Brainy Chick Finance

Financial Independence

The Beginners Guide: Tax Day Preparation

Tax Day Preparation

Yesterday was Tax Day – congratulations, you survived! Either that or you are mad at yourself for standing in line at the post office :/

I am going to be honest, I don’t do my taxes. I am fortunate enough to have my father who has a great working relationship with our CPA, set everything up for me. (The benefits to having a financially educated family. The downside is I don’t know how to do my taxes. :/ ) It is convenient to have a family member help out with taxes, especially being in my twenties, when I really am still learning what this all means.

The main learning for me? The better you do and more money you make, the more Uncle Sam likes to come a knockin’. I now understand how the Republican party is so large.

Anyways… after this year having my taxes done, I dug a little deeper when I went to sign my tax return. Here are some key things to know as you do preparation for next years tax day.

Tax Day Preparation

  1. Know your financial situation

If you know you have a more complicated financial situation, don’t try to do your taxes yourself. Hire someone. If it is your first time investing, consult a professional on what you will need to have when it comes time for tax day (k1s, 1099s… more numbered forms). If you are wanting to grow your wealth and earn more, know that you might need to set money aside to pay the government additional taxes. (I know it stinks and I am sorry!)

  1. Have the right person/software do your taxes

Once you determine your financial situation, you will to find the best way to get your taxes done. If you have no idea what you are doing, consult a CPA. If your financial situation is basic or have moderate complexities, you can try tax software like TurboTax. The more complicated your finances get, the more likely you should be using a CPA. Not sure where to find one? Ask family or friends. H&R Block could be a good first step as well.

  1. Keep important tax documents.

Throughout the year, keep important tax documents. Don’t wait until tax day to go looking for them either; the chances of you finding them are very small. As soon as you get a tax form in the mail, get a PDF version (or scan it in) for electronic copies. I keep a folder on my laptop for Tax Documents so that throughout the year, as I collect items, like vehicle registrations, I can PDF the receipt and into the folder it goes. The ease is when you go to do your taxes, everything is all in one easy file for you.

  1. Ask what can be deducted from your taxes

Each year, I find new things that can be deducted. Like, did you know that your vehicle registration can be deducted? Keep your receipt from the DMV and you could get about $100 back! (If you knew that already, sorry – it was a realization moment for me two years ago). Education can be deducted, like tuition or even learning materials for investing (like books). Not sure if things for work can be deducted? Just google.

  1. Read through your tax return

This might seem very daunting and burdensome, but read the first few pages of your tax return, or better yet, try and follow along through your tax return. The math IS really simple, I swear! The key is knowing where your money went and where it came from. This will give you a better understanding of how much you pay and how much you get to keep of your money.

  1. The Estimated Tax

This year is the first time I have had to pay an estimated tax which basically is the amount you owed the government this year projected ahead so that you could have a safe harbor for next year’s taxes. Basically, you won’t have to pay a penalty if you under estimate owing the government your taxes. What I didn’t take into account, was having some extra money lying around to pay for this safe harbor. I would recommend stashing some extra cash away for taxes each year for the JUST IN CASE.

What did you learn from doing your taxes this year?

The Best Ways to Spend Your Work Bonus

The Best Ways to Spend Your Work Bonus

Cha-Ching! Your annual salary bonus has arrived in your bank account. Was it a pleasant surprise? Did you get flashes of a nice tropical vacation with a cool alcoholic beverage in hand? The Best Ways to Spend Your Work Bonus

With that “extra” paycheck, have you decided yet as to what you are going to do with it?With annual employee reviews in full spring it is time to think about where you want that money to go. It might be time to think about where to shop, I mean on how you can make your money grow. Yes, Uncle Sam might be taking a chunk of it, but this money should be a nice windfall regardless. Bonuses can range widely depending upon income, industry, and performance. Typically, bonuses are between 5-10% of your annual salary. If you make $65,000 a year, and your company gives you 10%, you have $6,500 to play with – that is, before the government takes their piece of the pie. So, don’t get used to what your company might be telling you initially – wait for the money to drop into your account.

Next is deciding on a few ways to spend your bonus money. Try not to think of this money as something you can use to splurge on. With this mindset, you might get something that you cannot afford to sustain long term, like buying a new car but not taking into consideration different insurance, gas, and fees associated with the purchase. Make sure you determine what you are going to do with your tax refund first before getting it not after you receive the amount.

Here are a few ways to spend your bonus

Pay Yourself First… in your Roth IRA

If you are contributing to a 401k that is awesome. If you want more of a retirement cushion, invest in a Roth IRA. A Roth IRA is an additional investment retirement vehicle that you can max out each year at $6500 (if under the age of 59 1/2).

