US Taxes For Freelancers How To DIY: Save Big & Pay Less Tax

This lecture is an explanation of what a Federal Tax Return is. I also show you what document is called US Federal Tax Return, address in short all the parts of that document and show you modifications of that document which are used as well for simpler US Federal Tax returns.

The process of US Tax preparation always falls into the following steps:

1. List all income you made for the year from all sources.

2. Subtract all expenses you can claim as deductions.

3. Tax will be calculated as % of the amount above (percentage depends on the amount of money you make - there are several tax brackets).

4. Subtract all expenses you can claim as credits toward that tax.

5. Subtract amount of tax you already paid throughout the year (paycheck withholding or estimated tax paid).

6. Add any self employment tax (if you had gigs on the side or actually run a business that you own).

7. Subtract expenses you can claim as refundable credits toward the tax above.

8. Your result will be either refund (if you overpaid tax) or balance due (if you underpaid tax during the year).

Your goal to be as close to ZERO as possible because IRS is not after ALL of you money, they only want the amount that you are liable for as tax.

Every tax preparation software will calculate your tax liability exactly the same way no matter if you go to a tax office or do it yourself on your own computer. There is no need to pay someone to do your taxes if you can take this course and learn how to do it correctly yourself.

Every tax preparation software will generate your tax document depending on the amount of information you need to enter. It will be either the full form called 1040, or a shorter form called 1040A, or a one page form called 1040EZ.

This is only general information on what we refer to as 'US Federal Income Tax Return' and 'doing taxes'.

Please watch the rest of the course for in depth information on all 8 steps of tax preparation.

In addition to personal exemptions you can take either itemized deductions or one standard deduction on your return, which reduces your income and your tax bill even more. What's the best way to reach the smallest possible taxable income - with a standard or itemized deduction? It depends on your personal circumstances.

IRS instructions for form 1040 (Federal Income Tax Return) clearly states that you cannot take both, but take either itemized or standard deduction – whichever gives you SMALLER TAX BILL.

How much is your standard deduction?

That depends on your filing status.

In 2018 it is

$12,000 for single filers or married couples filing separately.

$18,000 for head of household filers.

$24,000 for married couples filing jointly or a widow(er) with qualifying child

The standard tax deduction is a flat amount that the tax system lets you deduct, no questions asked.

Which begs a question – what expenses are covered by a standard deduction? The answer is in the form called Schedule A or Itemized deductions.

Let's take a look at it.

If all of the expenditures that you can list on Schedule A total higher than the standard deduction, you will save on your taxes by itemizing them on Schedule A. If not, claim the standard deduction.

So the answer to the question about what expenses are covered by the standard deduction is in this list:

Medical Expenses

Charitable Donations

Job Related Expenses

However, if you don't spend more than 10% of your income on medical expenses, do not pay real estate tax and mortgage interest (like both couples in the case studies, who rents their apartments), do not contribute a lot of money to charity, most likely your state and local taxes withheld from your paycheck will not be more than the standard deduction.

In this case go ahead, claim the standard deduction, you do not need to fill out Schedule A, and you don't need to keep receipts for your housing.

Deductions and credits serve the same purpose - they reduce your tax bill.

To put it in very short terms, deductions reduce your taxable income.

For example, if you are single and no one else lives with you and you don't support anyone else financially, your income from all sources like your job, your side business, interest your savings have generated, etc. equals $75,000.

You rent an apartment which means that a standard deduction you are entitled to is $12,000 (in 2018). This amount is deducted from your income to reduce it before income tax is calculated. Which brings your taxable income down to $63,000.

You paid $4,000 in student loans interest, you will qualify for a $2,500 (this is maximum) student loan interest deduction from your income, which will bring your taxable income down to $60,500. According to the income tax table before this deduction was applied, your tax would be $12,445 but after the deduction was applied the tax would be $9,255. There is definitely a reduction in tax. That's how student loan interest deduction helped you to lower your tax bill.

Now it's time to apply credits toward that tax amount. In 2018 you listed your 10 year old daughter on your Federal Income Tax Return, and are eligible to claim Child Tax Credit of $2,000 . This credit reduces your tax from $9,255 down to $7,255 because the credit amount is subtracted directly from the amount of your tax bill. This is not the end of the calculation, of course, because most likely you've already paid some of this tax (or even higher amount of tax) through your pay check withholding, but this statement goes beyond our example the purpose of which is to compare how deductions are different from credits.

