“The hardest thing in the world to understand is the income tax.” — Albert Einstein
“How much do I owe?”
That was my reaction while completing my taxes in 2013. I got spoiled when I was in college because I always looked forward to getting money back. While I know that technically getting money back isn’t such a good thing, it still sucks to have to owe money.
A topic we think we think so much about, yet we know so little. This year you’re not going listen to your crazy relatives or know-it-all friends. This article is all you need to know about getting your taxes started. The rest is up to you to determine what the rules and regulations are in your jurisdiction.
I know that the deadline in the U.S is April 18th, 2016. Canadians have until April 30th, 2016. I know that tax rates are higher in Australia. This is the best last-minute article (especially for Canadians) or how-to guide on taxes for all young folks. Actually, I wish that someone else had written this article so that I didn’t have to.
I spoke with an actual tax professional for a long time. I asked questions that came from you guys. I wanted to help you with every single angle.
How do you get started with your taxes?
First, let’s look at the biggest issues with taxes and where most confusion comes from. We need to debunk a few tax myths too.
- Parents have been doing taxes. It’s going to be a big culture shock if your parents have always done your taxes for you. You’re a grown up now. You do your own taxes and laundry (eating at home is still cool). You can’t rely on your parents to do your taxes, even if your parents pay for your school.
- Nobody told me. Nobody has to tell you. You have to do your taxes. You can watch all the conspiracy theories that you want. Keep on watching them. Maybe you can ask the director for help when your wages are garnished off your check.
- I don’t make enough money. Everyone has to file taxes. Just because you’re a 21-year-old broke joke, you’re not excused from taxes. It doesn’t matter how much money you make, you have to file your income tax return.
Now it’s time to ask a few common questions…
Do I get it all back? What you pay in taxes is what you get back, right? Why do you get a tax refund?
A tax refund is for overpaying taxes. If you don’t pay a lot of tax, you’re not getting much back. You may not even be taxable. This is why it’s important that you file your taxes so that you see where you stand here.
Martin’s helpful hints to getting started:
- Print all of your forms out. If you’re a student, get your forms off the school’s site. Get your information. Don’t wait for it.
- It helps to remember that there are new procedures since parents were in school. You can’t go 100% off what your parents suggest.
- Get a professional to do it the first time. After a few years you can easily do your own taxes. It just makes sense to get a professional to file for you the first year.
That’s how you can get started with your taxes, regardless of your age. Now let’s move into the next stage of life.
Life after college. How do taxes work now?
At this point you have a job and a steady income coming in. Along with your new-found extra beer money, come taxes. Fortunately, taxes already come off your paycheck so that you don’t have to do them yourself. Your employer will also send you the proper tax documentation as well. You then use this to file your taxes. It’s pretty simple.
If you have tax write-offs and paid too much in taxes, you’ll get money back. If it’s the reverse, you’ll have to pay. You won’t find out until you sit down to file your taxes.
What about employee expenses? You generally can’t write off anything if you have your regular job that pays you. There’s only one condition and that’s when you get a form from your employer that indicates that you’re responsible for your own expenses.
What are my helpful hints here?
- Try to pay more in taxes. A friend of mine works two jobs so he went to both employers and asked to pay extra in taxes. He does this so that he doesn’t have to stress about not paying enough taxes when it comes to tax season.
- Take advantage of retirement accounts. Look into retirement accounts on your own and through your own employer. Take advantage of these. Learn more on this topic. I’m a bit torn because I struggle every year when it comes to deciding how much money to put into a registered retirement account.
- Consider donations and other things you can do to save money on taxes. There are many ways you can catch a tax break. Look into donations and other options.
- Don’t stress about wanting money back. Some folks say that it sucks to get money back because it means that you overpaid in taxes during the year. Who cares? Nobody sees it that way. Everyone sees it as a nice chunk of change that comes your way in the spring.
Now let’s add a few twists to the simple tax scenarios. Let’s throw in some self-employment and rental properties.
How do taxes work when you’re self-employed (freelancing or anything else)?
With an employer it’s relatively easy. They do everything for you. Taxes come off every check.
Let’s see you decide to quit your job because your side hustle is now full-time. Now you’re on your own for taxes and everything else (literally!). You’re now self-employed.
You need to do record keeping.
You’re in charge of organizing everything now. You can’t rely on the accounting department (unless you create one). You have to track your income, expenses, and everything else. Nobody else will do it. The good news is that private cloud software has made this easier than ever before. I just went on Paypal and turned my income/expenses into a PDF file, printed it, and went through everything.
What are expenses that you can claim on taxes?
Anything that’s involved in you being able to earn that income.
I can only speak from experience, so I’ll get into blogging. You can claim hosting, Paypal fees, a home office if you have one, consulting, and a few other things depending on your tax laws.
What about conventions/trips?
It has to be realistic and there’s a limit on how many business-related trips that you can write-off per year. You can also only write off the business-related portion of the event. There might be issues with you writing off your bottle of vodka and red bulls.
Martin’s super helpful tips:
- Put 30-40% into a bank account, in case you have to pay taxes. You don’t want to get blind sided. You have to pay taxes. Don’t act surprised when you find out how much you owe.
- Create a separate bank account. This will make life much easier for you. Create a separate account where you just deal with business income/expenses. You don’t need anything fancy. You can just use a regular free checking account.
- Look into incorporation/creating a business structure. Can you create a business structure? Ask around and see what other people in your field have done.
- Get a spreadsheet. Keep your expenses in one place. Helps you personally. I have tried to do this for my online income. Sadly, I totally got lazy in 2012. I was stuck pulling an all-nighter trying to finish everything up.
As tax laws can often change, it’s important to stay updated with the latest information. Online resources such as the Lively Blog is a great place to learn more about tax, investment strategies and health savings account guides.
What about a rental property?
Let’s say that you saved your money and have invested in a rental property. What do you have to do?
You likely guessed it. You have to claim this as well. You have to claim the rental property income. The good news is that you can also once again claim the expenses needed to maintain this property.
What expenses can you write off with your rental property?
It mainly depends on the deal that you setup with the tenant.
- Maintenance fees.
- Mortgage interest.
- Property taxes.
Taxes are pretty damn confusing at times. We barely scratched the surface here. I just wanted to help you get started with taxes if you were lost. As always, make sure that you consult a professional and don’t yell at me for anything.
Make sure you understand what you can and can’t do. Ask first. Don’t listen to friends. Don’t take anything someone tells you as fact. Find out from your governing body or accountant. Get the real scoop.
I’m also giving away three vouchers for TurboTax. All you have to do is leave a comment with how you would spend your tax return if it was $500.
Good luck with your taxes!
“In this world nothing can be said to be certain, except death and taxes.” — Benjamin Franklin