It's tax season, and if you haven't already filed your taxes, chances are you're a little stressed about it. But if you're an average taxpayer, you've actually got it pretty sweet. There are some income situations where paying taxes can require more paperwork, more filing deadlines and, yes, even more stress.
We reached out to the folks at TurboTax to find out which taxpayers have the toughest time when it comes to filing their taxes. They offered some handy tips to keep folks in these income situations on the right track with the IRS. So, if you ever think you'll be in one of these situations, keep this list handy.
Freelancers are a growing population of taxpayers especially with the growth of the "on-demand economy." A recent Intuit survey found that 3.2 million people currently participate in the on-demand economy, and that number is expected to grow to 7.6 million by 2020.
How taxes are different for them:
Freelancers and the self-employed often pay income taxes and self-employment taxes as they get paid for work. Known as estimated taxes or "quarterlies," freelancers typically make tax payments four times a year. This doesn't mean freelancers must file a tax return four times a year, it just means they're making payments that will be included as taxes paid when they do file their tax forms.
How to make filing easier:
Hiring a tax professional can save you time and headaches, but they can also be expensive. If you can't or don't want to pay an accountant, filing software is another option. Also, you'll want to be sure to track your receipts and expenses.
"Keep your receipts and track your income and tax deductible expenses year-round instead of waiting until the last minute," advised Lisa Greene-Lewis, a CPA and tax expert at TurboTax. "Figure out your estimated taxes. In general, if you think you will owe more than $1,000, you need to pay quarterly estimated taxes."
Greene-Lewis also recommended taking full advantage of business expense deductions available to the self-employed. "For instance, if you … drive for Uber or Lyft, you may be able to deduct the cost of the car you purchased up to $25,000 if you use the car over 50% for your business."
2. Commission Wage Earners
Commissions can be treated in two ways for tax purposes: as straight salary, in which case the employer would withhold taxes from the individual's compensation based on the elections the employee makes on Form W-4P; or the individual can be treated as a self-employed independent contractor, responsible for remitting their own taxes to the IRS and state tax department.
How taxes are different for them:
It's that second scenario that can get tricky, with special rules applying to tax withholding, including requirements to avoid excise taxes that apply to underpayment of estimated taxes. The help of a tax professional is probably in your best interest in this case.
How to make filing easier:
First, that tax professional is going to make life easier. Second, there are ways to reduce tax liability.
"Taxpayers expecting commissions or more [commissions] than usual may be bumped up into a higher tax bracket, but there are few things they can do," Greene-Lewis said. "If they want to reduce their tax liability they can reduce their taxable income by maxing their retirement contributions, paying estimated taxes, and seeing if their employer can defer an end-of-year commission to the following year."
3. Overseas Wage Earners
If you are a U.S. citizen or a resident alien of the U.S. and you live abroad, the IRS taxes you on your worldwide income. However, you may qualify to exclude some of your foreign earnings, according to the IRS. In addition, you can exclude or deduct certain foreign housing amounts.
How taxes are different for them:
You must keep track of all income, which can be tricky if you work in multiple regions and/or for multiple employers. All of this income must be reported to the IRS.
How to make filing easier:
"If you receive foreign income you may be eligible for a foreign tax credit reported on Form 1116 if you paid and accrued foreign taxes and are subject to U.S. tax so you are not taxed on the same income," Greene-Lewis said. "You may be able to take a deduction, but most people take the foreign tax credit if eligible since credits reduce your tax liability dollar for dollar."
4. Green Card Holders
Green Card holders become U.S. tax residents automatically, beginning the year they receive their Green Card. They must declare their entire income to the U.S. government (foreign wages included), unless steps were taken to be treated as a resident of a foreign country under an income tax treaty.
How taxes are different for them:
Some Green Card holders seem to think the number of days spent in the U.S. each year has some effect on whether or not they are a tax resident. This is true only for people who have nonimmigrant visas, not Green Card holders. The IRS provides answers to a lot of common Green Card tax questions on their website.
How to make filing easier:
Make sure you have your Individual Taxpayer Identification Number (ITIN). The IRS issues ITINs to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain a Social Security number from the Social Security Administration.
Also be sure to keep track of all income, foreign and domestic, and report all of it to the IRS.
