Getting serious about tax deductions
There is perhaps no admin task more loathed than preparing your taxes. Even Albert Einstein, a genius, thought "the hardest thing in the world to understand is the income tax."
One end of the year admin task I do is to send my accountant all the information he needs to put together my taxes. This includes – deductions.
1. Plan and pay the setup costs. Understanding what deductions you can take can save you tons of money. Here’s a great resource to get spun up. I’m not an accountant, so I won’t try to explain them all. BUT if you have any income not coming in the form of a salary from an employer, like speaking fees and honorarium, you need to get serious about deductions!
2. Put it all together. Recording your deductions can be super annoying and very time-consuming unless you approach it right.
I used to use a spreadsheet and go through my expenses every month and input deductible expenses – but that added a lot of work to the end of the month. I now use an app/website called ‘you need a budget,’ or YNAB. There are other apps, like Mint, to help you budget. For tax purposes, the important thing is the app 1) links to all your credit card and bank accounts, 2) less you categorize your expenses, and 3) you can create expense reports to see how much you spent in certain categories during specific time periods.
Setting up this software takes some time – mainly, you have to input the login information for all your accounts and make the categories. It's worth talking to an accountant to help you devise your categories, but here are some of mine to help you get started.
Travel (business purposes)
Out of pocket medical expenses
Military Uniforms expenses
Then it takes a matter of moments to categorize your expenses at the end of every week. And then, at the end of the year, it'll take you minutes, not hours, to calculate the amounts in each relevant category you can deduct. That is a lot of time saved!
YNAB links with your bank accounts and credit card accounts. Whenever a transaction is made, you quickly categorize it. So at the end of the year, all you have to do is look at the totals in each tax-deductible category and report it to your accountant (or input it into tax software yourself)
3. Produce reminders. Set up reminders for yourself to categorize your expenses. I prefer to do it at the end of every week because otherwise, it's hard to remember what certain expenses are. But you can decide what is best for you.
4. Performance notes. Every year my accountant informs me we actually cannot deduct certain expenses (529s – really? Saving for education should be easier), but I also learn of new deductions too. So make notes for yourself, so next year you remember what you learned this time around.