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Top 5 Tax Mistakes You Should Avoid

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Top 5 Tax Mistakes You Should Avoid

As tax season approaches, you’ll want to make sure your finances are in order to properly report your income and expenses to the IRS. Unfortunately, a lot of households make the same mistakes–and they’re entirely avoidable!

Simple mistakes can lead to a tax audit. That means the IRS will double check that your individual account and tax information is correct. To avoid the headache of a tax audit, be sure to report your income and expenses properly the first time.

This starts by avoiding these common tax mistakes:

Choosing the wrong filing status

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    The IRS uses five different filing statuses to determine things like your correct tax rate, eligibility on certain credits, and your standard deduction. These filing statuses include:

    • Single
    • Married Filing Jointly
    • Married Filing Separately
    • Head of Household
    • Qualifying Widow(er)

    It’s not always easy to determine which filing status you should choose. For example, if you recently separated from your spouse but are still legally married, should you choose Married Filing Jointly or Married Filing Separately? It’s also common for people to claim Head of Household when they do not meet the requirements.

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    The IRS can help with that. Take a quick five-minute survey, What is My Filing Status?, on the IRS website to ensure you’re filing correctly. Be sure to have the following items on hand:

    • Marital status
    • Spouse’s year of death (if applicable)
    • Percentage of costs your household members paid toward keeping up a home

    Failing to file taxes for household workers

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      One of the biggest mistakes individuals make is failing to file taxes for household workers. It’s not because people are trying to cheat the system, just that they are misinformed.

      If you pay household workers, such as nannies, home health aides, housekeepers, house managers, etc., over a certain amount each year, you are considered a domestic employer. The threshold changes each year as the national average wage index changes.

      According to the IRS, the threshold for 2015 is set at $1,900, but will increase to $2,000 in 2016. That means that if you paid your household workers more than $1,900 in 2015, you will have to pay Social Security and Medicare taxes. These rates are currently at 6.2 percent for Social Security and 1.45 percent for Medicare.

      Homeowners often misclassify domestic workers as independent contractors. Making this mistake may lead to fines and imprisonment. Independent contractors set their own hours, supply their own tools/machinery, and offer services to the general public. If this does not sound like your workers, do not send them a 1099! This point is incredibly important: don’t let someone tell you that you can just pay your domestic workers with cash–this is illegal! The IRS has clear guidelines for what a domestic worker is and if you fail to pay their taxes properly, you could face fines and penalties.

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      Talk to your accountant or a domestic taxes expert if you suspect workers, like your nanny, fall into this “household worker” category. Be sure to provide your financial records and payment information to ensure your taxes are filed accurately.

      Failing to report additional income

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        Too often individuals report only what they see on their W-2s and 1099s. However, you may have income from other sources that aren’t on these forms. By law, you still have to report it.

        This can include income like tips, self-employment income, income from rental properties, etc.

        Not only is this mistake avoidable if you’re proactive and keep track of your income, but omitting any additional income from your tax forms can result in fees and other penalties from the IRS.

        Claiming ineligible dependents

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          Claiming dependents on your taxes gives you certain exemptions that will lower how much you have to pay. It is common for individuals to misinterpret what is meant by “dependent.” For example, you can claim children and relatives as dependents, but you can’t claim your spouse.

          A dependent is someone you support financially, usually a child or relative that lives with you.

          Unfortunately, the rules for claiming someone is often misunderstood. For instance, if someone can claim you or your spouse (if filing jointly) as dependents on their tax return, you cannot claim someone else as a dependent. This is true whether or not the person actually claims you.

          For example, if you live with your parents and also have your own child, your parents may be able to claim you as a dependent. In that case, you can’t claim your child on your tax return.

          You can claim dependents if:

          1. They are a U.S. citizen, U.S. national, resident alien, or resident of Canada or Mexico. The only exception is for adopted children.
          2. The dependent is not married or filing jointly.
          3. The dependent is a Qualifying Child or Qualifying Relative according to the IRS.

          If you’re unsure, visit the IRS website and take a short survey, Who Can I Claim as a Dependent?

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          Be sure to have the following items on-hand:

          • Marital status, relationship to dependent, and amount of support you provided them.
          • Income information, including your adjusted gross income.
          • Terms of a multiple support agreement you may have for the dependent.

          Making mistakes on paper tax forms

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            While taxes were once filed exclusively through paper forms, the Internet has made filing taxes easier than ever. The benefit to filing electronically is that the system can check for miscalculations or mistakes, like forgetting to sign your name. Unfortunately, the IRS won’t even accept returns that aren’t signed, and making a single math mistake can cost you, either in a reduced refund or in various fees.

