It’s “officially” tax season—the IRS has already started accepting returns for the 2014 tax year—so there is no time like the present to get your report ready for Uncle Sam. Ideally, freelance professionals should plan and think about their tax situation all year long. However, if taxes have not been on your radar until recently, you may find it helpful to take note of the following tips to make tax season as pain-free as possible.
1. Expect your tax refund to be delayed
Right out of the gate this year, the IRS is telling taxpayers that they will likely wait at least an additional week for their tax refunds. This is due to budget cutbacks in overtime and temporary staff hours which, according to the IRS commissioner, will also reduce taxpayers’ ability to get assistance by calling the agency.
Given these anticipated delays, the best course of action is to file your taxes now, and if you need help, consult a qualified tax professional to assist you in navigating the new tax laws. Taking a proactive approach to getting your taxes done will ensure that you don’t pay more tax than you legally have to.
2. Prepare for additional paperwork due to the Affordable Care Act
Although the news media and politicians have been talking about the impact of the Affordable Care Act on taxpayers for a couple of years, this tax season is when the rubber hits the road for the average individual taxpayer. Everyone is required to report their healthcare status this tax season on Form 1040 (the individual tax return) and there are several new forms that you may be required to complete related to your health insurance coverage.
Of these new forms, Form 1095 is of particular importance because it states the payments you have made for your health insurance, and it will be used to determine if you qualify for the Premium Tax Credit (PTC), or if you owe money due to overpayments of the PTC (reported on Form 8962). If you receive Form 1095-A, 1095-B, or 1095-C in the mail, be sure to keep it with your tax documents so you will be prepared to report this information on your tax return.
Keep in mind that if you still don’t have health insurance, this is the year that you will be required to pay the fines imposed by the Affordable Care Act. The amount of the tax levied on you will depend on your income, and how many people are in your household. If you are paying the penalty this year, you may want to consider how you will handle your health insurance over the next couple of years as well, because the penalty will increase progressively through 2016.
3. Consolidate your information prior to filing
While there is no question that filing your taxes sooner rather than later is advantageous, it is also important to make sure you have everything you need to file a complete and accurate tax return before you get started. If you piled all of your receipts and other pertinent papers in the proverbial shoebox throughout the year, it’s time to sort through them and make sure you have the documentation you need to provide all required information and substantiate any potential deductions.
If you are having your return prepared by a tax professional, you may pay a little less if you have your information organized and consolidated before they begin working on your behalf, since their time won’t be spent digging for information.
4. Don’t claim what you can’t corroborate
While this tip may seem like common sense, a surprising number of individuals don’t take it to heart. Simply put, don’t be tempted to claim deductions for expenses that you do not have proper documentation for. Lost a receipt for a fancy client dinner? Unless you can obtain a duplicate copy of the actual receipt from the establishment at which you dined, you are better off cutting your losses rather than making an unsubstantiated tax deduction. In general, a credit card statement alone is not enough to satisfy the “burden of proof” imposed on taxpayers by the IRS. For most expenses, including those for travel, entertainment, gifts, and auto expenses, you need detailed records of the activities along with original receipts.
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5. Put personal security first
While filing your taxes electronically is faster, more convenient, and usually more secure than filing with paper forms, if you choose this option it is still important to keep your personal security in mind. If you are filing your own taxes online, be sure to keep your login credentials private. If you are having a tax professional file on your behalf, be sure they are following appropriate security protocols in their practice. In addition, once your return is done, securely store your supporting documents for the required period of time, and dispose of any sensitive documents you no longer need by shredding them before they hit the recycling bin.
By all accounts, this tax season may be one of the most challenging we have seen in several years. The combination of IRS delays, new tax laws, and the usual confusion and questions that arise when interpreting the tax code can result in serious frustration — and costly errors. Freelance professionals often have an added layer of complexity when it comes to filing their personal tax returns, depending on how their businesses are structured. If you are considering getting some help from a tax expert, now is the time to reach out and get the assistance you need before the peak of tax season is here.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for consultants across the country. His website, www.cpaforfreelancers.com, has a resource section with how-to articles and information for freelancers.