2008 was a tough year on your wallet every which way, so the last thing you want to do is pay more than absolutely necessary on your income tax return.
Whether you're a freelancer, side business owner, or regular old W-2er, check out three ways you can save a few extra bucks out of the financial trauma that is tax season. (That said, remember: I'm no tax accountant, so you should consult yours for specific answers about your situation.)
1. Save money by doing the right thing—donate to charity, contribute to retirement, and keep great records.
Good karma can save you money come April 15th. Charitable donations you make during the year are tax-deductible. Even the giant load of stuff you hauled to the Goodwill during this year's great decluttering or garage cleanup qualifies. For more info on how and what to claim, Bankrate's rundown on charitable donations. (Since it's March 2009, it's too late to get this deduction for 2008—but not too late for this year.)
Retirement contributions, which you should be making anyway for your own well-being come the rocking-chair years, also save you money on your tax return. It is NOT too late to open a retirement account (like a Roth IRA) and drop some coin in to claim the deduction—April 15th 2009 is the deadline to do so for your 2008 return. If you've already got a retirement account set up, make sure you've maxed your contributions for the year to get the biggest tax advantage you can.
Finally, keeping great track of where your money goes—and the receipts for expenses you can claim as deductions—will go a long way towards saving you money on your taxes. If itemizing your deductions is even a possibility (see below), you've got to get into the habit of tallying and filing deductible expenses as they happen throughout the year. For me this required a very conscious shift towards saving receipts and entering them into my system. If you don't already, several tools can help you get into the tracking habit:
- Shoeboxed —Mail your receipts to Shoeboxed and they'll scan and digitally file them for you (our original post, now teamed up with Evernote)
- Xpensr—Quickly message your expense details to Xpensr (like "Conference registration $235") to track them all in one place (original review)
- Tag or categorize your deductions in your finance manager of choice, like Quicken, Microsoft Money, Mint or Wesabe
- Old fashioned paper and folders (pictured)
2. Claim every last deduction.
Should you itemize your deductions? If the total of your itemized deductions is greater than the standard deduction, then yes. Here's a table of standard deductions for 2008, thanks to Bankrate:
Standard deductions:
- $5,450 for single taxpayers or married filing separately.
- $8,000 for heads of households.
- $10,900 for married couples who file joint returns.
Totaling your itemized deductions is a painstaking process of tallying up every work expense you had throughout the last year (which is probably why most people just opt for the standard deduction). This is where keeping meticulous records can save you money—and to keep those records, you've got to know which receipts qualify. If you've never itemized your deductions before, chances are there are things you can claim you didn't realize: any unreimbursed employee expenses, your home office, that new computer, your cell phone, conference and travel expenses, professional organization dues, subscriptions, tax preparation fees, postage, entertaining expenses, and advertising. (Of course you can only claim things that are work-related; in the case of phone and home office expenses, you can claim a percentage of time you use 'em for work.) Check out the IRS's breakdown what kind of expenses you can claim as deductions.
My accountant has me send him a spreadsheet of deductions broken down into categories, like: Office expenses over $500 (like a computer), office expenses under $500, business gifts, dues, entertainment, legal fees, postage and shipping, professional development, subscriptions, telephone (answering service, cellular, dedicated landline), travel, work clothing, tax preparation fees, advertising, charitable contributions, moving, auto mileage, and home office space.
For more on deductions you might not know about, see also:
3. Reduce your preparation fees.
Whether you break out the pencil sharpener and dead-tree forms, the CPA's business card, or TurboTax.com, how you do your taxes is up to you and what you're comfortable with. Before you start, here's a freebie, discount, and comparison you should know about.
First of all, if you qualify, volunteers can help you or family members file their taxes electronically for free. Check out the details at the IRS site.
If you're a TurboTax.com user, get 35% off federal filing discount thanks to T. Rowe Price. You don't have to be a T. Rowe client to get the discount; just use that link to get it (federal returns only).
Finally, if all this talk about deductions has you wishing for a tax-savvy human to answer a few questions, it's worth getting a CPA on your tax return case. See my Battle of the Human Accountant Versus TurboTax.com feature story to hear about what you get by paying a premium for the human touch. (I'd say it's a good idea for freelancers or sole proprietors to get an accountant to do their taxes—don't forget, the preparation cost is a deduction! Plus the peace of mind is worth it.)
More Useful Online Tax Tools
A couple more miscellaneous items:
- If you pay a contractor or hire someone for your business and need to issue that person a 1099 form, hit up FileTaxes.com. One 1099 will set you back just under $4, and FileTaxes.com does all the form generation and filing for you. I've used this service for the past few years to 1099 people I've hired, and it's dead simple.
- If you want to know ahead of time what you're in for on April 15th, estimate what you'll owe or get back using this 1040 tax calculator for 2008.
- Finally, to buy yourself more time to prepare your return, FileLater will file an extension for you for less than $20.
Got any tax tips or money-saving techniques to share? Let us know how your return is coming along in the comments.
Gina Trapani, Lifehacker's founding editor, is so relieved to be done with her taxes. Her weekly feature, Smarterware, appears every Wednesday on Lifehacker. Subscribe to the Smarterware tag feed to get new installments in your newsreader.
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