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How to Turn Your Side Hustle into Tax Savings

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If you took on an extra gig last year to earn some extra cash, you may have found an unexpected surprise when you filed your taxes — a big bill. That’s because independent contractors don’t have money withheld by their employer.

But don’t worry. With the right preparation, your side hustle could actually help lower your taxes. Follow these tips to help ensure your extra work pays off.

Estimate what you expect to earn. When you have a good idea of how much income you’ll generate, you can better plan for potential deductions and make tax payments in advance to help avoid tax penalties later. Estimate your earnings by looking at how much you made last year. To further fine-tune the calculations, examine your monthly earnings to date and use that number to project this year’s income.

Consider a health savings account (HSA). Opening a health savings account can help reduce your taxable income more than you might expect. The money you contribute is fully tax deductible, and can be used to pay for out-of-pocket medical expenses. The earnings in the account grow tax free, and any funds left over at the end of the year are rolled over for future health expenses.

Open a self-employed retirement plan. There are a variety of retirement plans for the self-employed, allowing you to make tax-deductible contributions. If you’re simultaneously holding down a full-time job that offers a traditional 401(k) plan, you may also be eligible for a SEP-IRA — one of the simplest ways to shelter your self-employment income.

If your side-hustle becomes a second full-time job, you may also look into a solo 401(k). This type of retirement plan offers high contribution limits and has enormous potential for tax savings. Keep in mind, you’ll need to apply for an employer identification number (EIN) to open one.

Take advantage of deductions and write-offs. Do you run your busines out of your home? You may be eligible for the home office deduction, allowing you to write off part of your mortgage, utilities and other costs. You can also take a standard home office deduction based on the square footage of your dedicated workspace and the size of your home. Always consult your tax professional before claiming these deductions.

All it takes is one small misstep…

If you’re not careful, your hard-earned side hustle money can cost you big time when tax season rolls around. Find out how the tax experts at Magone & Company can help keep more money in your wallet.

The above information is provided for general education purposes and should not be considered financial or tax advice. Please consult your accountant or financial advisor for advice specific to your situation.

 

 

5 Actions That Can Unexpectedly Raise Your Taxes

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Knowing what factors can raise your taxes is one of the best ways to keep more money in your pocket. That’s why proper tax planning is a year-round practice. Here are five actions that can unexpectedly increase your tax bill:

  1. Cashing in your retirement plan. There are many reasons not to cash in your plan early, and the tax penalty is one of the biggest. If you take the proceeds from your 401(k) plan in cash, instead of rolling it over into an IRA, you’ll have to pay taxes on the money you withdraw. Even worse, you’ll be subject to a 10% penalty. By the time you’re done, you could lose up to half your hard-earned retirement plan to taxes and penalties.
  2. Working as a freelancer. Working for yourself is great, but it can trigger tax headaches. Freelancers and other self-employed workers are subject to self-employment tax, which represents the combined employer and employee share of the Medicare and Social Security tax. The tax hit can be substantial, especially if you don’t plan for it.
  3. Failing to take your RMD. You can’t keep retirement funds in your account indefinitely. You’re required to start pulling money from your IRA and workplace retirement plans when you turn 70. If you fail to make that required minimum distribution (RMD), the penalty fees can easily offset your savings.
  4. Skipping your IRA contribution. If you’re accustomed to making an annual IRA contribution, skipping that contribution can cost you. Before you omit it completely, run the numbers and see how the decision will affect your tax bill.
  5. Paying off the mortgage. Eliminating mortgage debt can be very freeing, but it can also raise your taxes. Mortgage interest is deductible if you itemize your deductions. Losing that deduction may leave you owing more to the IRS. That’s not necessarily a reason to keep a mortgage, but it can be an important consideration.

With smart strategies for tax planning, the CPAs at Magone & Company can help you make the most tax-efficient decisions. Give us a call today at (973) 301-2300 to learn more.

The above information is provided for general education purposes and should not be considered financial or tax advice. Please consult your accountant or financial advisor for advice specific to your situation.

Amending a Prior Tax Return is Easier Than You Think

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Tax returns can often be filed with incomplete or incorrect information, leading to more tax trouble than you bargained for. If you filed early in years past, you might’ve overlooked income from a temporary job or a side gig. Or you may eventually realize that you’re entitled to an extra deduction or exemption. Lucky for you, the IRS routinely processes a significant number of amended returns each year.

