Category: Finances

Behind the Scenes of Small Business Financing: Setting Straight Loan Myths

Many first-time business owners come to us for assistance in obtaining financing for their ventures. Often, they have no idea what to expect when securing a business loan. However, several misconceptions about financing prevail. Let’s debunk some of these myths:

  1. Government Grants for Startups: There’s a widespread belief that government grants are readily available to kickstart any business venture. In reality, while there are opportunities for government contracts, grants for starting a business are rare and highly competitive. Be cautious of scams promising easy access to government funds without strings attached.
  2. Idea vs. Execution: My clients often tell me, “I have a great idea,” but they have no plans to execute it. Having a brilliant business idea is just the beginning. Potential lenders, such as banks, look beyond the idea itself. They require a solid business plan and demonstrate that you have a customer base that will purchase your service or product. Family and friends might financially support your idea, but a bank needs concrete evidence of feasibility.
  3. Importance of Personal Credit: Your personal credit history matters significantly when applying for a business loan. Lenders assess your creditworthiness to gauge your financial responsibility. They want to know if you prudently manage your own money before they lend you the bank’s money. Aim for a credit score of 650 or higher before applying. Monitor and improve your credit score well in advance of seeking financing.
  4. Expecting 100% Financing: Contrary to popular belief, most lenders require business owners to invest their own funds into the business. This is known as having “skin in the game.” Typically, lenders expect startups to contribute 10-25% of the project costs and 5-15% in a business that has longevity. Start saving early to demonstrate your commitment to your business venture.
  5. Pre-Qualification by Lenders: Commercial lenders don’t pre-qualify borrowers in the same way as mortgages. You need a clear project plan and loan amount in mind before approaching a lender. Many borrowers think of the minimum amount they need for the primary project, then consider additional tasks a bonus if they get more. Calculate potential loan payments and ensure they fit comfortably within your financial projections.
  6. Differences Among Banks: Not all banks are alike regarding business loans. Each bank has specific lending criteria and industry preferences. Some may require businesses to have a proven track record, while others may specialize in specific sectors or have unique risk tolerances. Recently, the banker declined my client for a loan because the banker considered the loan below their “minimum loan value.” Another time, a banker explained that their loan portfolio was too heavy for the industry my client wanted to enter. The bank wanted to diversify in lending to other sectors. Research and choose a bank aligned with your business needs and goals before you apply.
  7. The Necessity of a Business Plan: A well-crafted business plan is essential, especially for startups. It outlines your business goals, market analysis, financial projections, and operational strategy. Lenders rely on this document to evaluate your business’s viability and ability to repay the loan. Established companies will have their tax returns to demonstrate the business’s success, but you might still be required to provide a brief written history of your business and the purpose of the loan.

In conclusion, securing financing for your small business involves thorough preparation and understanding. It’s more complex than many initially assume, requiring diligence and a strategic approach. Educate yourself on the realities of business loans to increase your chances of success.

Did You Get a Large Tax Refund this Year?

In 2024, those who filed their taxes early received an average refund of $1,395. This amount is significant, but it’s $568 less than the average refund at this point last year. The IRS estimates that around 96 million taxpayers will receive a refund this year. Most of us hope for a refund each year, and a large refund can be exciting. It’s always nice to see an extra $1,395, or last year’s average of $1,963, in our bank account.

Many people use their tax refund to pay for a vacation or pay down credit card bills. While this is undoubtedly a good way to spend your refund, it’s important to remember that you have essentially given the IRS a large, interest-free loan. Consider reducing the amount withheld from your paycheck each month; you will have more money in your pocket. This is money that you have control over and can use to reduce interest payments or put into an interest-bearing account.

Let’s say you’re eligible for an average tax refund this year, which is $1,395. This amount is equal to about $116.25 per month. Now, suppose you spent around $1,000 on Christmas shopping last year and had to use your credit card to pay for it. If you have good credit, you might be charged an average interest rate of 16.25% on the balance you owe. But if your credit score is not great, your interest rate could be between 24% and 29%.

 To pay off your debt before next Christmas, let’s assume you’ve decided to set aside $100 every month. This chart shows how much interest you’ll have to pay each month, based on your balance and interest rate.

