Wednesday, July 31, 2013

Thrifty Thinking: Self-Employment and Social Security

For millions of self-employed Americans, there is a time-limit for reporting Social Security earnings and getting credits toward future Social Security Benefits. Filing tax returns in a timely manner is the only way for the Social Security Administration to know how much you earned for Social Security Credit purposes.

The California Society of Certified Public Accountants suggests the following steps to help self-employed Americans keep their Social Security Credits for retirement:

Step 1. Determine your tax filing status
The federal tax filing statuses include: single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child. You may qualify for more than one filing status, in which case you will have to make a choice. In that situation, you should choose the filing status that will result in the lowest tax.

Step 2. Calculate your dependents and personal exemptions
The IRS allows taxpayers to claim personal exemptions for themselves and their dependents. A personal exemption is similar to a tax deduction because it reduces your taxable income. For tax years 2009 and 2010, the maximum personal exemption is $3,650 — note that your personal exemption amount may be less if your income exceeds a certain amount. Your personal exemption information must be 100% accurate on your tax return because it largely impacts how much federal income tax you owe.

Step 3. Report your income for the tax year
Most people can simply review their W-2s (Wage and Tax Statements) to determine their annual income. This can get slightly more complicated if you have worked more than one job during the year. Furthermore, individuals who are self-employed will likely have to spend extra time on this part of the filing process.

Step 4. Claim eligible tax credits and deductions
If you qualify for any tax credits or tax deductions, you will want to take advantage of them. Tax deductions reduce your taxable income and tax credits reduce the actual amount of tax that you owe — both will increase your chance of receiving a tax refund. Make sure you understand how to properly claim any income tax benefits, as mistakes will delay the processing of your return. If you are preparing your own income tax return, you may order IRS tax forms (and publications) for delivery by U.S. mail or you can access the forms online.  All of the documents that you will need to file your federal income tax return should be available on the IRS website.

Step 5. Review tax return forms for filing.

Federal Income Tax Forms
There are different types of individual income tax return forms. You must use the tax form that corresponds with your particular situation and allows you to claim the income, deductions, credits, etc. that apply to you. The most common types of income tax returns include the following:
Form 1040 (U.S. Individual Income Tax Return) (a.k.a. “the long form)
Form 1040A (U.S. Individual Income Tax Return) (a.k.a. “the short form)
Form 1040EZ (Income Tax Return for Single and Joint Filers With No Dependents)
Form 1040NR (U.S. Nonresident Alien Income Tax Return)
Form 1040NR-EZ (U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents) If preparing your own taxes is too overwhelming, or you just don’t have the time, consider hiring an experienced tax professional. If you have a complicated tax return or you have questions about claiming certain tax credits/deductions, using a tax preparer can help make the filing process less painful. Or you can use an online tax preparation tool such as 1040.com. This article should help you understand how to file your federal income tax return. Although filing and paying taxes can be stressful, having the right information will reduce your risk of making costly mistakes.

Step 6. Do additional resource.

The California Society of CPAs has created a free Web site of articles, tools and resources to help consumers on this and other personal finance issues.  These resources can be accessed by going to: “Dollars and Sense.” 

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