On this episode of 2 Frugal Dudes, we’re talking about tips for tax season to help you maximize your tax return, whether you’re self-employed or working the 9-5.
Using an Accountant
Kevin wears a lot of hats: business owner, non-profit organizer, Podcaster extraordinaire– so it gets complicated. To simplify the task, Kevin pays an accountant to get him through tax season. The benefits of using an accountant include:
- Not worrying about annual changes – things change every tax season and it’s an accountant’s full-time job to stay up-to-date on these adjustments.
- Time management – it behooves small business owners to pay an accountant to process their tax documents. It’s also tax-deductible to do so.
- Stress reduction – if the idea of processing your taxes stresses you out, it’s worth paying someone else to file your taxes.
For those who only have one stream of taxable income, it often makes more sense to file your taxes using a program like TurboTax.
Standard Deduction vs. Itemization
Your standard deduction is an efficient way to reduce your taxable income and improve your refund. The standard deduction has drastically increased from what it used to be ($12,000 for personal and $24,000 for families at the time of recording), making it more viable for the standard consumer.
Itemization usually makes more sense than using the standard deduction when you operate multiple businesses. At this time, Kevin is still evaluating if he’s going to use the standard deduction or itemize.
If you find yourself in doubt, don’t use a generic tax preparer like HR Block. Work with a CPA who knows the ins and outs of the latest tax reform and has a rapport with the Internal Revenue Service. This is especially important if you worry about getting audited.
Sean is a fan of TurboTax, as his taxable income is a lot simpler than Kevin’s. He likes the simple approach and there’s usually a $20 discount code online.
Sean also uses Vanguard for his investments, which easily integrates with TurboTax to make the process even easier!
Taxation and Tax Refund
Most people work a W2 job, in which an employer withholds tax money for the government. At the end of the year, you figure out how much you should have paid versus how much you paid. If you paid more than you owe, you get a tax refund. You essentially gave the government an interest-free loan for that time.
If you find yourself owing or receiving a significant refund, you need to take another look at your deductions on your W4. Adjust your contributions to try and get your tax withholdings to have a limited amount owing and a limited amount on your return. Why? As nice as the lump sum once a year in the form of a tax refund is, you’re probably better off controlling your money rather than leaving it in the hands of the government. Just in case.
If you discover while going through your tax filing process that you owe back taxes to the IRS, don’t stress about it. The money you held in your hand could be used to invest in retirement accounts and other endeavors throughout the year.
Putting your money in retirement accounts is another way to reduce your tax burden at the end of the year. You can make more money gaining interest there than you will having internal revenue hang onto your cash.
However, it’s important to note that:
- You will have to pay it back, so plan ahead
- If you owe over $10,000 you could be hit with a penalty
There are financial benefits to owing tax dollars rather than receiving a return; you just have to use the money wisely in the meantime.
Know Your Deductions and Credits
It’s important to know the difference between deductions and credits when trying to reduce your tax burden. For example, knowing your childcare tax deduction can be a huge relief when filing taxes.
Tax deductions are money that you take away from your taxable income to reduce what the IRS can tax.
Tax credits are applied to the return to reduce your amount owing.
Where Our Money Went
Kevin’s money went toward crowns for his middle son’s teeth. The only way to reduce the cost is to reduce pain management, but frugality only goes so far!
Sean also had to invest in his son’s mouth after an overenthusiastic leap ended up in a fall and resulted in a trip to the emergency room. Both boys are doing fine!
Show Links & Related Episodes
Disclaimer: Kevin and Sean are not professional financial advisors. Do not take any advice they give without first speaking with a professional and performing your own due diligence.