MonthBeginning BalancePaymentInterestPrincipalEnding Balance
January$1,000$100$13.54$86.46$913.54
February$913.54$100$12.37$87.63$825.91
March$825.91$100$11.18$88.82$737.09
April$737.09$100$ 9.98$90.02$647.07
May$647.07$100$8.76$91.24$555.83
June$555.83$100$7.53$92.47$463.36
July$463.36$100$6.27$93.73$369.63
August$369.63$100$5.01$94.99$274.64
September$274.64$100$3.72$96.28$178.36
October$178.36$100$2.42$97.58$80.78
November$80.78$80.78 $80.78$0
Total Interest  $80.78  
Paying off Christmas Debt Example 1

Paying off credit card debt can be a tough challenge for many people. For example, imagine if it took you almost a whole year to pay off your credit card debt; during that time, you ended up paying an extra $80.78 in interest charges. Unfortunately, this is a common problem that many Americans face. In fact, as of September 2023, around one-third of all Americans were still struggling to pay off the credit card debt they accumulated during the Christmas season of 2022.

Now, let’s look back to January 2023. You use the IRS tax calculator, and it reveals that you are having too many taxes withheld. You lower your withholding amount to match your expected tax liability, giving you an extra $116.25 each month. Add this to the $100 you had budgeted to pay off your $1,000 Christmas credit card debt. The table below shows the results.

MonthBeginning BalancePaymentInterestPrincipalEnding Balance
January$1,000$216.25$13.54$202.71$797.29
February$797.29$216.25$10.80$205.45$591.84
March$591.84$216.25$8.01$208.24$383.60
April$383.60$216.25$5.19$211.06172.54
May$172.54$172.54 $172.54$0
Total Interest  $37.54  
Paying off Christmas Example 2

This plan would enable you to pay off your Christmas debt in just five months instead of eleven months. By doing so, you would have saved $43.24 in interest. Moreover, you would have an additional $43.71 in May and an additional $216.25 in each of the next seven months. This would have given you a total of $1,556.99 that you could have utilized to pay for Christmas 2023, along with an additional $557.

It is not possible to change your withholdings for 2023 after the fact. However, you can make changes right now. Assuming you began 2024 with $1,000 in debt from holiday spending and budgeted $100 to reduce it, and your accountant filed your taxes on time, you have received a refund of $1,395 this week. You can use $647 of this amount to clear your debt balance (as indicated in the first table above). As a result, you will have $648 left from your refund. Additionally, you can modify your withholding now to receive an extra $116.25 monthly for the remainder of the year.

If you add the $100 you have budgeted every month to put towards your debt and the $116.25 you have available, you will have an extra $216.25 per month. By saving this amount for eight months, in addition to the $648 lump sum, you will have a total of $2,378 by the end of 2024. It’s important to note that you won’t receive a large tax refund in 2025, but you’ll have the money available throughout the year. You can use this money to pay off debt, fund a nice vacation, or cover Christmas 2024 expenses without incurring new debt.

This plan assumes that you will maintain your current spending levels for regular and Christmas expenses. On the other hand, if you are likely to fritter away the extra money and not save it for your Christmas spending, then you will be better off to maintain your current level of withholdings.

For more tips on managing money wisely, please see my other blogs. My Bible study, Honoring God with Your Money, is an excellent resource.

If You Have to File Late, Avoid Penalties and Interest

April 15 is just a few days away. If you won’t be able to mail and postmark your taxes by April 15, you may need to file for an extension. You can request an extension if you need extra time to file your tax return. However, it’s important to note that an extension only gives you more time to file your return; it does NOT mean you have an extension to pay.

All taxes that you owe must be paid by the original deadline. Otherwise, you may be charged a late fee along with an interest. If you fail to file your return on time, you will be penalized with a Failure to File penalty unless you apply for an extension.

Failure to Pay Penalty

A Failure to Pay penalty is assessed on the balance of taxes owed after April 15. The penalty for unpaid taxes incurs a monthly fee of 0.5%, with a maximum penalty of 25% of the unpaid taxes, regardless of whether you filed an extension.

Failure to File Penalty

A Failure to File penalty is assessed based on how late you file and the amount of taxes owed on the due date. This fee is assessed if you do not file your tax return AND you do not request an extension. This penalty is calculated at 5% of the unpaid balance per month and maxes out at 25%.

Both of these penalties may be assessed for the same months. However, the combined penalties will be at most 5% of the taxes owed per month.

