When you hear about people who run into problems with their tax returns, most of the stories involve huge numbers and vast wealth. And that stands to reason as they are attention grabbers – for beyond that, who really cares about tax stories? They are also the stories that are the most ‘criminal’ as they often include an attempt to circumvent the system or at least involve some spurious arguments that were knocked back. Most tax mistakes, though, are smaller, and I think it’s likely that most of the mistakes end in people paying too much in taxes, not in getting some sort of break.
So how does this happen? Well, it is when people do not claim deductions and/or credits for which they would have been eligible. And why wouldn’t they? The answer is usually that they simply are not aware of what was out there for them.
We see this happen a lot with people whose situation changes. If someone starts going at their tax returns by themselves when they start working and have one job for which they receive one W2, it is likely they started off submitting their most advantageous return. But for most of us, our situations become more complicated as we grow and if we are still submitting a similarly simple return, the chances that we are missing out on something that could have helped us increases.
This type of dynamic becomes amplified when someone starts a new business or changes from being a W2 employee to becoming self-employed. And the potential advantages there can be immediate if you are aware of where tax savings can occur. But how does one even know that they should start tracking their mileage driven for business when they begin? And even if they find out about this later, how impossible is it to reconstitute months of trips that were already taken?
And then when it comes time to file your taxes, is there awareness of how to use a home office deduction for those now working from home?
Then once things are going well, would there be some benefit by paying yourself as an employee? Or setting up a retirement plan?
And just how much potential savings could be missed out on if continuing to go it alone for years?
For those whose interest has been sparked by this, you can read this recent article to find some tax tips for the self-employed. And for those whose interest expands beyond reading an article, please always feel free to reach out to us and have a discussion about how your current situation could be leveraged to your best advantage.
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To ensure we don't make the folks at the IRS ornery, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.