Stand therefore, having girded your waist with truth, having put on the breastplate of righteousness – Ephesians 6:14
Telling the truth may be complicated by failure to remember what the truth is. This sometimes happens while filling out tax returns. Most people don’t make mistakes on a return because they set out to defraud, but simply because they don’t have the facts straight.
Unfortunately, the only way to have the facts straight is to keep records. I don’t like record keeping. Strange to say since I worked in that line and I like numbers, but that’s the way it is. Record keeping is tedious, so many small things to account for like bills and receipts and payments. There are various ways to approach this.
The Shoe Box
In this method you just toss everything in a shoe box. At tax filing time, you take your box down to the tax return preparer and set it on his or her desk. Unfortunately, the preparer doesn’t like this approach and probably won’t accept it. H/she wants you to give the amounts to fill in the blocks—just the facts. So you’ll have to go through that box and add up the amounts before you go. I’ve got to tell you this approach will cause you drink too much caffeine and tear your hair out. And it may lead to some big mistakes.
EZ If You Can
For those who file the EZ method, this will work. All you have to report is earnings. Standard deductions are worked into the charts. Only W-2s and 1099s are required. These are fairly easy to keep up with, although I confess I’ve managed to lose one or two over the years. If this method of filing fits your situation, you don’t need help with preparation. In fact, the IRS will figure it for you. State returns may be just as easy. Read over the rules every year to make sure you qualify.
If you take deductions like home mortgage interest, state and local taxes, charity, medical expenses (lots of changes in that this year), you can get by with simple ledgers for each deductible. Recording the expenses as they occur on an excel spreadsheet will do nicely. It’ll add and subtract for you. Be sure to date and identify, and don’t forget travel expense allowed for a particular deduction like medical or charity. Actual expenses are almost always more than the standard allowance tables. Stuff the receipts into envelopes or file folders, identified for the applicable deductible.
When tax time comes around, you’ll have the amounts ready to plug in or give to your preparer to plug in. Yes, this method is tedious, but much more reliable than digging through a shoebox of receipts and trying to remember what goes with what. Record the information at least weekly, and ladies, don’t wait three months before cleaning out your handbag as I’ve done in the past. I’ve found a receipt for a local taxes at the bottom of my bag that had scribbles on the back and folded so many times I could barely read the numbers.
Home Based Business
There are millions of home based businesses in the United States, and even the most simple sole proprietorship demands a bookkeeping system, if not the traditional double entry type, at least a debit/credit incoming/outgoing facsimile with a ledger for each expense. In fact, as soon as you determine your enterprise is a business and not a hobby, and write out your business plan, it’s time to set up bookkeeping. Here’s my money saving tip of the week.
When your tax return gets to the degree of complication that self-employment requires, it’s time to seek professional help. Find a tax accountant experienced in small business and sole proprietorships. Before your appointment, make a list of all your questions, and when you go in, pick the accountant’s brain. Cover every state and local law and regulation as well as federal. It may cost more, but this is the only time you’ll need to consult him or her. Before you leave, make sure you understand how each item on the tax forms was obtained and why. Your copy of these forms and the answers to your questions will be your prototype for your future returns. If you’re intelligent enough to run a business, you’re plenty smart enough to do your own in the future. Yes, there are changes to the tax code each year, but rarely will they affect you, and even if they do, you should be able to figure it out.
Speaking of changes for home businesses, there is a change this year that simplifies taking a deduction for the home office. Instead of jumping through hoops like most tax forms require, you can now multiply your home office’s square footage by $5.00 up to $1,500.00. But actually, if you take my advice and get a one-time professional help, you’ll be able to jump through the hoops and fill out the regular Form 8829 and Schedule C without having to worry about an IRS audit. Provided you have a good bookkeeping system in place.
Something else that’s new provided by the IRS is electronic filing that’s supposed to be as easy as those computer tax programs in the stores. You know, it’ll take your information and tabulate the forms for you. I haven’t tried it myself since I file by paper and snail mail. I just don’t trust my SSN on the computer. But if you have any spare time, visit IRS.gov and make yourself at home. It’s more user friendly than healthcare.gov, I promise.
Keeping records will help you know and report the truth, and as we all know, that will make us free. So put on your armor of truth and have the records to back it up.