In addition to these penalties, the IRS charges interest on past-due amounts. This interest is charged on the taxes owed, the penalty, and the accumulated interest. The more you owe, the higher the interest will be. Interest begins on the day the tax is late and continues until the tax, along with interest and penalties, is paid in full.

To avoid getting in trouble and paying penalties:

  1. File your tax return on time and pay any tax owed by the due date.
  2. If you cannot file your taxes by the deadline, you can avoid a Failure to File penalty by requesting an extension.
    a. The extension must be filed by the due date.
    b. The extension gives you to October 15 to file.
    c. File form 4868 or use IRS Free File to apply for an extension.
    d. You need to enter an estimation of your 2023 tax liability and the amount of
    payments you made in 2023 through withholdings and estimated tax payments.
    e. Include payment for the balance to avoid late penalties and interest. If you cannot pay the balance in full, pay as much as possible.
    f. Estimating high and overpaying is much better than subjecting yourself to late penalties and interest.
    g. It is much better to estimate high and overpay than subject yourself to late penalties and interest.
  3. If you are unable to pay the balance when you file the extension, you should pay as much as you can and apply for a payment plan that will allow you to pay the remaining balance over time.
    a. Apply for a short-term plan if you can pay your taxes owed within 180 days.
    b. Apply for a long-term plan to make monthly payments over some time greater than 6 months.
    c. Set-up fees are applied to long-term plans; this fee is significantly lower if payments will be made by direct deposit.
    d. If payments are made by credit card, a fee will be charged.
    e. You may be able to apply for a payment plan online, depending on how much you owe. Online setup requires a computer using a supported browser and a cell phone that receives text messages.
    f. If you cannot apply online, you will need to complete Form 9465, Installment
    Agreement Request.
    g. For more information on applying for an IRS payment plans, go to
    https://www.irs.gov/payments/online-payment-agreement-application

If you cannot pay your taxes on time, you must establish a payment plan with the IRS. If you do not follow these steps, the IRS can levy your salary, bank accounts, or property. You do not want to get into that situation.

Thinking About Doing Your Own Taxes?

Hiring a tax accountant can be expensive, so you may consider doing your own taxes. But before making that decision, you should carefully evaluate (1) whether you are capable of doing them yourself and (2) if so, how to proceed.

You might feel comfortable doing your taxes if:

  • Your taxes are relatively simple
  • All income is reported on W-2s and/or 1099s
  • Most things have stayed the same since last year, such as marriage status, jobs, etc.
  • You will take the standard deduction.
  • Your taxes are a bit more complicated, but you are willing to take the time to read the IRS instructions.
  • You have self-employment income as a single owner and feel confident to complete the Schedule C form.

You might be better off hiring an accountant IF:

  • You have multiple sources of income.
  • You worked numerous jobs or worked in various states.
  • You sold a home, investments, or a business
  • You have investment properties
  • You have investments in foreign companies.
  • You own a company with business with partners.
  • You want to be sure to maximize all your deductions and get the most significant tax refund possible.

Options for Preparing Your Taxes:

  1. IRS Fillable Forms. You can complete your taxes and file them online; however, no guidance is provided, and you must perform some calculations yourself.  
  2. Tax Software—These five options were ranked as the top 5 online tax software providers by Forbes. You should compare options to determine which one is best for your particular situation.
    • TurboTax
    • H&R Block
  3. TaxSlayer
  4. CashApp
  5. Jackson-Hewitt Online

If you have not completed your taxes yet, it’s time to get to work. Tax returns are due on April 15. Check back next week for tips on minimizing penalties and interest if you are not able to complete and file your return on time.

Filing a Final Tax Return

Losing a loved one to death is one of the most challenging circumstances in life. The IRS will require the deceased person’s representative to file a final tax return to add insult to injury.

My father passed away early in the year, and I had not completed his tax return for the previous year. I had to file it for him. A year after his passing, I had to file a final return for him as he had received social security and retirement benefits in his last year of life. These were emotional experiences for me. If you are in this position this year, you have my sincerest sympathy, and I hope this information makes the experience less stressful for you.The return must be filed by your loved one’s surviving spouse or representative.

If you are the one filing, follow these steps.