            It’s tough to catch mistakes like this with the human eye, but they can be easily mitigated when you eFile through the IRS.

            Tax season can be stressful for both individuals and accountants. However, you can relieve some of that stress by paying attention to these common mistakes. That way, you know you’re not headed down a path toward incurring fees, penalties, and even jail time. If at any point you’re unsure of what’s expected of you or whether you qualify for certain categories or not, talk to a professional to get expert advice on your personal situation.

            photo credit: Pinterest

            Featured photo credit: El Nariz via thumb9.shutterstock.com

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            Kathleen Webb

            Co-Founder, HomeWork Solutions

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            Published on November 8, 2021

            How To Achieve Financial Freedom With the Right Mindset

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            How To Achieve Financial Freedom With the Right Mindset

            What would being financially free mean to you? Have you made the mistake of thinking that financial freedom requires millions of dollars and decades of hard work? When it comes to our relationship to money, the answers really lie in our mindset. Change your mindset around money and your entire financial outlook will change with it.

            And no: we’re not talking about putting a check for a million dollars under your pillow at night. This is about you becoming a financially free person, in whatever capacity you choose. And that’s really the key: it needs to be defined by you. So many people outsource this responsibility to society/celebrities/the government etc… and as a result never achieve it.

            What if you could identify what financial freedom looks like for you, realize that it is possible to get there in a matter of a few months and then build a road map to do just that?

            Read on, because that’s what we’re going to open you up to. This isn’t about giving you specific strategies “guaranteed to work in five minutes or your money back…blah blah.” This is about awakening you to just how powerful you are, where your blocks lie and how to smash through them effectively.

            Financial Freedom – What is it?

            Well like I said: I’m not going to define this for you. That misses the whole point of this article, but let’s lay out some ideas to get you started.

            Typically, when we talk about financial freedom in the west, we really mean: freedom from needing to work, in order to meet financial obligations. We know that there has been a rise in depression amongst nine-to-fivers, 62% as a matter of fact between 2019 and 2020 in the USA.[1] It’s therefore no wonder that there has been correlative uptick in the search for alternative solutions to finances.

            This depression is largely as a result of feeling trapped, unable to realize potential and being denied opportunity. It is also likely that, thanks to a more global world and social media: we see just how abundant life can be for some; like a carrot dangled tantalisingly close, but just out of reach. We yearn for more meaning in our lives, more excitement and to be able to live on our terms.

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            Finances are (as we see it) the stumbling block and the preserve of the chosen few…not us.

            So to start building an accurate picture of what financial freedom would be for you, begin with what your life would look like if you didn’t have to worry about money. How would you feel if you didn’t have to consider your monthly budget, when putting your hand in your pocket to pay for lunch?

            The point is that a lot of the stress and resulting depression that comes from feeling like a ‘wage-slave’ is down to our lack of clarity on what we actually want. We get caught, focussing on what we lack and that perpetuates a mindset of lack that very quickly is reflected in our reality. We are allowing our subconscious, emotional mind to be bombarded with imagery every day that reenforces a sense that we aren’t good enough. That we do not have what it takes.

            That wouldn’t happen though if we had done the work of pinning down exactly what we wanted in the first place.

            Does Financial Freedom Come at Extreme Levels of Net Worth?

            There is a tendency, thanks again largely to how we are conditioned through media, to think that financial freedom only comes at extreme levels of net worth. What if I told you that is completely ill-founded and untrue?

            Using the standard/assumed definition of financial freedom for a moment; this means that you need enough capital to generate a return that is greater than, or equal to your monthly expenditure. That doesn’t necessarily tell the full picture, but nevertheless; it’s is a good place to start.

            If your monthly outgoings (mortgage, bills etc…) come to $3,000 for argument’s sake, you can achieve that with as little as $108,000 invested over three years.[2]

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            Hardly the millions you had probably envisioned is it?

            Remember: we’re not talking about you living a lavish lifestyle necessarily. If that is what you want; fantastic, it’s certainly achievable, but what we’re getting at here is your ability to meet all of your financial obligations without having to work.

            I’m sure you’re unlikely to find $108,000 down the back of your couch, but it is a figure that is well within reach of most working adults. A $36,000 salary opens you up to borrowing that kind of money, and even if you have to continue working in the short term in order to service the debt and keep up with your bills; you’ll have a clear end goal in sight.

