Tax season can be stressful and feel complicated as a creative. But it can be a relief after you’ve scored a big refund, more moolah for your wallet, right?
Wrong. A juicy refund is actually a bad thing. Yes, getting “free” money from the government isn’t as wonderful as you think it may be.
While I am a financial coach, and a money mentor but not a tax advisor or CPA, so I can’t give you specific advice around your taxes, I do have some suggestions to support your personal finances. So in this blog, I’ll explain why having a big refund isn't something to get the champagne out for. And how you’ll want to rethink your taxes strategy to truly get the most out of your tax refund.
Understanding Tax Refunds: What They Are & How They Work
Before we get to why having a big refund isn't something to celebrate, let's get clear on the basics of taxes, shall we?
Because I know, I know, the mere mention of taxes can send shivers down your spine but I got you, I'm here to make it as painless & simple as possible.
So let’s talk about the elephant in the room, what is a tax refund?
It’s when the government reimburses you for taxes you overpaid from the previous year(s).
Your refund is calculated by taking into account income, deductions, and tax credits to determine how much tax you owe. And if you decide to file for a tax extension, don't think that means an extension to pay your taxes. Nope, sorry to burst your bubble, but the interest will actually add up over time, so it's best to pay your taxes before the extension day (which is October 17th, by the way).
Now, I'm all for outsourcing to a CPA or an EA (Enrolled Agen) to prepare and file your taxes, but let's make sure you're financially protected. Always get your preparer to sign the tax form and give you a copy of it. That way, if you run into any tax issues, you've got proof of your tax return and you're covered.
While tax season is almost over now, it’s never too late to start prepping for next year.
Because let's face it — organizing and keeping track of expenses throughout the year can feel like a real chore. But the truth is, it's never too late (or early) to start prepping for next year's tax season. By taking some simple steps, you can make the process feel less daunting and set yourself up for success.
Here are some tips to help you stay on top of your expenses for tax time:
- Check your income and expenses weekly or biweekly each month. By reviewing your spending regularly, you can quickly catch any discrepancies and adjust your budget accordingly. And it’ll be one less thing off your to-do list when you have to reference back during tax time.
- Use tools like QuickBooks, FreshBooks, Wave, or for freelancers, a banking app like Lili, which tracks both personal and business expenses by swiping left or right, or even a Google Sheets spreadsheet to keep organized. These tools can help you track expenses, income, and deductions in a centralized location, making tax season a cakewalk, especially if you keep up with reconciling everything!
- If the thought of managing and reconciling your finances overwhelms you, consider outsourcing to a professional. A bookkeeper or accountant can help you stay on top of your finances year-round and ensure that everything is in order come tax time.
By implementing these simple tips, you can take control of your finances and make tax season a stress-free experience. So start prepping now and thank yourself later!
Why a Big Tax Refund is Not Ideal
Now let’s get into the nitty-gritty! Why is a big tax refund not ideal?
Simply put, it’s like an interest-free loan to the government. Because your tax refund is money you overpaid in taxes from the previous year. You're essentially giving them your hard-earned money to hold onto for the year, without earning any interest on it.
It can feel like a one-sided exchange where the government can charge us interest but we can’t do the same for our overpaid taxes.
Do you see how a big tax refund isn’t something to be dancing or popping champagne for?
And even though seeing those dollar signs may feel magnificent, it’s not true financial abundance & freedom. Think about it: wouldn't you rather have that money in your pocket throughout the year, so you can invest back into your business or reach your personal financial goals sooner?
And if you're one of the many people who do quarterly taxes, you're at an increased risk of overpaying. Leading to an even bigger refund, but it's not ideal for your financial well-being in the long run.
But let’s back up for a second, what are quarterly taxes?
It’s where you’re paying estimates of how much you “technically” owe the government each quarter. This is helpful to break down what you owe instead of paying all at once in April. However, if you miscalculated, you’ll find out during the end of the tax season that you’ve either overpaid — or underpaid.
So if you’ve gotten a big refund you’re not alone, because take my past client for example, let's call her Leah. She overpaid her taxes by $8,000 one year. Yes, that’s 4-figures just flowing around waiting for her to claim back. I don’t know about you, but that’s a gigantic sum of money that could’ve been put to better use elsewhere, like in a Roth or Traditional IRA (up to $6000 for 2022 and $6500 for 2023, if you’re under 50 and $6500, $7000 respectively, if you’re over 50.)
