THE REALITIES of business sometimes get in the way of our artistic pursuits. Because we earn money from our work, reporting income to the government is something that has to be done. That’s why this is my busiest time of year for tax tip questions; but I’m afraid it’s also the worst time of year to try and implement tax strategies. The truth is that most of your real tax planning for 2010 should have been done long ago. Still, there are at least seven steps that you can use to improve your 2010 taxes – strategies that should help you keep more money in your pocket.
Some people have tax documents in a neat stack, ready to be organized. These aren’t usually artists like us! But hopefully you at least have a general idea where to locate 1099’s, W2’s and other documents so you can quickly hand them off to your tax professional or input them into your tax accounting software program. Since it’s too late to improve the numbers that are on those documents, it’s now a matter of arranging the puzzle of numbers in a way that decreases your tax bite most dramatically. (Once you use these seven tax tips don’t forget to seek out advance strategies to make your 2011 tax bite smaller.)
For now, let’s focus on arranging this year’s numbers as effectively as possible for your tax return. Before we start, I’d like to warn you that a true tax professional is invaluable! There’s nothing I can say here that will apply specifically to your situation. Consider hiring a company or individual that has direct experience working with other artists. They should have the most current information regarding the allowable deductions for your particular business.
1) Double check your work. I know taxes may not be your thing, but every year people send in forms without signatures. Worse yet, there is incorrect math or other easily identifiable mistakes. Double-check your return carefully before sending it to the IRS. If you catch a mistake after you send it in, what should you do? File form 1040-X as quickly as possible to avoid unnecessary penalties.
2) Remember itemized deductions. Don’t assume that you don’t qualify for itemized deductions. Compare the standard deduction the government gives you with all of the write-offs you can possibly find. In 2010 the standard deduction for single filers is $5,700 and $11,400 for those married and filing jointly. Find an itemized deductions page and work through the list of possibilities. You may be closer than you think to a larger refund or lower tax bill.
3) Did you remember to keep receipts for all of your charitable contributions from 2010? As artists, we often give performances and donate services to charitable groups that we’d ordinarily only do for money. These may be deductible. Don’t estimate your charitable giving, though. The IRS has cracked down in recent years on fraudulent charitable claims.
4) Look for extra credits and deductions. Did you add any energy efficient appliances or utilities in 2010? Here’s a link to the EPA website so you can check the list of available tax credits: http://www.energystar.gov/index.cfm?c=tax_credits.tx_index
5) Are you teaching others your craft for money? Did you take classes to improve your artistic skills or business acumen? Do you have children in college? For each of these situations, you may be eligible for additional deductions or credits often overlooked by taxpayers. Check with your tax professional for details on these opportunities.
6) Have you kept receipts for your business activities? There is a fine line between a business deduction and tax fraud, so let me be clear: you need to manage your artistic business as a business. Keep track of your mileage. Keep track of your business expenses. Use a separate check book for business activities. Ask a tax professional to verify which expenses are tax-related and which are not.
7) Open an IRA if you’re eligible. You may be able to lower your taxes by putting money into a tax-deductible IRA this year if you don’t have a workplace plan available. If you do have a plan available through a job, you still may be able to make a full IRA contribution if you get to the “adjusted gross income” line of your tax return and it’s less than $89,000 if you’re married filing jointly and $56,000 if you’re single. This deductible contribution can be $5,000 or less unless you’re over age 50. People over 50 can make an additional $1,000 contribution.
There you have it; seven good tax tips for you to use while prepping your return. Hopefully, you’ll find some gold among them that helps lower the pain of writing a tax bill check this year. I’m sure that you’re juggling your art, tax planning, and other responsibilities, so start early! You’ll feel a great sense of relief when your 2010 tax preparation is behind you.