            And you’ll have doubled your income in the meantime, for the same amount of work!

            How To Achieve Financial Freedom With the Right Mindset

            As we touched on earlier, coming at your life from a space of ‘lack’ simply perpetuates more of the same. As I always say: your environment doesn’t lie. Look around you, if you’re dissatisfied with any aspect of your life, you first need to accept responsibility for it. If you don’t, you’re abdicating your power to make new choices.

            You may well have been the victim of circumstance in the past, but how you respond and what you do with that experience is up to you. If you choose to look for the positive, however minor it might be in any given situation – your experience of life will begin to change.

            This is, in essence, what The Law of Attraction is all about. What lies behind it is your reticular activating system (RAS). The part of your brain designed to filter out the (as it sees it) unless information, highlight the important information and prioritize your safety. Thanks to it being part of your primeval/‘lizard’ brain however, it predates the conscious mind, intellect and reason.

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            The issue for a lot of us is that we haven’t understood how to communicate in a way that our RAS understands. We can’t translate our conscious desires and are therefore caught in a loop between two incongruous forces.

            Our subconscious wants us to be alive and it bases its criteria for this, largely on the principal of: same = safe. Meanwhile, your quality of life, passive income, work/life balance etc… are inconsequential. That part of your mind doesn’t give a hoot about the utility bill or being able to afford a holiday.

            It is perfectly possible to show you subconscious/RAS the benefits of financial freedom though, or indeed any other outcome you’d like to see in your life. You just have to speak its language. Becoming debt free and financially free is actually one of the easiest things you can communicate to your subconscious, because you have so much ‘real-world’ experience with money.

            Here’s how:

            1. Start by clearing your mind and being present – find a meditation, visualization or breathing exercise that calms your mind, allows you to focus on the present moment and become an observer of your surroundings. The point of this is to stop all of those thoughts buzzing around in your head that are pulling you back to the past, or projecting you into an imagined future.
            2. Then build a mental movie or slideshow of what your average day would look like, were you to achieve financial freedom. We’re not talking about big occasions, huge wins or events; just an average day.
            3. From your position of present observer – start to observe the feelings that arise as you go about this average day in your new life. Do you feel your shoulders relax and drop? Have you got excited ‘butterflies’ in your stomach? Are you smiling more?

            Learn to recall these feelings at will – this will connect the dots for your RAS and you will soon start noticing a shift. Think of it as connecting with your desired future and pulling it into/towards your present.

            Bonus Hack – Practice Gratitude

            We’ve already discussed how you can start attracting/observing the opportunities that will enable you to achieve financial freedom. This involves a lot of work in order to finesse, but the principals are easy enough to understand. Something that we can all do, no matter what we’re trying to achieve, is practice gratitude.

            Using the same principals that I’ve outlined above: something of a ‘catch-all’ that we can train our minds to produce more of, is gratitude. If we can shift our mindset so that the next time some negative, external and unforeseen event occurs, we are still able to be grateful for it; your entire experience will shift.

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            Not only will you observe more to be grateful for all around you on a daily basis, but you will shift out of a mindset of ‘lack’. All of the barriers that stood in your way before (not enough capital, stuck in a job I hate etc…) they will shift to becoming things that support your desires and goals.

            For example:

            The job you hate, when reframed as the means to support a transitional stage of your life (i.e. enabling you to borrow money to invest) suddenly gives you a resource to be grateful for.

            The added beauty of this is that your RAS doesn’t know the difference between a big win and a small win. You being truly, deeply grateful for your socks (for example) carries the same weight as being grateful for your health, or your spouse. This is why I say “practice” gratitude. You can start whenever you want!

            Look around you right now and find something that you really are grateful for, no matter how small and seemingly inconsequential.

            Practicing this will create a snowball effect. Much quicker than you might think: you’ll be overwhelmed with gratitude for your life and all that’s in it.

            In Summary

            Financial freedom is more within your reach than you probably think or feel. Understand that the limits you’re assuming to be there are largely a product of your subconscious mind, having been drip-fed evidence of that over the course of your lifetime. Changing that might take a lot of effort in the short-term, like cranking over an old car, but the effects will begin to build up quickly and self-perpetuate.

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            Apply this mindset to your financial situation and you will find that it too will begin to ‘snowball’. Financial freedom is closer than you think, so start looking for it today!

            Featured photo credit: Pepi Stojanovski via unsplash.com

            Reference

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