  1. Gather all tax documents for your loved one as you would prepare your tax return.
  2. All income received up to death must be included on the final tax return. If the deceased person was elderly, their income likely included: (1) retirement benefits, (2) social security, (3) IRA distributions, (4) Interest and dividends, and (5) investment Income
  3. If they were younger and still working, they will receive a W-2 or 1099 from those they worked for in the final year of life.
  4. If filing electronically, you must check the box “Taxpayer Died Before Filing.”  If filing a paper return, write “Deceased” along with the taxpayer’s name and date of death across the top of the return. You do not need to include a death certificate or other proof of death.
  5. If the deceased person was married, the surviving spouse can file Married Filing Jointly or Married Filing Separately for the year of death.
  6. All credits and deductions for the deceased person were eligible for still apply.
  7. The appointed representative must sign the return for the deceased individual. The spouse must also sign the return if the person has a surviving spouse. If no representative was appointed and the person did not have a surviving spouse, the person handling the estate should sign the return as a personal representative.
  8. A personal representative should complete Form 1310, Statement of Person Claiming Refund Due for a Deceased Taxpayer. A court-appointed representative can skip Form 1310 but should include a copy of the court order showing their appointment.
  9. If the deceased person is due a refund, the representative must agree to distribute the refund to the person’s heirs in accordance with their will. If the deceased person has a tax liability, the personal representative must pay it from the estate asset.

You can use the IRS’s Interactive Tax Assistant (ITA) to help you determine how to file for your specific situation:  https://www.irs.gov/help/ita/how-do-i-file-a-deceased-persons-tax-return

If you have not yet filed your tax return, check back next week for tips on filing your return yourself.

Gig Workers & Taxes: Filing a Schedule C

Are you among the 73 million Americans who work in the gig economy? If you drive for Uber, deliver meals for DoorDash, shop for others through Instacart, design websites on Fiverr, pet sit for friends and neighbors for a fee, take on side jobs through Upwork, or engage in any other type of side hustle work, then you are part of the gig economy. If you are one of these workers, you may wonder (1) if you have to claim these earnings and (2) how you claim these earnings.

Many individuals who work in the gig economy also have a conventional job that provides them with a steady salary or wages. They obtain a W-2 form from their employer and must file a tax return. They may overlook the smaller amounts earned from their side jobs, but this would be a mistake.

Gig workers are considered independent contractors or freelancers by those who hire them rather than employees. As such, they do not receive W-2s at the end of the year. No taxes are withheld from their income, and the companies they work for do not pay a portion of their required Medicare and Social Security contributions.

The IRS considers earnings from side hustles or freelance work as self-employment income. For this income, you will file a Schedule C, Profit or Loss from Business. This form will be part of your income tax return, and the Net Profit or Loss will transfer to your 1040.

Each employer you worked for as an independent contractor should provide you with a 1099-NEC form. If you have earnings of $400 or more reported on these forms, you must file a Schedule C. This form requires you to sum up your total income and write it in Line 1. You can add up your income on Schedule C if you have worked multiple freelance jobs.

In Part II, you will need to list all the legitimate expenses for your business. This is crucial to ensure that you pay the correct amount of taxes and do not overpay.

  • Your expenses may include the costs incurred while driving your car to transport passengers or make deliveries. You should keep track of the miles you have driven and use the standard mileage rate of 65.5 cents per mile set by the IRS. You can enter the total miles driven on Page 2, Part IV, and then multiply the total mileage by .655 to get the exact value, which you can then enter on Line 9.
  • Advertising and marketing expenses, such as creating business cards, fliers, a magnetic sign for your vehicle, or a website, are entered on Line 8.  
  • Contract labor comes from hiring someone to assist you with jobs. If you are a freelance web designer, you might subcontract the creation of a logo for your client to a graphic designer or artist. If you had those expenses, enter the total on Line 11.
  • Insurance for your business is entered on Line 15. Typical insurance charges are surcharges added to your vehicle insurance due to making deliveries; errors and omissions insurance if you provide a professional service such as tax preparation; property insurance to cover a loss of tools or equipment for fire or theft; and general liability insurance.
  • Commissions and fees paid to Fiverr, Uber, Upwork, or another job matching service are entered on Line 10.
  • Payment processing fees. If you use PayPal, Venmo, or another service to process payments, you are paying them a percentage of the charges for their service. If your clients pay by credit card, then your credit card provider will deduct a service fee. These fees are counted as Other Expenses entered on Line 27a. You can detail these expenses in Section V. 
  • Cellphone and internet service charges are deductible if used primarily for business. These expenses are typically included on Line 27a and in Section V.
  • Supplies used to operate your business are deductible. Office supplies are standard for most companies. A food delivery driver might also invest in insulated bags to keep food warm or cold, a pet sitter might purchase pet treats and toys, and a handyman would buy tools and hardware. Keep track of these and deduct them from Line 22 on your Schedule C form.

