Making Your Taxes Easier One Step At A Time
Ok folks, it’s tax time, and that means it’s also time to starting thinking about next year’s taxes. I know that the tax code is needlessly complex, riddled with loopholes for special interests that serve no purpose, and that thinking about doing your taxes evokes about the same level of happiness as getting shot, but it doesn’t have to be this way.
This year, it might be too late to do anything about your current tax situation (except for stashing away some extra money in an IRA before April 15), but if you start now, next year’s taxes will be a breeze. This post is a quick, practical guide to making tax season less stressful, and in some cases, more lucrative. Doing your taxes isn’t fun, but at least it can be less painful, if you follow these tips and suggestions.
Just remember that none of the tips and tricks here should be construed as actual tax advice, since everyone’s situation is different. Definitely consult your tax professional before jumping in head first to a strategy you may not fully understand.
Stuff Everyone Can Do:
Maximize your tax-advantaged contributions
First things first, max out your 401(k), 403(b), or TSP account before putting money into a traditional or Roth IRA. Your employer will probably match some of it, it decreases your income for tax purposes, and since the investments grow tax-deferred, you won’t even have to bother with messy 1099-DIV or 1099-INT tax forms. Hooray!
Next, put some money in an IRA. If you make too much money to put in a traditional IRA tax-deferred, consider a Roth or even using a backdoor conversion if you make too much money for the Roth. Not sure what this paragraph means? Talk with a financial advisor since backdoor conversions can be tricky (and some politicians want to get rid of them…isn’t the fickle nature of the US tax code awesome?)
Create an i401(k) for contracting work
So let’s say you don’t have a 401(k) option because you’re a contractor. That’s ok, you can still put money away in a SEP IRA, Simple IRA, or i401(k) depending on your specific situation. You just have to create a business entity for your work and set it up through that business. Then you too can benefit from tax-advantaged accounts and not have to put all your money in taxable investment vehicles.
Setting up a separate business doesn’t necessarily make taxes easier, but it will keep you thinking about them more consciously throughout the year, so you’ll probably have a better idea of what your taxes will look like when the tax man cometh in 2017.
Stuff Business Owners Can Do:
Keep your receipts in one place
If you run a large business, you probably already have your accounting system ready to go. But what if you just opened a small business because you’re a contractor and want to take advantage of some of the stuff mentioned in the above paragraph? Google Drive (and many other online storage apps) allows you to take pictures of receipts on your phone and upload them as scanned documents. Boom, you suddenly put all of your deductible expenses in one place, so you can throw those physical documents away and keep a tidy office. And when tax season comes, you don’t have a shoebox full of receipts. Instead, you have a tidy computer folder full of them, making it easier to check through them as you go.
I won’t go into all the joys and perils of creating a small business for contracting work (if you’re a W-2 employee, unfortunately this section won’t apply to you), but basically you’ll have the option of telling the government about all kinds of stuff you do. This could include all your expenses, what your business gives to charity, how much you spend on office supplies, and more. In exchange for giving up buckets of information, you’ll get a pretty great deal on your taxes.
A lot of people complain about taxes in the US, but there’s a reason the US is the #1 tax haven in the world. Most Americans just don’t have businesses or enough money in the stock market for you to benefit from what the rest of the world already knows to be true: America charges very little tax on the whole.
Stuff Investors Can Do:
Stop trading so much:
Do you invest and make dozens of trades throughout the year? Well each one of those is a taxable event…yuck. And considering all the commissions you pay for that pleasure, it’s probably a good idea to just diversify, sit back with a Pina Colada in your hand, and let your portfolio do it’s thing. Then you’ll have fewer tax forms to deal with next year too!
Some politicians want to tax stock trades as well, which would almost certainly cut away at the incentive to trade. It’s hard to say whether this policy is good for investors (will it stop them from trading their savings away?) or not (will it make the markets less efficient?). There are a lot of intelligent arguments on both sides, and that’s beyond the scope of this post. Regardless, if we do impose taxes on trades and you trade frequently, expect a much bigger tax headache in the years to come.
Stuff Homeowners Can Do:
Rent out a room:
Now you get more income, yay! Also you can deduct expenses for stuff that goes wrong in your house (within reason). There’s some mortgage expenses that might be weird for you if you make your home an LLC before you rent it out, so you probably want to consult with your financial advisor or a lawyer before going all in with this strategy. Note that you don’t have to incorporate to rent out a room if you don’t want to and still get many (if not all) of the benefits.
This strategy doesn’t really simplify your taxes appreciably, but it will help you get a deeper sense of the tax code and all of the things that are wrong with it. Rental income is considered “passive income” while stocks have “dividends and capital gains” and the money you get from working is called “regular income.” All of these are taxed differently in some way or another. See how bizarre the tax code is?
So Now What?
Are any of these suggestions right for you? I don’t know. Don’t just go do something because you read it on a blog. The likelihood that you’ll pursue any or all of these strategies to make your taxes less complicated (or lower) is a personal decision, and not without consequence. But this short list is a good place to start thinking about your tax situation for next year. In 2017, maybe I’ll even come out with another list like this one with even more food for thought. Until then, keep calm, and carry on doing your taxes.
Nathan is the Chief Financial Advisor at Monte Largo Financial