For errors beyond simple math
If you need to change your filing status, income, allowable deductions or credits, amending your return is essential. An increase in reported income, for example, is likely to result in more tax due, while an additional deduction or allowable tax credit could get you a larger refund. And who wants to miss out on money owed?

An amended return adds the corrections to the original return. Individual income tax returns filed with the IRS can be amended up to three years after the due date of the original return by filing IRS Form 1040X. A separate Form 1040X is necessary for each year being amended and must be mailed in its own envelope to the address provided in the instructions. A copy of the original return itself isn’t required, but any added IRS forms must be included, as well as any other supporting documents that can help substantiate the amendment.

It can take several weeks for the IRS to process an amended return. An amendment to a federal return might also require a change to your state return, especially if an increase in income is reported.

Ensure that a tax expert has your back
If your amended return results in asking for a large sum of money back or owed, it may be in your best interest to consult with a tax expert. At Magone & Company, our NJ CPAs specialize in tax resolution and can help navigate the tax amendment process. Give us a call today at (973) 846-8265  to schedule a no-obligation consultation.

The Procrastinator’s Guide to Surviving This Year’s Tax Season

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If you’re a procrastinator, tax filing season is probably the worst time of year. With deadlines looming, filling out all those complicated forms and making sense of the ever-changing tax code can seem like an overwhelming task.

But no matter how long you put it off, the April 15th tax filing deadline will arrive, and what you do to get ready will make all the difference. Here are three timely tips you can use to get a jump on tax filing season:

  1. Find last year’s return now. Go ahead, we’ll wait. It’s stressful to hunt for vital information at the last minute, so make sure you have it in hand well before you need it. Your previous return is required to verify your identity — an important step the IRS implemented in the face of growing identity theft and tax filing fraud.
  2. Touch base with your tax professional early. Don’t wait until March to call or email your CPA. Keep them in the loop of any changes since last year’s filing. Did you get married, have another child, sell a business interest, receive PPP funds or withdraw early from a retirement account? Make sure they have the most current filing information to stop easily avoidable errors.
  3. Gather tax forms as they arrive. Facing the tax deadline with a stack of papers is daunting — even for the non-procrastinator. Instead of waiting until everything is ready to go, gather documents as you receive them and save them in a dedicated folder on your computer.

Miss the deadline anyway?
Most often, a decision made deliberately and slowly is preferable to one made in haste. But as a procrastinator, you know things don’t always go as planned.

Last-minute snags may happen despite your best efforts, but you don’t want to mess with the IRS. Keep in mind that filing for an extension doesn’t absolve you of paying the amount you think you owe.

If you’ve missed filing in the past, the NJ CPAs at Magone & Company can help. To learn more about our tax resolution services, give us a call today at (973) 846-8265.

Avoid These 5 Common Tax Filing Mistakes That Can Get You In Tax Trouble

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Whether you file the simple 1040EZ or a complex 1040 with multiple schedules, making a mistake on your tax returns could lead to big tax trouble. Something as simple as a math error or unsigned form could invite extra attention from the IRS.

The tax agency sees those mistakes every year, and IRS representatives warn taxpayers to be careful when filling out their forms. Even if you think you have everything filled out perfectly, it never hurts to double-check and look for these common errors.

#1 — Assuming your tax pro prepared your taxes properly
Blindly trusting your accountant or tax preparer to file your taxes correctly can be costly. Most tax professionals do a thorough job, but letting them file without your careful review is a mistake.

We resolve back tax problems for people, and often what gets people in trouble is a simple mistake, like forgetting to report income, missing deductions or taking too many deductions. These are sometimes honest mistakes that if not caught early can trigger red flags and have the IRS sending you balance due notices.

No one knows your financial situation better than you, do so it’s important you double-check your return so you’re not blindsided with an unwanted surprise.

#2 — Waiting until the last minute
Filing taxes is stressful enough. Don’t make things worse by waiting until midnight on deadline day to get your return in the mail. Give yourself plenty of time to gather all the necessary documents and complete your return.

Keep in mind that unexpected problems could interfere with your last-minute tax filing plans. Getting your taxes completed early is the only way to protect yourself from unforeseen circumstances that can delay your tax filing.