When you have entered all your expenses, total them on Line 28. Subtract the total from your income to determine your Tentative Profit. For most independent contractors, tentative profit is the same as Net Profit. However, those working from a home office may elect to deduct some home office expenses, lowering your taxable profit but requiring additional work.

Cost of Goods Sold is calculated in Section III, but as gig economy workers do not commonly incur it, we will not include it in this post.

Your Net Profit on Line 31 should be transferred to Line 3 of your 1040 and also to Line 2 of your Schedule SE. Schedule SE is used to calculate your self-employment tax. Your tax software or your tax preparer will do this automatically. Your role is to accurately track your income and deductible expenses from your side hustles so that your tax liability will be accurate.

Check back next week for another Tuesday tax tip.

Do I Have to File a Tax Return this Year?

If you are currently retired and living on a small, fixed income or barely making enough money to support your family, you might wonder whether you need to file a tax return this year. The answer is most likely “Yes.”

In 1789, Benjamin Franklin famously said, “In this world, nothing can be said to be certain, except death and taxes.” That has not changed much. Filing a tax return is a requirement of life for nearly every American.

You are required to file a tax return if:

  1. Your gross income was greater than the applicable standard deduction for your filing status.
  2. You had self-employment income of $400 or more.
  3. You owe taxes.

Keep in mind that gross income is not just income earned from working a job. It includes social security and retirement income, IRA distributions, interest and dividends, capital gains, and any other sources of income you might have.

Let’s look at the example of a 90-year-old widow whose social security and retirement benefits total $23,400 annually. Additionally, she received $157 in interest on her savings and a dividend of $384 from stocks. Therefore, her gross income is $23,941. This amount exceeds her standard deduction of $15,700. Consequently, she must file a tax return for the year. It is likely that she had taxes withheld on these incomes and that she is entitled to a refund. If so, filing is not only required, but it is beneficial.

Even if you are not required to file a tax return, you will want to file if (1) you are due a refund on taxes withheld or (2) if you are entitled to claim a tax credit. The most common tax credits are:

  • Earned income tax credit
  • Child tax credit
  • American Opportunity Tax Credit
  • Credit for Federal Tax on Fuels
  • Premium Tax Credit
  • Health Coverage Tax Credit
  • Credits for Sick and Family Leave
  • Child and Dependent Care Credit

If you are still unsure whether you have to file a tax return, you can use the IRS’s Interactive Tax Assistance (ITA). It has an Interview Tool to help you figure it out. The interview is estimated to take 12 minutes to complete. Remember that the tool is only as good as the answers you provide. Access the interview tool here: https://www.irs.gov/help/ita/do-i-need-to-file-a-tax-return

Free Tax Filing Options

Did you know you may be eligible to file your taxes for free? Several free filing options are available, depending on your age, state of residency, and income. You can find a free tax filing option if your Adjusted Gross Income (AGI) is $79,000 or less.

In order to move forward, you will need to determine your AGI for 2023. This information will help us explore the best options available and make informed decisions. Let’s take a moment to calculate your AGI so we can confidently move ahead.

Step 1:  Calculate your total income by adding up all sources of income you receive. Typical forms of income may include:

  • Wages
  • Retirement income
    • IRA distributions
    • Dividends
  • Capital gains
  • business profits
  • interest earned
  • Investment income 
  • Social security
  • Tips
  • Rental income
  • Dependent care benefits
  • Employer-provided adoption benefits

  • Medicaid waiver payments

    Step 2:  Sum up the adjustments made to your income. These adjustments may include: 
  • Half of the self-employment taxes you paid
  • Self-employment health insurance premiums
  • Applicable donations to IRAs
  • Student loan interest
  • Unreimbursed educator expenses

Your AGI is your total income minus your total adjustments.

