When this time of the year comes, we all wonder how to maximize tax return, and what are the steps to get taxes done right. Many of us once believed that taxes can be difficult or impossible because we no longer follow a traditional path with a simple W2. We spent weeks or months juggling paper and working with tax companies, only to find ourselves frustrated, time wasted, and with limited refunds in the end.
This doesn’t have to be the norm every single year. We need to talk about good tax habits that put you in the driver’s seat, making tax refunds done fast (in hours, not days or weeks), and low cost (you don’t need to hire an account every year), and maximize refund without being audited or breaking the laws.
Disclaimer: I’m not an accountant. This isn’t official accounting or tax advice.
How to maximize Tax Return in 2023? (Top Tips)
1. Don’t be fooled by getting taxes done “for free”
Free isn’t always “free”, and free often doesn’t give you the best solution. In this case of tax return, free options will likely not give you maximum refunds. Sure, filing form 1040 is free, as is submitting estimated taxes. But if you don’t understand your income, expenses, incentives for home-based businesses, renewable energy upgrades at home, and others, you are missing out big time on potential tax cuts. Don’t be fooled by getting taxes done 100% free.
There are options that are nearly free when you look at the big picture. TaxAct is a reliable and affordable option to guide you through the tax return process for $100-200 as a self-employed person.
2. Home-based creators can deduct their home expenses
Say yes! This is possibly one of the most exciting parts of working as a home-based creator and freelancer. Also one of the most important aspects on how to maximize tax return. You can deduct a portion of your total home expenses including utilities. The portion is based on the area (in square footage divided by total home footage) used for your business.
To make it even easier, TaxAct will ask you to categorize these home expenses based on:
Direct expenses would include painting or repairs to a specific area of your home used for business. Enter 100% of your direct expenses in the appropriate field.
“Indirect expenses are those paid for keeping the entire home up and running and cannot be specifically associated with just the business area (i.e. painting the entire house). They benefit both the business and personal areas of your home. Generally, enter 100% of your indirect expenses in the appropriate field and they will be allocated to the business portion using the ratio of your business square footage to the total square footage of your home. Examples of common indirect expenses are rent, mortgage interest, and real estate (property) taxes.” – sourced from TaxAct.com
Do not pass on these deductions, they can significantly reduce your taxes each year as a home-based creator.
3. Get started early
It’s not uncommon for taxpayers in general (not just creators) to wait until near the deadline to begin preparing for their taxes. This can cause unnecessary stress and force you to get it done quickly and skip over important tax-saving incentives.
For example, April 15th is the deadline for United States taxpayers. I typically gather all my paperwork and begin filing taxes in early February. By that point, I would have received all the 1099s from my clients, banking, and investment companies needed to file my taxes.
The decision is up to you but sooner is better. Filling early can potentially help you get your taxes accepted and receive your returns sooner because there will be many more filings for IRS to go through by mid-April.
4. Get your paperwork ready for filing
1099s for contractors this includes you if you have been working as a contractor, freelancer, or self-employed creator.
If you hired US-based contractors, you need to email/mail them 1099s at the beginning of the year, and vice-versa, if you have been hired as a contractor/self-employed person, or a single-person LLC company, you will receive 1099s from your clients. It’s important that you keep track of these forms and remind the ones who send them late. This way you can gather all 1099s and not delay your filing process.
(Note: even if you did not receive 1099s – not your fault – you can still enter those incomes as “Other Income” in filing software such as TaxAct or TurboTax. But 1099s help a lot especially when you have multiple clients and it’s their responsibility to send them to you by end of January each year)
All your tax documents from banks and investments (all the other 1099s such as 1099-INT, 1099-K, etc).
You don’t have to memorize or fully understand what each of the 1099 means, but it’s important to gather them prior to filing for taxes. If you are using tax software such as TaxAct, they will be walking you through the filing process and prompt you to gather these documents.
What are these financial institutions and apps?
- Banks such as Bank of America, Capital One, etc.
- Payment apps such as PayPal, Stripe, Wise, etc.
- Investment/retirement firms such as Vanguard, Fidelity, etc.
- Personal Loans such as LendingClub, etc.
- Online marketplaces where you buy/sell such as eBay, Etsy, etc.
Above is a list of common financial institutions. Be sure to go through what you have and secure 1099s from them all.
How to prepare yourself for this task:
Gathering 1099s sounds straightforward and it’s not hard to find the documents. Often times you can log into the appropriate banking/investment websites, and search for “tax forms” or “tax documents” to find what you are looking for. However, the slightly irritating part is that they aren’t all released at the same time. Most of these forms are ready by end of January, but some might be later in the first or second week of February.
5. Use a business bank account
If you don’t have a business bank account, start one today to save yourself for the upcoming tax year. I cannot emphasize the importance of separating business vs. personal expenses enough for creators.
If you are mixing personal and business expenses currently, you must stop that right away. It’s not too late to start a business account. You can do that easily with the bank you already have. For example, Bank of America, and Capital One both have business accounts.
I won’t go into details about which ones to choose. In general, you want to use one that’s suitable for your business. If you have a relatively small business without tens of thousands of dollars transacted each month, you can choose small business banking, and be sure to avoid banking fees as much as possible.
If you are unable to easily find business banking for your needs, consider FOUND, a simple solution for self-employed people. I’ve written this article:
Another option I really like is Wise for both domestic and international transfers. Since 2020, my business has welcomed a lot of international clients. Wise helps me manage payments easily with my clients with minimum fees. Learn more:
6. Get a business credit card
Some people prefer keeping track of all their expenses on a bank card or a debit card. This is to help some folks always stay on top of their expenses and never spend more than they have. Maybe that’s your preference too.
