Happy to share it, Scott. I figured it was generic enough to be useful to most anyone, and especially to those who (unlike you) have recently started up businesses!

  • fredmcmurray

    Awesome info on the home-office deduction.

  • Wingate Wyndham Sulphur

    Great info to know! Shared~

  • Veronica Solomon

    Thanks for the great information. My CPA is pretty good about making sure I don’t overpay or underpay the tax man

    • That’s the best thing to have, Veronica: a qualified CPA who is truly looking after your best interests!

  • Norma Doiron

    Over my head on this one – will leave this in my accountant’s capable hands. Besides, it’s probably different here in Canada?? Great post as always!

    • Whatever country you’re in, Norma, the key is having an accountant with “capable hands” … as well as one who communicates effectively with you so he can do the best possible job for you. (No, they’re not mind readers … 😉

  • Great information, I always hate tax time. There are always so many fine lines with the rules.

    • Christy, there are indeed more and more regulations, which makes tax filings that much more difficult for the public to handle on its own.

  • Kelly

    The tax return going to someone else happens more often than people think. Alot of time it is because someone has stolen your social security number and are already filing taxes under our name to work here in the United States. I work in the credit industry and we help them work through all of this..

    • Kelly, what’s worse, in this case they even filed with a misspelled name, which is why it took so long for the IRS and this person to unravel it! There was actually a suggestion that he obtain a new SS number. Can you imagine the implications of that, for Social Security, Medicare, all banking, all credit cards, everything? Crazy!

  • Simona R.

    Now that I read this I will go ahead and pay the bill for my domain hosting this year. I was planning to do it in January, but I probably could use the deduction on this year’s taxes, since I did not buy any big office equipment. Thanks for the tips, especially for the one about the home office. Mine is a real home office, every bit of it.

    • As long as your home office qualifies as “exclusive use” per IRS definitions, Simona, this new ruling makes it an easier calculation. (And much less complicated in case you own your home; it used to affect depreciation.) As for hosting charges, moving such real expenses can effective.

  • Marilyn Arriaga

    Wow, thanks for this tax info. I needed to know much of it. I am preparing for taxes now. what a huge ordeal.

    • What’s good is that you still have 3+ weeks to implement a few of the suggestions in 2013. As you build your business, Marilyn, more and more of these issues will become second nature!

  • Michelle Edwards

    Thanks for all of the tips and reminders!

  • Do we not all love paying taxes, filling out tax declarations and the ensuing “discussions”? Each year I try to be on time (I am NEVER) handing in my papers and assume a positive attitude when paying my tax bill (“it will be put to such goooooood use”).

    I found the best tips in the comment section, Sharon: Mr. Tax Mann is not our enemy, he is our friend and he will show us ways to legally find write-offs. Cool!

    • It used to be easier to feel good about where the tax revenues were going, Barbara! Unfortunately, we don’t have much choice about paying them. All the more reason to educate ourselves so we’re paying only what the regulations require! 😉

  • Susan Schiller

    These are great tips that will save a lot of people money, Sharon – thank you! I’m going to click onto your link to the 2013 tax brackets right now 🙂

    • I hope the tips WILL save money for someone, Sue. As long as the article starts up a new dialog between client and accountant, or we do another run through our expenses to see if we missed something, it’s worthwhile!

  • Tereza

    Great info once again, Sharon!

  • Robin Pedrero

    Always such good advice here. Thank you Sharon.

  • Robin Strohmaier

    Sharon, you do always give such great advice. Thank you for bringing all these great tax tips at this time of year. Something to definitely put on the top of all of our lists to think about.