It's tax time of year again and arming yourself with a little knowledge first- whether you go to an accountant or file your own taxes- can save you a lot of money in the short and long run. First of all I will help you determine if you need an accountant and what kind to look for- paying a preparer for most simple returns is unnecessary. Then I will go into some specifics for the most common issues and deductions basically trying to outline the things that are worth putting your time and money into to save you money. Who knows, if you take it seriously enough your instructables projects could even be part of a business that will give you valuable write-offs against your other income (you do have other income, right?)
My goal here isn't to give you everything you need to file your own taxes, that would be absurd to try and do in an Instructable. And do not construe this as advice- I take no responsibility for anyone getting into trouble by getting in over their heads with a little information, basically like all the people who say in their Instructables if you cut your finger off it's not my fault... well you get the idea. What I am trying to do here is to give you enough information that you will be able to ask the right questions when you see your tax accountant so that they can save you the most money on your taxes. Unlike most of my colleagues I'm a big fan of educating my clients because I feel that the people who know more about how taxes affect their own situations are more likely to ask smart questions when I see them allowing me to save them money.
So you might be asking who is this crazy woman and why should I listen to her? I've been a tax specialist for the last six years and I figured I would share some of my expertise with the Instructables crowd because I've so been enjoying the projects I've been making on this site and the great ideas I've discovered, so this is my chance to give back. I'm an Enrolled Agent- meaning that I am enrolled to practice tax law in all 50 states. I can represent clients before the IRS in essentially the same manner as an attorney in addition to the tax preparation and advising activities that I do. I got into this line of work through a round about way. I got really into drag racing and I had seven cars on the streets of SF and I needed to find somewhere to keep them, so I got into owning investment real estate. Then I started having some real tough tax questions about the real estate that nobody could answer for me, so I took a tax class just so I could learn enough to talk to my accountant and research laws for my own curiosity, but did so well the company I took it with begged me to work for them, and it turned out I enjoyed doing it for work. I spent the next five years working for other companies preparing returns for high net worth individuals and small businesses, and then last year I started my own firm so I could focus on the types of tax work I really enjoy doing.
I specialize in very complex tax issues, it is why I got into the business in the first place and really is what interests me. Most potential clients that approach me are far too simple for what I care to work with and I wind up referring them to colleagues or telling them to DIY. I enjoy solving problems- multiple years of unpaid taxes that need to be filed so a person can remove the overwhelming stress of the government breathing down their neck, business entity formation and sales, real estate investment and entertainment industry issues are always fun. Basically I like doing the work that few others in my field enjoy, and that is really all I want to work with if I have my way. But I hope you benefit from the information in this Instructable, and if you run across unusual issues either in your own life or through a friend, feel free to send them my way.
One word of advice about working with an accountant: don't just hand your information over to someone and then trust them on blind faith that it is prepared correctly, and never sign a tax return if you don't understand what it says inside. There are a lot of scam artists out there that will get you big returns by putting a bunch of bogus numbers in your tax return, everything seems great until sooner or later the IRS stumbles across that dishonest firms and audits all their clients- that means you. Suddenly you will find out that it is you- not your accountant- that is on the line for the money owed to the government. I would assume that most of the people out there preparing returns are honest, but if someone doesn't seem on the up and up, or is rushing you through signing, go elsewhere. Lying on a tax return just isn't worth the stress and worry that comes along with it- being honest and working within the legitimate loopholes for saving money on taxes always works out for the best for the preparer and the client in the long run.
I will end this intro page with my favorite quote about taxes:
Over and over again courts have said that there is nothing sinister in arranging one's affairs to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands.
- Judge Learned Hand (1872-1961)
My goal here isn't to give you everything you need to file your own taxes, that would be absurd to try and do in an Instructable. And do not construe this as advice- I take no responsibility for anyone getting into trouble by getting in over their heads with a little information, basically like all the people who say in their Instructables if you cut your finger off it's not my fault... well you get the idea. What I am trying to do here is to give you enough information that you will be able to ask the right questions when you see your tax accountant so that they can save you the most money on your taxes. Unlike most of my colleagues I'm a big fan of educating my clients because I feel that the people who know more about how taxes affect their own situations are more likely to ask smart questions when I see them allowing me to save them money.