IRS File Free

The IRS has collaborated with several tax software providers to offer free access to those who meet the requirements. Each provider has its own set of criteria for eligibility. Please visit the provider’s website to determine if their free service is available in your state. Below is a list of the IRS’s trusted partners and a link to their websites.

1040 NOWAGI < $68,000Any agehttps://www.1040now.net
Drake$17k<AGI<$68kAny agehttps://www.1040.com/
EzTaxReturnAGI < $79,000Any agehttps://www.eztaxreturn.com/
FileYourTaxes$8.5k<AGI<$79k< 65https://www.fileyourtaxes.com/
On-Line TaxesAGI < $45,000Any agehttps://www.olt.com
Tax ActAGI < $79,00020 – 54https://www.taxact.com/
Tax HawkAGI < $45,000Any agehttps://www.taxhawk.com
Tax SlayerAGI < $44,000Any agehttps://www.taxslayer.com/
Comparison Free Tax Filing Options

The IRS has a tool to help you determine which of these trusted partners is right for you: https://apps.irs.gov/app/freeFile/general/

  1. Go to IRS.gov
  2. Click “File your taxes for free.”
  3. Select “Explore Free Guided Tax Software”
  4. If you are a first-time free tax filer, select “Find Your Trusted Partner(s)” to find the right preparer for your situation. Or you may browse all the IRS-trusted partners.
  5. Once you use IRS File Free, you will receive an email from the company you used with a link to file for free next year.

Check back next Tuesday for another tax tip to help you decide whether to itemize your deduction or take the standard deduction.

Itemizing Deductions vs. Standard Deduction

When doing your taxes this year, it’s essential to ask yourself whether you should itemize deductions or take the standard deduction. The standard deduction has significantly increased over the past few years, resulting in fewer taxpayers benefiting from itemizing.

If your deductions exceed the standard deduction, you will reduce your tax burden by itemizing. On the other hand, itemizing is a time-consuming process that you may only want to go through if you know it is to your advantage.

For 2023, the standard deduction is:

  • Single taxpayer:  $13,850
  • Head of Household:  $20,800
  • Married filing jointly:  $27,700

If you are 65 or older or blind, your standard deduction is increased by $1,850 for a single taxpayer or head of household and $1,500 per qualifying spouse for married filing jointly.

Questions to Ask Yourself

You can make a quick assessment as to whether it is worth your time and effort to deal with itemizing deductions by asking yourself these five questions:

  1. Did I spend a significant portion of my income on medical bills and prescriptions in 2023?
  2. Do I own a home with a mortgage?
  3. Do I live in an area with high income and property taxes?
  4. Do I give a large amount of money to tax-exempt charities?
  5. Have I experienced any uninsured losses from theft, natural disasters, or other casualty?

If the answer to two or more of these questions is Yes, then it is worth your time to do a quick calculation to estimate your deductible expenses. Your most significant deductions and the easiest to determine are (1) your mortgage interest, (2) your property taxes, and (3) regular charitable donations.  

Add these values. If the sum approaches your standard deduction, totaling all your deductions is most likely worth the effort. Otherwise, you are done, and you should take the standard deduction.

Itemizing Your Deductions

Medical Expenses: Multiply your adjusted gross income by 7.5%. You can only deduct medical expenses over this amount. If you think your medical expenses exceed this value, you will want to total all deductible expenses. Keep in mind that you can only deduct your out-of-pocket costs. Eligible expenses include:

  • Health insurance, dental insurance, and long-term disability insurance premiums
  • Doctor visits and prescriptions
  • Medical tests, lab work, surgeries, and procedures
  • Hospitalization costs
  • Cost of eyeglasses, contact lenses, braces, dental appliances, crutches, wheelchairs, and guide dogs
  • Mileage for trips to the doctor’s office, hospitals, and pharmacies.

State and Local Taxes:

  • State income taxes paid. This includes taxes withheld from your paycheck and/or estimated taxes you paid in 2023. If your state does not have a state income tax or you elect not to deduct your state tax withheld, you can deduct state sales tax. This can be done using actual calculations of sales tax paid or by using the optional sales tax tables.
  • Real estate taxes paid. Include only real estate taxes you paid on property you own that was not used for business. Typically, this is your primary residence, but it can only include taxes on a vacation or second home.
  • Personal property taxes paid. These taxes are typically paid on cars, boats, motorcycles, and campers. You can only deduct the portion of taxes based on the value of the items.

