Working on your taxes? This year, we’ve got a surprise for you: a list of tax saving tips for the self-employed AND another list for salaried employees. Pick whichever one suits you best and read on. Note that some of the tips can help you save on your taxes right now, whereas others will help you do better considering costs and deductions for next year.
List 1: Tax saving tips for the self-employed
1. Avoid penalties on your tax return
Just started your small business? Make sure you avoid penalties by paying at least:
A) 90% of what you expect to owe for 2015
OR
B) 100% of what you owed in 2014
You are expected to pay estimated quarterly taxes, but if you meet the above criteria, you can’t be penalized for under-paying.
2. Minimize your potential income
You can wait to invoice your customers for December until after January 1st, which means you won’t pay taxes on that income. However, keep in mind that you will stay have to pay those taxes next year – you are just putting them off for now.
3. Pay yourself a salary
Is your business an S-corporation? You can pay yourself an income-taxed salary. But you can also pay lower tax rates for additional profits that you withdraw as “dividends.” This lets you pay your income tax but gives your business access to a greater overall amount of cash.
4. Maximize your deductible business expenses
You can maximize the business expense deductible by pre-paying for items you plan to buy in the first quarter of next year. This includes office equipment, advertising expenses and more. By pre-paying for these items, you’ll be deducting them from this year’s profits rather than next year’s.
5. Maximize your deductible home expenses
Do you itemize deductions on your personal tax return? You can also prepay your mortgage for January and deduct that extra month of interest. Other personal expenses you might consider prepaying before January are property taxes, medical costs, and childcare.
6. Max out your retirement accounts
There are special types of retirement accounts that offer advantages to small business owners. These include SEPs (Simplified Employee Pensions), solo 401(k)s and SIMPLE IRAs. These special accounts typically mean you can shelter a larger amount of your income from taxes.
7. Evaluate your taxable portfolio
Be careful about holding onto positions that aren’t likely to return to profitability. These become a tax liability and you may be better off selling them to offset gains. You can even use an additional $3,000 of losses to offset tax due on your ordinary income.
8. Carry over losses from previous years
Speaking of evaluating your portfolio, did you know you can carry over losses from previous years at the rate of $3,000 per year? This means you should keep track of your previous losses – you can continue to carry them forward until they are offset completely.
9. Consider gifting
If your estate has grown enough that it is eligible to be taxed (>5.43 million per person), you might want to consider gifting. You can gift up to $14,000 per person tax free, or 28,000 per person if you’re a married couple filing jointly. This lets you provide for your heirs and reduce your overall estate so that it’s no longer taxable.
10. Donate assets
Donating your assets directly to charity is often more effective than selling the assets, and then donating the money to charity. When you sell an appreciated asset, you will have to pay taxes on it before you can give the remainder of the money away. Many charities will accept stocks or other assets, and you can give more if the asset isn’t taxed first.
List 2: Tax saving tips for salaried employees
1. Use pre-tax dollars to pay your childcare bills
Using pre-tax dollars to pay childcare bills can save you a big chunk of the overall cost. Many employers offer dependent care assistance plans, so be sure to check if yours does. These plans let you avoid income tax on childcare up to $5,000.
2. Use job-hunting expenses as a deduction
Were you unemployed last year? If you searched for a position in the same line of work, you can treat expenses you incurred from your job-hunt as itemized deductions. These expenses could include the cost of traveling for an interview, food, lodging, etc. If the expenses exceeded 2% of your adjusted gross income, they are deductible, so make sure to keep your receipts.
3. Use moving expenses as a deduction
You can deduct moving costs from your taxes even if you don’t itemize expenses. You just need to have moved for a new job that is at least 50 miles farther from your old home than your old job was. The costs of relocating (moving yourself and your belongings, including gas expenses if you use your own vehicle) are a potential deduction.
4. Get the most out of your 401k
Since you can invest money in your 401k without paying income tax on it, it can grow tax free. This means you’ll be investing a larger chunk of money than you would otherwise – which means better gains in the long run.
5. Deduct costs from refinancing your mortgage
If you refinanced your home last year it’s definitely something to include on your deductions. You may be able to deduct some of the costs associate with those loans. Haven’t refinanced your home? Since interest rates are low right, you may be considering it this year.
6. Deduct interest on student loans
Hefty student loans have become more and more common as college tuition rises. But did you know there’s a special deduction for interest on student loans? This deduction can reduce your taxable income by up to $2,500.
7. Deduct interest on your mortgage
Do you own a home? Interest you pay on your mortgage can be deducted from your taxes. If you’re married and filing jointly, the amount you can deduct grows.
8. Deduct state sales tax
Although most of the time, people pay state sales tax in a fixed amount, you may find it helpful to itemize these deductions and claim local sales tax. Don’t forget you’ll need your receipts – you can use apps like Mint to keep track of them.
9. Defer income
Sometimes it’s helpful to defer income, and correspondingly, defer paying taxes on it. “If you’re due a year-end bonus,” says Jeff Gonzalez, a CPA and CFO at Electric Entertainment, “see if your employer is willing to defer that payment into next year, rather than paying it this year. The more income you can push into next year, the less tax you’ll have to pay this year.” This is a tip to be careful with though. It can be helpful if to reduce your taxes this year, but will lead to higher taxes in the upcoming year.
10. Make charitable donations
Donating to charity is not only a great way to help others, it’s also a tax deduction. You can use apps like ItsDeductible to record donations of clothing, electronics, books etc. and estimates on their value. Keep in mind that if you donate something that’s worth more than $250, you will need a receipt for it. There are also limits to donations that exceed 20% of your income.
There’s one final tip we’d like to provide you: using an all-in-one accounting solution. ZipBooks is free accounting software that lets you consolidate your records and spreadsheets into one place. It can help you get organized for the upcoming tax season, and simplifies many small business activities like sending invoices, accepting credit cards without steep fees, or even receiving financing invoices that are yet to be paid.
ZipBooks is free cloud-based accounting for freelancers and small businesses. Here is a (partial) list of its best features:
- In-app live chat support
- Send invoices and estimates via email or download as a PDF
- Credit card processing with form embedded right in the invoice
- Invoice history that tracks customer views, partial payments, etc.
- iPhone app with receipt image capture
- Bank integration
- Tutorial videos / knowledge-base
Be sure to explore ZipBooks, and let us know your favorite tools and tips when it comes to managing your personal and business finances.
