Some Tips On Doing Your Own Taxes

Doing Your Own Taxes may appear daunting, in a lot of cases however it is really not that difficult. In order to be successful with it though, you will need an accurate record of your expenses and incomes, and will also need to become familiar with the available tax codes. If you have questions for a tax professional on this topic just ask your question ateHow.com.

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Instructions

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You should generally stay organize and keep a record of your incomes and expenses throughout the entire year. You will need a dedicated binder or file system to keep your tax related files/documents together.

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You should know the type of deductions you can make from your total income. You will need to itemize your deductions or take a standard deduction. Using some calculations or a tax software can help you to determine which is better for you. If your medical costs are low, and you are not paying a lot of mortgage interests or taxes on real estate, it may be better for you to take a standard deduction with your filings.

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You will also need to become familiar with the tax forms. A lot of households will generally file the Form 1040. You can provide the details of your incomes online or may fill them in on the W-2s tax forms. If you had earned over $400 in self-employed incomes through freelancing etc, you will need to fill the Schedule C and SE forms and will need to deduct any business related expense against your self-employed income.

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You should make use of some tax file and software online for accuracy and simplicity. You can make use of free software like TaxAct, TurboTax etc. Some banks (USAA etc) may provide some eFile services for free too.

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You may key in your deductions, income, personal information and tax credits into a tax software/application or you can fill them in on some paper tax forms. You will need to include your W2 forms with your paper forms, or you can fill in your information when you are filing or generally doing your own taxes.

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You can file your tax returns and then provide your bank details for direct withdrawal/deposit or could mail in your check. When you file your tax on the web, you should get an email acknowledgement, returns that you mailed will generally not get an acknowledgement however. If you get a refund or your payment is withdrawn from your specified bank account, you will then know that you have done what you should do right.

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Tips And Warnings

For taxes that are complicated and other issues you should contact an accountant.

You should also avoid getting any red flags with your tax filings (some tax software can alert you on this), in order to reduce the likelihood of your refund being audited by the IRS.

Self Employment Tax Issues

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People often get so swept up in the first exciting year of starting their own business, going freelance or contracting that they forget some of the more mundane, but nevertheless important changes that self-employment will bring. Along with a renewed passion for your career and control over your own destiny and potentially far greater financial rewards, there are also a number of downsides and financial hurdles to setting out on your own.

Self Employment Tax will be one of those hurdles. Self-Employment Tax is a tax that you were never required to pay as an employee, but essentially it is the self-employment version of the FICA (Federal Insurance Contributions Act) tax that is used to pay for social security and medicare and it comes out of your net earnings from your self employment. Back when you were employed by a company you probably never gave a moment’s thought to this payment because your employer would have been paying half of it, approximately 7.65% each. But now you are classified as self-employed, whether you are a sole proprietor or an independent contractor, you have to pay the full 15.3% levy yourself on your tax return. As long as you earn over $433 per annum, you must pay 15.3%. And once you reach $106,800 you then pay 2.9% for every dollar after that. The tax itself is split into two parts. Social Security receive 12.4% and Medicare receive 2.9%.

So how do you know if you need to pay it? Basically, if you’re self-employed in any way, you pay the tax. It is levied on net earnings from your business. Whether you file a Schedule C (Profit or Loss from Business), a Schedule F or a Schedule E with income from a partnership then you’re required to file a Schedule SE and pay the tax. However, it relates to income from your job and earnings, not from investments so investment income is not subject to Self-Employment Tax. Rents and royalties, dividends, interest and capital gains are therefore not taxed.

The next thing you need to consider is that when you were employed your employer would take care of paying this. Now the responsibility lies with you. Unfortunately going freelance means more paperwork and more responsibility. You need to calculate your Self-Employment tax on Schedule SE and enter this figure into the “Other Taxes” section of the 1040 form. This is so the IRS can differentiate between income tax and the SE tax. You will need to make estimates quarterly on your tax obligation in April June, September and January and if you don’t pay or they aren’t enough you could face penalties and interest.

There are, however, some ways to reduce Self – Employment tax. Firstly, you can charge your own business a rental charge for using your property. This income that you get from rent is not part of your self-employment and therefore is free from Self-Employment tax. Secondly, when calculating Self Employment tax you are permitted to reduce your income by 7.65% before you have to apply the tax rate. So if your net self-employed income is $100,ooo this is what you write on your 1040 for income tax. But on your Schedule SE the taxable amount is $100,000 less $7650 which comes to 92,350. This saves paying 15.3% tax on $7650, making a saving of $1170.

Alex Simmonds is a journalist and copywriter living in the UK. He can currently be found writing a daily blog on contracting and  home-working for The Bedouin Group., a contractor portal.

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