Did my taxes yesterday - holy shit, this may be the first time EVER we filed before October. Yay! (And also boo, because, taxes.)
It occurred to me while getting my ducks in a row, that I might try something different and offer a few tips I have picked up in my many years of crunching numbers.
(For the record, I refuse to think of myself as an accounting professional. I still believe it’s temporary. BECAUSE IT IS. Also, I am not a CPA and do not offer tax advice. Merely organizational suggestions.)
First off, if you don’t use accounting software such as Quicken or Quickbooks, Intuit offers a great free tool called Mint. You can register at Mint.com and enter your login information for any accounts you hold - banks, credit cards, loans, etc. Mint uses the same security (ie. encryption) the banks use so no need to worry; they can’t access your money, just your information. Download the app for your phone too. Mint updates your accounts in real time, so you can check your overall financial situation at any time and always know where you stand.
(Not always pleasant, but definitely useful. It’s amazing how quickly things can get away from you, especially when you don’t pay with cash - and who the hell uses cash any more?).
Mint will send you alerts, letting you know when bills are due, if you incur bank fees, etc. You can also set goals, and keep track of your progress. If you are falling behind, Mint will suggest ways to get back on track.
When you first start out, it’s useful to login frequently and check that your transactions are being assigned to the correct category (such as meals and entertainment, fuel, website expense, etc). Most of us spend our money at the same places, so after the first month, it pretty much takes care of itself. Every time you pay at Chevron, for example, Mint will categorize it as fuel. But it’s a good idea to check periodically and reassign anything that’s lumped into “uncategorized expenses.”
You can also tag which categories are tax-related. When it comes time to do your taxes, login on your computer and run simple”trends” reports to find out how much you spent on tax-related (deductible) expense categories for the year. It’s a good idea to check the uncategorized expenses again (for the year) before you do this, to make sure you don’t miss the big stuff by accident. The reports are not as detailed or in-depth as you get with accounting software, but they can still give you the sums you need to file your taxes. Saves a lot of time combing through bank statements or adding up receipts.
(It is also useful for non-deductible expenses if, like me, you are often left wondering where all your money went: Wait, I spent how much at Target???)
Speaking of which, save those receipts! Especially if you are an independent contractor (as it seems almost everyone in LA is) filing as self-employed with a Schedule C to itemize your deductions.
Did I just lose you? It’s not as complicated as it sounds. Most people in this country are employed by a company and paid through payroll, with taxes withheld from each paycheck. Those people will receive a single W2 (that piece of paper that shows how much you earned and how much you paid in taxes) at the end of the year, which makes filing your taxes pretty simple. You can choose to take the standardized deduction, which varies depending on your income and the size of your family, or you can choose to itemize (list out) your actual deductions. For payroll employees with a single W2, it’s definitely easier and often more beneficial to take the standardized deduction. If you are filing your own taxes using a program like TurboTax, you can try it both ways and see which one saves you more money.
However, if you are an independent contractor receiving multiple 1099s and subject to self-employment tax (one of the many taxes I totally don’t get - What’s that? You don’t have any benefits or job security? Or paid vacation? Or sick days? Or retirement? Well, in that case, you better pay us an extra 15% of your income, you lucky bastard!), you will want to itemize your deductions. In the event that you get audited, the IRS will not accept bank or credit card statements as proof of payment, so keep all your receipts just to be safe. I use an accordion file with a divider for each month. I keep it in a drawer and try to stick all my receipts in the correct month at the end of each week. Or even better, each day. You can get fancy and separate them by expense category. Personally, I tried this once and found that because it required one extra step (thinking), I didn’t do it. The monthly method will require extra work should you ever get audited, but not nearly as much work as my previous filing system, which consisted of a drawer.
(My previous filing method left something to be desired… Wait, is that a baby in there?)
There are lots of free financial tools available online and in the app store these days, from loan calculators and credit card comparisons, to free credit scores. If you’re interested in finding out more about any of this stuff, Bankrate.com is a great resource for all things financial.
Good luck, and may the odds be ever in your favor.
(Yep, finished it.)