(Editor’s note: Today we hear from Argel Sabillo, Co-Founder of Levee, the app that tracks and categorizes business expenses and miles, then files your taxes via its affordable online accountants. Tax issues are complicated, so please be sure to consult a tax advisor about how the information below applies to you.)
Looking to lower your taxes this year? If you’re asking this question before the year is over, then you’re already ahead of your peers who’ll miss out on additional tax deductions this year. Here are the 10 smart moves you can take now to lower your taxes and avoid a tax audit:
Capture All Your Income Sources
You may be rideshare driving or hosting for a while but perhaps before you committed to one or two platforms, you tried other sharing economy jobs. Even if you only earned a few hundreds, your earnings are still subject to tax and you’re still legally required to report all your income. Avoid a notice from the IRS and report all your income sources.
How to check: Review your online bank statements from January to December for income received throughout the year. A fast and easy way to do this is to filter all the debits and go through each transactions. Odds are the transactions will be repetitive from the same source so do an eyeball check for one-off debit transactions.
Defer Your Income
Are you on the cusp of being taxed at a higher tax rate due to increased 2015 income? If so, maybe you should defer some of your income until next year. If you can afford it, consider stopping driving until beginning of next year. Ask yourself this question: do I want to get taxed now or a year later?
If you also have a full-time job, consider contributing to your 401(k) plan at work. The money you contributed is excluded from your income. In 2015, you can contribute up to $18,000 to employer-based plans. If you’re 50 or older, you can make an additional $6,000 in catch up contributions.
Round Up All Your Deductions
Do you have too little deductions this year compare to other sharing economy workers in the same platform? If so, go back to the drawing board, check your bank statements, receipts and odometer readings for potential deductions. If you want to know what other expenses you can deduct, ask your tax preparer or get a hold of one of our tax experts and we’d be happy to give you smart advice.
You can also download our app where you can categorize your expenses and mileage as personal or business, then we’ll help determine if your expenses are tax deductible and where it should be reported on your tax returns.
Donate to Charity
If you’re itemizing your deductions this year, you can write off your donations to qualified charitable organizations. If you’re cleaning out your closets and garage this year, make the donation before December 31 and obtain a signed receipt with the appropriate date. Take a picture of your receipt and store it in the cloud or in your tax folder. This is one of the documents that seems to magically vanish around tax time.
Also, make sure your are donating to qualified charitable organizations, otherwise, your donations are not deductible. To find out, here’s the IRS list of exempt organizations.
Pre-Pay For Professional Help
If you’re expecting professionals services next year, you can pay vendors and professional services like cleaning, repairs, and accounting in advance. Pre-payments up to one year is tax deductible in the current year which means you don’t have to wait until April 2017 to claim your deductions.
If you drive a lot or use your credit cards for both personal and business expenses, you may use financial tools or mobile apps like Levee to stay organized for tax time. The money spent on mobile app purchases related to business is tax deductible. Pre-payment for a full year subscription is tax deductible on the year paid.
For example, with Levee, you can purchase the app and prepay the tax preparation of your 2015 tax return. You can claim 100% tax deductions for filing your business returns which will be reflected on your 2015 tax return – and not 2016.
Sell Your Losing Stocks
Playing the stock market? If you sold some stocks for gains and you’re in the higher tax bracket, sell some losing stocks to offset your gains. If you need more deductions, sell your losing stocks so you can claim your deductions this year. The maximum you can deduct for the year is $3,000. Any excess losses can be carried over to the next year (make sure you track your carryovers).
What if you didn’t make enough this year? If you’re in the 15% tax bracket, you’ll pay 0% on long-term capital gains. In 2015, you’re eligible for the 0% capital gains rate if your taxable income is $37,450 or less if you’re single, or $74,900 or less if you are married filing jointly. Review your portfolio and sell the stocks you’ve been holding for more than a year with the largest unrealized gains.
Give To Your Family
Giving a gift to someone is not tax deductible unless it’s business related where the IRS will allow you to deduct $25 per recipient.
Gifts you give to family members or anyone is not taxable to the recipient but the IRS requires that you document your gifts. The reason for tracking who you give gifts to is because ultra wealthy people used to game the system to avoid paying estate taxes on their inheritance. However, an IRS exception allows for you to gift up to $14,000 to as many people as you want without filing a gift-tax return.
Alternatively, you can give your appreciated stocks to your parents. If they’re in the low tax bracket, they can qualify for the 0% tax rate on long term capital gains.
Estimate Your Tax Liability
Doing a rough calculation of what your taxes may look like by the end of the year is a helpful exercise to figure out where you stand with your taxes so that you can act to further lower your taxes before the year is over. In addition, the 4th quarter estimated tax payment is due January 15th. Therefore, if you’re a full-time sharing economy worker, make sure you pay your estimated tax payment to avoid penalty and interest.
Boost Your W-2 Withholding
Most sharing economy workers use the money as a supplemental income to their full time job. If you’re a new participant this year, chances are, your tax liability will be more this year. If you have a W-2 job, consider increasing your W-2 withholding.
The IRS imposes an underpayment penalty for insufficient payment of taxes throughout the year. So if you haven’t been paying taxes on your 1099 income, you might be subject to penalties and interest. However, taxes that you withheld from your W-2 are treated as if they were spread out evenly throughout the year, so you can avoid the penalty by boosting your withholding now versus paying estimated taxes.
Use Up Your Flexible Spending Account
A flexible spending account is a fringe benefit provided by your employer which allows you to pay for child care or medical bills with pre-tax money. The only catch is that you have to decide how much to contribute to the plan then use it all up before the end of the year, otherwise, you’ll most likely lose it.
Make that doctor’s appointment before the year is gone and/or stock up on over-the-counter meds and extra contact lenses to use up your funds.
If you apply any or all of these tips, you can save a lot more money than you did last year. Plus, your tax preparer will be impressed on how savvy you are in tax planning. While some of these tips are pretty straight-forward, others may be complex and require more assistance from your tax professionals. If you have any questions about tax planning and/or require some assistance, you can contact Levee tax professionals.