Life is fast-paced and people today have a short attention span. Taxpayers rush through their tax preparation requirements, either paying a professional or leaving it up to a tax software program to file their returns. And they hope for the best. They hope for accuracy. They hope for no red flags. And of course, last but certainly not least, they hope for a big fat refund.
But each taxpayer would benefit greatly by having a rudimentary knowledge of taxation and what benefits can be derived for his or her own particular situation.
Millennials, especially, need more than basic knowledge. After all, they are the world’s bright faces of entrepreneurism and creative work environments. And without due diligence, these young adults could be missing out on significant tax savings or worse yet, be endangering their finances and freedom by not knowing how tax law affects them.
I spoke recently with Jonathan Barsade, CEO of Exactor. He provided me with 5 sound tax tips for Millennials:
Do your due diligence. “Taxes are getting more complex with time. There are so many more returns and schedules than there were in the past. You must be aware of your exposure.”
When considering exposure most people think in terms of the IRS. However, city taxes, state taxes, sales taxes and property taxes can come into play!
“Many people don’t know what to file, where to file, when to file. And they end up with penalties,” Barsade adds. “People are expected to do their due diligence and figure it all out.”
Barsade cites a story of a co-worker who moved to another city closer to work thinking she would be saving money by cutting down on her commute. After living there for a while, she discovered that she was required to pay a City tax, something she had never heard of before. Before making a major move, find out what taxes are levied in your new locale. Did you know that some states do not levy an income tax? Take Texas for example – no state income tax, but if you buy a home down there they hit you hard with property taxes.
Find out how your job affects your taxes. Job seeking expenses, moving expenses (for a new job), and unreimbursed employee business expenses are just a few categories that provide substantial deductions on a tax return. And with the Internet, business is being conducted in ways completely different than it was just a few decades ago. Barsade states, “Many people work from home – do they know about taking a home office deduction? Or maybe they’re doing something fun like developing an app or a game and it’s so much fun they don’t realize that perhaps what they are doing is a business and this opens the door to business deductions like home office, automobile expense, etc.” It’s not work if you’re having way too much fun, right? Wrong! Your expenses just may be deductible. Find out the rules. In fact, it’s worth a consultation with a licensed tax professional to review your situation to determine if you are missing deductions in this area.
Technology is your friend. And when it comes to taxes there is a lot of technology that can help with the project. Barsade encourages the use of this technology to improve knowledge and to avoid pitfalls.
“Technology can help save time, reduce errors, increase your knowledge and expedite the filing of a return,” he says.
The IRS Website provides “Free File,” a technology for those making less than $62,000 per year to electronically file their tax returns for free. For those making more, you can use IRS’ “Free Fillable Forms” to create and file your tax return. There are many apps and programs available for tracking your deductible expenses. And anytime you have a tax question, you can throw it into the IRS search engine to discover the answer. But be very careful. Tax law contains so many gray areas, changes so constantly (539 new tax law changes last year alone!) and is offset with plenty of court cases, that you may need the interpretation of a tax professional.
Don’t cheat on your taxes. It’s tempting to leave off a chunk of income or maybe inflate a deduction or two to reduce the bottom line. But it’s just not worth it. After all, Big Brother is here. And it’s not just evident in the constant video surveillance we are subjected to. Make a face at your neighbor and it shows up minutes later on YouTube, right? Barsade says, “There is so much cross-referencing of third party documents, that the taxing agency may be able to figure it out if you do cheat. Then you can be the subject of an audit. Or end up paying penalties. Provide all data on your original return. Make it as complete as possible.” The IRS matches what you report with what these providers report to them. It will certainly question you if the paper trail is contradictory to what you report or if your data strays far afield from industry standards.
Report income from anything sold on an Internet site. It’s so easy these days to start a little sideline business, let’s say, making aprons and selling them on E-Bay. Well, guess what? That’s self-employment income and if your sales total $400 or more, you are required to report the income and expenses on Schedule C of your tax return. Barsade says, “Reportable activities could be triggers. If you are engaged in on-line activities there is likely an obligation to report that income. You may also be liable for sales taxes and you may be required to have a license.”
The easiest way to judge whether or not you are in compliance and if you are saving as much in taxes as you could be is to sit down with a tax professional and review your circumstances. Barsade sums up by saying, “Pretty much, it’s awareness.”