#3 — Failing to file on time
If you cannot file your return on time, you can ask for an extension by filling out a single form. Even if your documents are in disarray, there is no excuse for not filing on time. An extension gives you six more months to get everything in order and complete your return.

Keep in mind that even when filing an extension, you will still need to estimate the tax you owe and make your payment. Filing an extension extends the amount of time you have to get your return to the IRS, but it does not provide a reprieve from your tax debt. If you wait to make your tax payment, you will get hit with penalties and interest.

#4 — Not making a backup or keeping good records
Making backup copies of your tax returns, income documents and schedules is an essential part of tax planning and preparation. Set up a folder or file box and use it to store your tax documents as they come in, and then scan each one before you put it away.

Once you have completed your return, be sure to make copies of every document, including your W-2 form and tax schedules, before sending the return to the IRS. If you file electronically, save a PDF copy of your return before completing the final step. Save all of those electronic tax documents on your computer or cloud storage device. Ordering a lost copy of a past year’s return from the IRS is time-consuming and expensive; you can save time and money by making your own backup copies. If the IRS audits you or requests more information, having your own records organized will be extremely helpful in the process.

#5 — Ignoring letters from the IRS after you file your taxes.
Sometimes the IRS will send follow-up correspondence, especially if you owe them money. It can be easy to ignore the first few letters. Even if you have the intention of paying your taxes soon, you should still take action and either get on an installment agreement or reach out to a reputable tax relief firm if your financial situation requires it.

That’s not all. Here are some suggestions to keep in mind if you’re preparing your own return.

Owe back taxes?
Our firm specializes in tax problem resolution. And you certainly don’t want to talk to them yourself. If you want an expert tax resolution specialist who knows how to navigate the IRS maze, reach out to schedule a virtual or in-person no-obligation confidential consultation to explain your options to permanently resolve your tax problem. Need immediate assistance? Call 973-846-8265 today.

What is a Levy? IRS and Other Asset Levies Explained

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Falling behind on your debts is never a fun position to be in. It’s less fun when a levy is placed on your assets. In this article, we take a look at what an IRS levy is, why it happens, and what you can do about it.

What is an IRS levy?
Simply put, if you owe back taxes and you ignore the IRS, they can seize your property, take money from your bank accounts, or sell your assets in order to satisfy the balance due.

The IRS will give you plenty of notices via mail before they take this step. If you do not satisfy the debt or make payment arrangements by the specified date, the IRS will attempt to take the amount of the levy directly out of your bank account.

Other types of levies
Private creditors may issue a levy against your bank account with a court order. Court orders are not required for levies by government agencies. The creditor must notify you of the upcoming levy at least 21 days before removing any funds from your account. You may not withdraw money or close the account during this waiting period.

Funds earned from child support, social security, unemployment, workers’ compensation settlements and certain other types of government agency payments are exempt from levy. You must request the exemption and offer proof of the source of the funds.

Wage garnishments
Government agencies may also garnish an employee’s wages for back taxes, child support and other delinquent payments required by law.

The IRS has the authority to levy up to 85 percent of your paycheck. The levy notice will be sent to your company’s payroll or human resources department, which will then withhold the appropriate amount of money from each paycheck and send it to the IRS or state tax board. You must provide a wage garnishment release if you’re able to work out a payment arrangement.

If you are behind on your taxes, the IRS may levy most payments from federal agencies. This includes railroad retirement benefits, Medicare supplier and provider payments and federal retirement annuities, among others.

Seizing your assets
The IRS may also seize your real estate and personal property such as a car or boat. You will receive a 30-day notice indicating that seizures will follow if you do not pay your outstanding taxes or contact the IRS to make payment arrangements. This authority also extends to property and money you own that’s being held by another party, such as the cash value accrued from a life insurance policy. The government sells its seized property at auction to recover some of the funds owed by delinquent taxpayers.

What to do if you have an IRS levy
Back taxes don’t just disappear if you ignore them long enough. Putting your head in the sand will cause the problem to get worse. The IRS knows if you’ve paid or not. They might even be willing to compromise.

If you have back tax debt, we highly recommend you reach out to our firm first, particularly if you owe more than $10k in federal or state taxes and can’t pay in full. Our clients never have to talk to the IRS, and tax resolution through our firm can save you money and time in the long run. You might also be eligible for other IRS relief programs or get your penalties reduced or removed. Reach out today for a consultation.