Deductions and credits help to lower your tax bill, both of them are without a doubt tax benefits.

This lecture includes details you need to understand the terms used in the software so you can answer the questions regarding Obamacare (Affordable Coverage Act) as it relates to you, your family and if possible, avoid paying a penalty.

As you've probably heard, the ACA, which some people refer to as "Obamacare", requires most Americans to have health insurance. If you already have insurance - or even if you don't - we'll walk you through what this means for your taxes.

You're considered covered for 2014 if you had minimum essential coverage for at least one day of each month during 2014. Special rules apply if someone was adopted, born, or died during 2014.

If you have received a form 1095-A (Health Insurance Marketplace Statement), you might want to know how to read it.

Here is line by line explanations for your 1095-A form:

• Line 1 contains the name of the state where you enrolled in health insurance coverage.
• Line 2 is the number the Marketplace uses to identify the policy in which you are enrolled.
• Line 3 contains the name of the company that holds your policy.
• Line 4 contains your name or the name of someone in your household with health insurance coverage from the Marketplace.
• Line 5 may show only the last 4 digits of the social security number (yours or one of your household members with health insurance coverage from the Marketplace.
• Line 6 will be filled out if there is no Social Security number.
• Line 7 only contains information if advanced payments are made (if the insured person is married).
• Lines 10-11 - check start and end dates for accuracy. If you were enrolled for the whole year, you will see December 31st 2014 on this line and you must re-enroll for annual coverage each year.
• Lines 12-15 are self explanatory.

• Part II details information for each individual covered under the health insurance policy. If more than 5 individuals covered, you will receive additional 1095-A forms. If you enrolled into Marketplace coverage with one or more people who you don't list on your tax return (for example your children under age 26), then make sure they got a copy of this form. If during enrollment you specified that you would not list them on your tax return, then you will not see their info on this form and they will get their own form from the Marketplace.
• Part III information is there for you to use it when completing form 8962 (Premium Tax Credit) when doing your taxes.
• Part IIIA is the total cost of the monthly health insurance coverage premium. If you received advance tax credit payments, you may only be responsible for a portion of this total cost.
• Part IIIB - this amount is calculated by the Marketplace. It is used to determine your monthly advanced tax credit payments and premium tax credit you get on your tax return. Keep the Marketplace informed about all change to your coverage during the year so these numbers are accurate.
• Part IIIC - this is the amount of advanced credit payments that were made to your insurance company for all or part of your premiums. If no payments were made, this section will be blank.

Let's go on the Internet now and find Tax Hawk website. I prefer this website to others for a couple of reasons - the software is full of Help topics and anyone can use it to file their federal tax return for free, regardless of income level. To file a state tax return is extremely affordable too.

So, click 'Start Free Return' button and you will see new account screen with 'Create New Account' button. Once you click on it, the software will open up a template where you can provide your e-mail address which will become your user name, create password, create security questions, and click 'Create New Account'.

The next screen will give you an overview of what kind of support you can expect from this company - tax help, technical support for the website, etc. They give you a promise to take you all the way through tax preparation process.

You are done with this step and now you are ready to start filling out your tax return.

Once you create an account in an online tax prep software, you need to enter your and your family personal information.

The first thing you have to chose is your filing status. It is 'Head of Household' for Nancy Green. Make sure to watch the video and read supplemental materials to find out what requirements you need to meet to be able to claim this most advantageous filing status for single/divorced people.

Your personal information and your dependents personal information is entered on separate screens, there are requirements which your dependents need to meet to qualify you for Head of Household filing status, and other possible tax benefits, so please make sure you don't fly through the video, but watch closely and read everything on your screen when you do your own case study for Nancy Green.

If you wrote a book and put is up for sale on sites like Amazon, then at the beginning of the year you will receive a 1099-MISC form with amount of sales you got, recorded in box 2 of that form.

This is business income and Nancy will report it on Schedule C. She will enter all the information from her 1099-MISC into software and answer all the questions regarding expenses she had incurred to generate this income.