So you might be asking who is this crazy woman and why should I listen to her? I've been a tax specialist for the last six years and I figured I would share some of my expertise with the Instructables crowd because I've so been enjoying the projects I've been making on this site and the great ideas I've discovered, so this is my chance to give back. I'm an Enrolled Agent- meaning that I am enrolled to practice tax law in all 50 states. I can represent clients before the IRS in essentially the same manner as an attorney in addition to the tax preparation and advising activities that I do. I got into this line of work through a round about way. I got really into drag racing and I had seven cars on the streets of SF and I needed to find somewhere to keep them, so I got into owning investment real estate. Then I started having some real tough tax questions about the real estate that nobody could answer for me, so I took a tax class just so I could learn enough to talk to my accountant and research laws for my own curiosity, but did so well the company I took it with begged me to work for them, and it turned out I enjoyed doing it for work. I spent the next five years working for other companies preparing returns for high net worth individuals and small businesses, and then last year I started my own firm so I could focus on the types of tax work I really enjoy doing.
I specialize in very complex tax issues, it is why I got into the business in the first place and really is what interests me. Most potential clients that approach me are far too simple for what I care to work with and I wind up referring them to colleagues or telling them to DIY. I enjoy solving problems- multiple years of unpaid taxes that need to be filed so a person can remove the overwhelming stress of the government breathing down their neck, business entity formation and sales, real estate investment and entertainment industry issues are always fun. Basically I like doing the work that few others in my field enjoy, and that is really all I want to work with if I have my way. But I hope you benefit from the information in this Instructable, and if you run across unusual issues either in your own life or through a friend, feel free to send them my way.
One word of advice about working with an accountant: don't just hand your information over to someone and then trust them on blind faith that it is prepared correctly, and never sign a tax return if you don't understand what it says inside. There are a lot of scam artists out there that will get you big returns by putting a bunch of bogus numbers in your tax return, everything seems great until sooner or later the IRS stumbles across that dishonest firms and audits all their clients- that means you. Suddenly you will find out that it is you- not your accountant- that is on the line for the money owed to the government. I would assume that most of the people out there preparing returns are honest, but if someone doesn't seem on the up and up, or is rushing you through signing, go elsewhere. Lying on a tax return just isn't worth the stress and worry that comes along with it- being honest and working within the legitimate loopholes for saving money on taxes always works out for the best for the preparer and the client in the long run.
I will end this intro page with my favorite quote about taxes:
Over and over again courts have said that there is nothing sinister in arranging one's affairs to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands.
- Judge Learned Hand (1872-1961)
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Signing UpStep 1: How Complicated Are You?
The first step in saving money on your tax return is figuring out how complicated your tax issues are. If you are a single person who works a regular job for a paycheck and you don't have much in the way of assets you probably are best off filing your own taxes with tax filing software. Certain itemized deductions are easy to report on your own let's say you own a house with a beefy mortgage, have some property taxes, state taxes you paid in, etc. -real easy things to DIY a tax return without getting yourself into trouble. However, if you have super high medical expenses, or have a job where you have a lot of unreimbursed expenses (salespeople, police, firefighters, pilots, and construction workers for example) then things get more complicated and seeing a good accountant is probably worth spending your money.
If you have kids then things get a whole lot more complicated. Depending on how much you earn there are many credits that can help out parents and some will actually give you more money back as a refund than you paid in. Yes it is possible to get a tax refund even if you paid zero taxes in under certain circumstances. Most accountants are fully capable in getting big refunds back using these credits and the franchised firms are built around doing this kind of work. The rules for these credits are complicated and you might be well off to hire someone to prepare your return if you have children, just ask about fees first because most preparers charge per form and can wind up become unconscionably expensive.
