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Audio Tax Man and Ms Entrepreneur
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.