She will also have an opportunity to claim any depreciation of the business assets she uses to generate this income.

She did not have any health care insurance associated with this business, nor any car expenses. She sold $350 worth of books without help of retailers, to her friends and family. She will report that income on her Schedule C for book selling business as well.

If you sell product for a company as an independent distributor and make commissions on those sales (more than $600), you will get a 1099-MISC form from the company and the amount of your commissions will be recorded in box 7.

You have to report that income on a Schedule C. If you had expenses associated with this income, like Nancy did, you can report those expenses.

Advertising, supplies, use of your car, parking fees, talls, any fees for networking events, training, membership fees - all of it can be used to offset your business income.

Make sure you go over all the screens and read instructions carefully, so you take advantage of all tax benefits as a business owner.

Supplemental materials for this lecture and other lectures in Nancy Green case study will provide you with plenty of additional information, so you can make educated choices while preparing your taxes.

If you have a business with a name registered as an LLC, you can use Schedule C to report your revenue.

Have your 1099-MISC ready and enter them into the template on software, exactly like you see it on your paper copy. Make sure you records all vehicle expense, better yet, use standard mileage deduction. To do that, you need to have accurate records of the dates and places you drove your car to for business. In 2014 standard millage rate is $0.56.

If you used a room in your home exclusively and regularly for this business, you can record that on your Schedule C and get a deduction.

Nancy purchased a couple of items to use specifically for this business. She can claim depreciation deduction for these expenses. Make sure your business usage is recorded accurately.

If you have alimony income (which IRS considers to be uncommon income), report it in Other Sources Of Income Section in the flow of the tax interview in the software.

Do not mix it up with child support because child support is not taxable to you. Just record the number in the box on the screen and you are done.

The answer to this question is simple once you know from the first section what standard deduction is and what the difference between the standard and itemized deductions is.

The bottom line - IRS wants you to claim the one which gives you the biggest benefit, so make sure you watch this lecture and make the right choice when doing this case study and your own tax return.

When preparing 2014 tax returns, most people will simply have to check a box to indicate they and everyone on their tax return had health care coverage for the entire year. You will not need to file any additional forms, unless you are claiming the premium tax credit or a coverage exemption.

Under the Affordable Care Act, you will need to report minimum essential coverage, report or claim a coverage exemption, or make an individual shared responsibility payment when you file your 2014 federal income tax return. If you are not required to file a tax return and don't want to, you do not need to file a return solely to report your coverage or to claim an exemption.

If you and your dependents all had minimum essential coverage for each month of the tax year, you will indicate this on your 2014 tax return by simply checking a box on Form 1040, 1040A or 1040EZ; no further action is required.

You will not need to send the IRS proof of your health coverage. However, you should keep any documentation with your other tax records. This includes records of your family's employer-provided coverage, premiums paid, and type of coverage. You should keep these – as you do other tax records – generally for three years after you file your tax return.

If you or someone in your household goes to college, make sure you have good records of all amounts paid for tuition, books, equipment, supplies, fees. These are all expenses that qualify for the credit.

You also should have received a form 1098-T from college. Look for it in the mail, and use it to report amounts listed on that form so you can get a tax benefit for those college expenses.

In this lecture I give you step-by-step instructions on how to report all of eligible college expenses even if they are not included on form 1098-T.

If your income is low, you might qualify for Earned Income Tax Credit.

How much of a credit you will receive depends on the number of children you claim on your tax return. In the supplemental materials for this lecture I included a chart showing amounts.

There will be a number of questions to answer in the tax interview flow, make sure you answer them correctly.

I have also uploaded more materials to read if you want to know more about this tax credit.

When you get to this part of your tax preparation, make sure you don't open up forms which you do not need, keep it simple, don't confuse yourself.

Nancy does not have to enter here, but take a look, you might find something that has everything to do with you and including these expenses on your own tax return can be very beneficial for you.

It is important to go over all possibilities for getting additional tax benefits before you file your taxes and print out a copy for your records. I am going to take you over each step in the process.

You will also have an opportunity to take a look at the preview of your final paperwork before you file, to make sure there are no typos, etc.

Make sure to take a look at the PFD file of Nancy's tax return preview and see how all the work which was done on preparing taxes is placed on appropriate lines of each form.