If you are an independent contractor (meaning you get a form 1099 at the end of the year from your employer instead of a W-2) your life is a lot more complicated and you really should find a good accountant because they will be worth their fees for you. Independent contractors are essentially business owners and therefore have many deductions they can take to offset their tax burden. However the flipside of that boon is that you are responsible for your own Social Security and Medicare taxes that normally your employer pays half of. This is known as the dreaded self-employment tax, and it is a flat tax on your net earnings of approximately 13.5%. Because this is based on net earnings you can beat it down by your expenses, but you probably will owe money still- if this is your situation see step 4 where I go into business deductions in detail. Here are a bunch of calculators that can help you figure out your income and SE taxes: Tax Calculators
Then we get into the more complicated issues- if you own rental real estate, dabble in day trading, get royalties, have a farm, earn enough to get into Alternative Minimum Tax territory, make money off your instructables.... you get the idea. Then you need a lot more specific info and should find yourself a good tax accountant because they will more than make up for what they charge you in legitimate tax savings and audit risk management.
If you have kids then things get a whole lot more complicated. Depending on how much you earn there are many credits that can help out parents and some will actually give you more money back as a refund than you paid in. Yes it is possible to get a tax refund even if you paid zero taxes in under certain circumstances. Most accountants are fully capable in getting big refunds back using these credits and the franchised firms are built around doing this kind of work. The rules for these credits are complicated and you might be well off to hire someone to prepare your return if you have children, just ask about fees first because most preparers charge per form and can wind up become unconscionably expensive.
If you are an independent contractor (meaning you get a form 1099 at the end of the year from your employer instead of a W-2) your life is a lot more complicated and you really should find a good accountant because they will be worth their fees for you. Independent contractors are essentially business owners and therefore have many deductions they can take to offset their tax burden. However the flipside of that boon is that you are responsible for your own Social Security and Medicare taxes that normally your employer pays half of. This is known as the dreaded self-employment tax, and it is a flat tax on your net earnings of approximately 13.5%. Because this is based on net earnings you can beat it down by your expenses, but you probably will owe money still- if this is your situation see step 4 where I go into business deductions in detail. Here are a bunch of calculators that can help you figure out your income and SE taxes: Tax Calculators
Then we get into the more complicated issues- if you own rental real estate, dabble in day trading, get royalties, have a farm, earn enough to get into Alternative Minimum Tax territory, make money off your instructables.... you get the idea. Then you need a lot more specific info and should find yourself a good tax accountant because they will more than make up for what they charge you in legitimate tax savings and audit risk management.
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This isn't quite as simple of an issue as it appears on the surface. Deductions get you back a percentage of what you pay in- the same percentage as your tax rate. In your example, this person who makes 18k a year and donates $1800 would probably be in a 15% tax bracket (hard to say exactly without knowing more details- but that would be my guess) and that would translate to a tax reduction of $270. But that would be beneficial for them only if they itemize, and at such a low income bracket I would doubt itemizing would be useful.
For 2008 the Standard Deduction everyone automatically gets is $5450 and if this person owns a house they could add up to another $500 to that amount for property taxes they paid. That means this person would have to come up with other deductions of more than $3850 (w/o owning a house) in order to get the first dollar of benefit from itemizing, and even though they could potentially get a tax benefit from the donation, without itemizing it doesn't help them.
Basically unless they have a big mortgage, most people get no benefit from itemizing, especially someone in a low tax bracket like your example. But they still get the goodwill and spiritual benefits from donating money. There are fancier ways that this person could get tax benefits from the money they donate- I could easily think of a few strategies.
One possibility would be to use the money to buy assets, and either lend them for church use, or hold them for several years, then donate all the assets at once and get a larger deduction. If this person invested the money on the church's benefit- say buying stocks in a beaten down market like we have today and the assets appreciated, then they could donate the appreciated assets in a few years and get a full tax benefit from the donation to offset the sale of the appreciated assets (within limits).
If you want to learn more about determining if your particular church is a tax-deductable entity I have some FAQ's about that here: Charitable Deduction FAQ From your question it sounded like you could also be asking about forming charities which is a whole different issue but one I do have some experience with. Hope this has answered your question and if you need more clarification feel free to ask.
Cheers, Crystal