How to File Your Taxes with Side Income

Want to maximize your 2017 tax refund? Get organized now.

During the first week of the 2018 filing season, the IRS processed more than 18 million individual income tax returns—and issued more than $12.5 billion in refunds.

If you’re looking to get yours in hand (or just get the headache of filing out of the way), the first thing to do is get organized. Create folders on both your desk and your computer labeled “2018 Tax Season,” then…

Get your work forms together.

Start by collecting the tax forms from any company you worked for during the tax year. They should be W-2 forms if you worked as an employee or 1099 forms if you’re self-employed or a freelancer. (Note: Even if you consider yourself a freelancer, some companies will pay you as an employee—meaning they’ll withhold taxes from your paycheck and send you a W-2 form. If you’re a W-2 employee who did some freelance work on the side, you’ll likely have both.) At the latest, Form W-2 should have come to you via snail mail during the first week in February. Employers are required to send them to employees by Jan. 31. If you anticipate receiving Form 1099-MISC from a company, you can expect to see it in your mailbox by the end of February.

If you believe you should have received a specific form but didn’t, you can reach out to the company’s HR or billing department (whichever you invoice or handles payroll). When you receive each form, drop it into the folder on your desk. And if you have multiple business clients, be sure you got all of your 1099 forms from them. Each client should send one as long as they paid you at least $600 during the year and are considered a business entity. You’ll hear from the IRS if their record of what you were paid and your record of what you were paid don’t match up.

Download other documents relating to income, deductions, and insurance.

Bank and brokerage accounts should also issue you tax forms. For example, if you earned more than $10 in interest on a bank account or certificate of deposit, the institution will send you Form 1099-INT since it counts as taxable income. If you received dividends or capital gains over $10 from stocks or mutual funds, you should receive Form 1099-DIV. The applicable forms might be delivered to you online (you should get a notification from your financial institutions). Log into all of your providers’ websites (there should be a tab for “tax forms”), download your forms and drop them into the folder on your computer as well. Then, gather and download year-end forms on accounts on which you paid interest that’s deductible—specifically mortgage and student loan interest.

You’ll also need proof of health insurance. If you had it all year, you won’t be penalized with a fee. But if you weren’t covered for a month or more, you’ll likely owe the government some money (you may be able to elect to have the amount deducted from your potential refund). Note: The penalty for not having health insurance will no longer be in effect starting in 2019. The information you need should be sent to you in the mail as well, but you can also log into your insurance provider’s website to download the appropriate form.

Gather what you need to make the call on itemizing (or not).

Here’s a #MoneyRule for tax season: Don’t leave free money on the table. That’s why it’s important to make an informed decision this year about whether to itemize (which entails outlining each deduction separately) or take the standard deduction. For the 2017 tax year, the standard deduction is $6,350 for single taxpayers and married couples filing separately. It’s $12,700 for married couples filing jointly and $9,350 for heads of households.

If your deductions add up to more than the standard deduction, you’ll want to itemize. (It’s more work, but you also typically save money.) To itemize, you’ll again need to build a paper trail on. For example, you’ll want to pull together documentation for expenses such as charitable donations (everything over $250 requires a letter from the charity confirming you made the contribution), medical expenses (don’t forget about travel expenses, or parking fees, incurred to get medical care), and job-hunting expenses (these are allowable only if you’re looking for a job in the same line of work you’re now in and they exceed 2 percent of your adjusted gross income).

Other things to note: Did you buy any big-ticket items this year with a high state sales tax (like cars, furniture, technology)? If so, find the receipts, because you have a decision to make. If you are itemizing, you can choose to either deduct your state and local income taxes or the sales tax on your purchases—but not both. There’s an IRS Sales Tax Deduction Calculator to help you determine your total sales tax for the year. You can compare that number with your potential deduction for state and local income taxes to see which will get you a better refund. Drop all your records in your tax folders, and if it’s looking like you’ll have more total write-offs than the standard deduction, there’s a good chance you’ll be using these records when you file.

Build your business-expense paper trail.

Finally, one of the best things about being self-employed (or having a side gig) is that you can write off expenses related to your business. Say, for example, you’re a freelance writer—you can deduct things like the cost of reference books you used for work, advertising and marketing expenses (like the cost of upkeep for your website), or networking coffees. Just make sure to keep the receipts or records of purchase. If you have paper copies, hand-write a quick note on the receipt about why it should count as a tax write-off (who you were with and what you discussed, just in case you ever need it). Keep in mind that travel and entertainment expenses are looked at particularly close by the IRS. The agency watches closely to be sure those expenses are related to an actual money-making enterprise and not just a hobby you’re trying to pass off as one. If you’re not reporting a profit for at least three out of five years, Uncle Sam might come knocking at your door.

Let's block ads! (Why?)

Source : TaxAct Blog