Again, while I'm not a tax advisor or CPA, I can help you through your financial journey 1-on-1 or in my group membership to work on your budget, give you a clear plan with your financial goals, see how to minimize taxes, and so much more.
And this next section will ensure you’re well-equipped towards building your wealth and true financial freedom! Because as a creative, it can be challenging to navigate the complex world of taxes. And no one should be overpaying or giving interest-free loans to the government.
7 Money Management Need-To-Knows
1. File an accurate tax status
One of the first things you need to do is determine your tax status.
As a creative, it can be tricky to determine what forms to use and what deductions you're eligible for. Are you a sole proprietor, LLC, or S-corporation? Each status has different tax obligations and implications, that's why it's important to do your research to choose the right one for your business.
To skip the headaches, you can consult with a tax professional about your status and to avoid any penalties or missed opportunities.
2. Estimate your business income
For your planning purposes, you’ll want to get in the habit of estimating your business income for the year. Knowing how much money you're making will help you determine how much you need to set aside for taxes. But let's be real, it can be a bit overwhelming, especially if you're just starting out. And I got you, with some tips to help you out.
Consider looking at past years' income statements, researching industry averages, and forecasting future income based on current trends. You’ll want to track your monthly income and expenses, using accounting software, or consulting with a financial advisor or a coach like me.
By keeping a close eye on your money management, you'll soon learn your business income pattern and if you pay quarterly taxes, you can make more accurate estimates. Trust me, determining your business income may seem intimidating at first, but with a little practice, it’ll feel fail-proof in no time!
3. Take advantage of deductions & business expenses
Make sure you’re taking advantage of all the deductions you’re eligible for. Because this is a great way to reduce your taxable income and save money on taxes.
This can include anything like:
- A home office
- Office supplies
- Marketing expenses
- Educational expenses
And yes, even that client lunch can be charged as your business expense. In other words, be sure to keep track of your expenses since they would be a deduction available to you.
If you’re curious about what else could be a deduction, check out my list of financial benchmarks & tax deductions by clicking below.
This tip is juicy: to make the most of your business expenses, buy your most costly business expenses before December 31st. That way you can take advantage of the deduction sooner rather than later.
4. Report your self-employment health insurance
This deduction is so important it needs its own bullet point. As a creative, your health insurance expenses can be a massive drain on your finances. But there's a bright side — reporting your self-employment health insurance on your taxes can save you a bundle. Seriously, it's a massive deal. Make sure you're accurately reporting your expenses to take full advantage of this deduction and reduce your tax liability.
5. Check if you qualify for tax credits
Tax credits are another way to save money on taxes. There are a variety of credits available for different situations, such as:
- The Earned Income Tax Credit
- Child Tax Credit
- Child and Dependent Care Credit
- The American Opportunity Tax Credit
- Lifetime Learning Credit
Researching these credits and seeing if you qualify can potentially save you thousands of dollars. To gain a deeper understanding of tax credits, I recommend checking out this Nerdwallet article that simplifies what they are and helps determine if you qualify for any of them.
6. Automate your business profit and losses
Finally, consider automating your business profit and losses with accounting software like Quickbooks, Freshbooks, or KeeperTax. These tools can help you keep track of your income and expenses, calculate your estimated taxes, and generate financial reports.
Yay! I’m ecstatic for you because you’re steps closer to locking down your personal finance with your tax refund.
As a creative, you don’t want your passion to be melted away because of taxes. While a tax refund may feel like a win, it's actually a missed opportunity for financial growth and freedom. Instead, it's important to understand your tax situation and reevaluate your tax strategy to ensure you're not overpaying and getting the most out of your hard-earned income.
You want to decrease your chances of getting a government interest-free loan and not be in the same situation Leah was in.
Listen, by implementing simple tips like tracking expenses regularly and outsourcing to a professional if needed, you can take control of your money and make tax season a breeze.
And again if you want to check out the FREE Guide to Tax Deductions and Financial Benchmarks, just click below.