Roth means that when you retire, your distributions (what you take out of the account) is tax free. This option is great because it allows your money to compound (grow) tax free.

For example: Say your IRA account is at $100,000 when you retire. With a traditional IRA, when you take the money out of your account, you will be taxed on the amount that has grown ($100,000) versus the $5,600 you put in during your 20s. Essentially, with a Roth IRA, you potentially get taxed less than with a traditional IRA.

Contribute to your Fun Fund

Indulge yourself with something that you might have wanted. Albeit, hopefully something small that is a nice reward for working hard, like a spa day. It is fine to make plans, but don’t spend the money before it even arrives in your bank account. When you know it is coming, it is easier to justify the purchases and say that the money will be there.

Now, don’t go putting all of your refund into your fun fund, but definitely look at taking a portion of it. You worked hard, so pamper yourself.

Add to your Emergency Fund

This account is never fun to think about, especially if you have to tap into it, but $500 or $1,000 deposit into your emergency fund can be a great start to growing it or adding to it. You never know what might happen and it is good to set aside some money in case of emergencies.

How much should you have in your emergency fund? Roughly 3 to 6 months worth of expenses. Make sure your housing, food, and bills are covered with this money for a substantial amount of time.

Pay off Student Loans or Debt

Overspent a little bit on a shopping spree? Want to pay off those loans a little faster? Adding an additional payment can only help your credit score and lower the balance you owe. See how much an extra payment would be – remember you would not have had the money regularly, so what is another payment anyway?

Don’t forget about the emotional factor for when you make an additional payment – the feeling of relief. Now this feeling is priceless.

Invest the Money

This is what I plan on using most of my money towards. I will put some in a robo advisor investment account, and a little into some yearly savings accounts, and of course I will pay my self by putting a large chunk into my Roth IRA (see above).

Most of my investing will be in the stock market, but maybe in a few other ways as well: art or into a business. The options are endless!

Bonus: Build a Plan for Your Bonus Raise

Start now and work out a place for your bonus. Fill out this simple form and build a plan for your money.

Step 1: Write out your main goal for the money

______________________________________________________________

i.e. grow my wealth

 

Step 2: How much do I want to put towards me, my future, or my past?

______________________________________________________________

i.e. retirement, fun fund, debt, investing etc.

 

Step 3: Assign a Percentage to Your Goal

______________________________________________________________

i.e 20% towards my retirement, 5% towards my fun fund, 50% for investing, 15% towards my emergency fund

Step 4: Execute!

How I Side Hustled My Way to $450 A Month

How I Side Hustled My Way to $450 A Month

Looking for semi-passive income and not sure what to do? Live in a great area? Have you tried Airbnb?

There are some stigmas and reservations with renting out your home, but in my case, it can bring in about $450 a month. I have only been using Airbnb for 3 months and have had some heavier traffic months in January compared to February (less traffic) and March (low availability).

In my condo I have an extra room that is a spare bedroom. Initially, I had it rented out to friends who would pay a monthly rent that covered all of the bills. Since I knew them, there was no fear when renting out my place. Unless I know them, I don’t want full time renters because I still want to live my life. After about a year of not having a roommate, it seemed like wasted space not to do something with it.

How I Side Hustled My Way to $450 A MonthWhy Airbnb?

Initially, we had some family who had highly recommended it. They loved the ease of booking and had no issues. Upon doing more research, it was easy to use, easy to adjust to our schedule, plus since we are in a highly sought after area, we could command more money and they provided a free photographer to shoot our location.

Our reservations:

First, we have a pet, so not only do we state that up front, but even in our communication we add it in because we have found that not everyone reads through your posting. While our dog is friendly, we might not get booked as frequently because we state we have a pet. But, on the flip side, we allow dogs, so for those conscious pet owners, we might be a better choice.

Next, the security of having someone you don’t know in your home. We tried to avoid this issue as much as possible by being home for most of the time when our guests are here. However, every guest we have had thus far has been great. They have been friendly, social, and kind to our home.

The upside:

We have been able to hustle $450 a month by renting out our room! While we have had to deal with San Francisco’s new tax regulations (and still figuring them out), there has only been only about $50 processing fee and maybe $100 worth of my time. We have met some great people who have been very interesting.

We have been able to tailor our Airbnb schedule to fit our needs. If we are planning a weekend trip, we won’t Airbnb. If there is an event in the city, we can opt to charge more. While semi-passively earning money has been some effort, it is more than what we would get not renting out the room at all.

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