Interest Paid: You can deduct mortgage interest and points on your primary home or second home.

  • These costs can be associated with a first or second mortgage, refinanced mortgage, or home equity loan.
  • For this purpose, your home can be a house, condominium, cooperative, mobile home, boat, or other property that provides sleeping space, toilet, and cooking facilities.
  • Generally speaking, the loan proceeds must have been used to purchase, build, or substantially improve your home.
  • Investment interest paid on money borrowed to purchase an investment property may also be deductible.

Gifts to Charity

Donations made to qualified charities can be cash, property, or out-of-pocket expenses for volunteer work done for the charity. Expenses include mileage, tolls, and parking fees incurred while volunteering.

  • Deduct the value of any benefit you received from your donation.
  • If you gave more than $250 to any one charity, you need a receipt from the charity to verify your gift.

Loss from Casualty or Theft

  • You must complete Form 4684 for each loss.
  • You may deduct only losses that were not recovered by insurance.
  • If you have a qualified loss and you have decided against itemizing, you may be able to claim the loss by increasing your standard deduction.

Please note that this list of deductions is not comprehensive; it only covers the most common deductions. If you decide to itemize, you will want to review IRS Schedule A thoroughly for other possible deductions or discuss with your tax preparer.

Check back next week for options for filing your taxes for free.

Gathering Your Tax Documents

You should have received all your tax documents by now. Whether you decide to file your taxes on your own or hire a professional, staying organized is crucial. I organize my necessary documents and group them together to make the process easier for my accountant.

Let’s start with what your preparer does NOT need:

  1. Utility bills
  2. Lunch receipts
  3. List of all your prescription medicines

It’s essential to include all crucial documents when filing taxes. Here are the documents you need to ensure the best tax return possible:

  1. All W-2s and 1099 statements. 1099s come in many varieties depending on whether the income is from retirement, interest, dividends, royalty payments, social security, cancellation of debt, or jury duty.
  2. Income earned from self-employment as documented by a balance sheet, income statement, and profit and loss statement. You must report self-employment of more than $400.
  3. Calculate the sum of all “Estimated Tax Payments” you made last year.
  4. Form 5498 showing contributions to IRAs
  5. Form 1098-E documenting interest paid on college loans
  6. Alimony and child support received
  7. Form W-2G documenting gambling winnings

If you plan to itemize deductions, you must provide additional documentation. They are:

  1. Summary of medical and dental expenses, if the total is more than 7.5% of adjusted gross income
  2. State and local income taxes paid
  3. State and local real estate and personal property taxes
  4. Form 1098 documenting mortgage interest and points paid
  5. Home mortgage interest and points paid to an individual. Include the individual’s name, address, and identification number.
  6. Summary of charitable donations. It is helpful to include a list, along with the organization’s address to which you donated.

After sorting your documents into categories, creating a summary of your tax information is helpful.

Here’s an example using a fictitious couple. John Doe is 66 and continues to work full-time. His wife Jane is 68 years old; she works part-time and draws social security. I have created a summary of the information that they should provide to their accountant.

Tax Payers:  John and Jane Doe
2023 Tax Summary
Income Summary:
John’s W-2 income$52,714
Jane’s W-2 income$18,000
Jane’s social security$22,177
Jane’s retirement income$25,434
Bank account interest $47
2022 state tax refund $916
Total income$119,288
Adjustments to Income:
John’s IRA contribution$23,000
Total adjustments to income$23,000
Deductible Expenses:
Mortgage interest paid$15,093
Property taxes on home$2,843
Taxes on personal property$1,794
Total taxes and interest$19,730
Charitable Donations:
Church$12,000Address
Food pantry $2,400Address
Christmas toy drive $500 Address
College alumni association $600Address
Total charitable donations$15,500
Total itemized deductions$35,230
Tax Summary Spreadsheet

If you would like a copy of my tax summary spreadsheet, please comment “Spreadsheet” or email me at susan.ball5@aol.com, and I will send it to you.

Make sure to tune in next week for my next blog post on determining whether it’s worthwhile for you to itemize your deductions. I will help you make informed decisions and potentially save you money. Take advantage of this valuable information – sign up for an email subscription and be notified when my next blog is posted.