As for me and most others, having a dedicated business credit card is a better option. I like the ability to easily reject charges (yes, you can do that too with bank cards but I find it easier with credit cards), and I like the perks and benefits that come with credit cards such as 2% cash back with Captial One’s cash reward business card.
But the bottom line is – always, always pay off your credit card before the deadline each month. You have heard this from numerous other personal finance gurus. Credit card fees are no joke. So if you plan to spend it, you have to plan to pay it off in full each month, too.
7. Gather ALL your business expenses before filing taxes
You’ll quickly learn an important lesson here, which is that you must simplify your payment and collection system as much as possible.
Don’t split the charges between personal and business, PLUS don’t split expenses between two banking systems if you don’t have to, such as PayPal and your bank. This way, you don’t have to go through two systems to reconcile your expenses for the same transaction.
There are things that might seem like a good idea at the time, but they will cost you time and even money during tax season.
No matter how messy your expenses are, there are systems and software (Quicken, QuickBooks, Mint, etc.) that are built to help you consolidate them in one place and then break them into categories of deductions for your business. For example:
I used to use Quicken but find it clunky with imports from banks, PayPal, and other sites. The import doesn’t always work for the full tax year and takes many tries to get it right. QuickBooks is a little fancier and designed to work for you with your accountant, but reconciliation takes hours when you are off by a few dollars. I find the effort to be overwhelming and unnecessary.
These days to consolidate my expenses, I simply use Mint.com. You can create an account for free, add all your accounts, then go to the “Transactions” tab to filter on only the bank accounts and bank credits, and export all based on a tax year. Voila! You get a clear spreadsheet (CSV) with all the transactions you need for your taxes. Hence why I emphasize the importance of creating business banking and credit cards for those specific transactions, so you never have to parse them out from personal items.
8. Categorize your business expenses following IRS rules or guidelines from your preferred tax software
In previous years, I made the mistake of creating my own categories for different expenses and then having to match them to the IRS standard categories, which have been changing slightly over the years.
Then I learned to strictly follow the pre-defined categories as shown in my TaxAct account. It saves so much time. There aren’t that many, and you don’t have to memorize them. Each category has a definition that can be found on IRS.org or your tax software’s info/help section.
For example, business expense categories:
- Office expenses
- Commissions and fees (fees and charges)
- Repairs and maintenance
- Travel (including hotel, travel, auto parking, and fuel)
For some things that are common for your small business but aren’t clearly part of the above categories, you’ll have the opportunity to enter them manually in self-defined fields in most tax software such as TaxAct. As for Feisworld, some of them are:
- Gifts for clients
- Bank/Credit Card fees
- Inventory fees
Don’t overlook the bank and credit fees, and inventory fees for the products you sell. When companies such as PayPal, eBay, and Stripe send you their 1099s, they only include the gross income for each month. They don’t deduct any costs that incur for your business. This is a huge miss for many self-employed creators. To give you an example, a small business like Feisworld can incur thousands of dollars in bank and transaction fees each year.
9. Don’t forget the federal and state tax credits for renewable energy incentives
While I’m generalizing renewable energy in the same category, it can refer to many different products and expense categories around your home. Some popular ones are:
- Heat pumps
- Solar panels, batteries, and systems
- EV (electric vehicle)
This is a huge category for the deduction you don’t want to miss out on. Unfortunately, it’s not always easy to find the exact information you are looking for.
Instead of going to a single page to find all the details related to each and every one of these incentives, they tend to live on different sections of IRS.gov – or you may very well find different sites that explain the terms and conditions much better.
You can do it to Google “federal incentives for heat pumps”, or “federal incentives for Tesla in 2022”.
Among the incentives, EVs are the trickiest given the price limitations and models of the vehicles. The incentives also change often, so what is true for 2022 will likely change for 2023.
Last but not least, be sure to check both federal and state incentives as the subtitle suggests. For example for EVs, the US federal incentives could provide up to $7500 in credit, and there’s an additional state-level incentive in Massahcuttes that offer an additional $3500 if the EV is below a certain price.
Many of my creator friends are making their purchasing decisions based on these incentives. Understandably so, which I didn’t do. My newly purchased Tesla Model Y with red paint and long-range add-on pushed me over the state limit of $55,000, so I can no longer claim the state credit.
I’m not suggesting that you will have to make these decisions based on tax incentives, but it’s a good idea to know them ahead of time.
How to maximize Tax Return: Conclusion
Taxes for self-employed, home-based creators aren’t necessarily easy, but after preparing yourself with these best practices, you should expect to save days of work and much less hassles to get it done.
How to maximize tax return in a nutshell:
- Have a business bank account, and ideally a business credit card (if you are someone who pay off credit card charges in full each month)
- Gather all your paperwork before filing taxes (all 1099s) from your clients, bank and investment accounts
- Consolidate all your business expenses in one place – I recommend Mint.com which is free or the software of your choice. Downloading CSVs from each source and combining them isn’t wise as they are formatted differently and will cost you a lot of time to match them up.
- Don’t skip over Business Use of Home to deduct direct and indirect expenses – huge savings!
- Look into any federal and state-level incentives such as renewable energies and other categories that are relevant to your unique situations, such as child tax credit, recovery rebate credit, child and dependent care credit, and gifts to charity among others. Learn more on IRS.gov here.