Updated on February 6, 2025 by David Korpel
Navigating the labyrinth of the U.S. tax code can be daunting. With provisions dating back to 1939’s first codification and new regulations emerging as recently as 2022, staying informed is crucial. Overlooking key deductions, credits, or opportunities can lead to paying more taxes than necessary.
While tax preparers can’t conjure refunds, they understand the intricacies of IRS preferences and regulations. For W-2 employees, options are limited. However, small business owners can leverage strategies like retirement contributions and accountable plans to minimize tax liabilities.
Drawing from extensive experience in tax preparation, here are top tips for self-filers aiming to reduce tax liability and avoid IRS scrutiny legally:
After preparing thousands of tax returns, I’ve identified key strategies to help self-filers legally minimize their tax liability and avoid attracting unwanted attention from the IRS. Implementing these practices can lead to a smoother, more efficient tax filing experience.
Report All Income Accurately
It’s imperative to declare all income sources, including wages, freelance earnings, interest, dividends, and even income from illegal activities and stolen property. The IRS mandates that income from illegal activities, such as money from dealing illegal drugs or rug-pulling your most loyal followers, must be included in your income tax return.
Report Accurate Mileage
Claiming business mileage can significantly reduce your tax bill, but meticulous record-keeping is essential. Maintain a detailed log for each business trip, noting the date, starting and ending locations, purpose, and miles driven. The IRS requires that you substantiate your expenses with adequate records or sufficient evidence to support your statement.
If audited, lacking this documentation could lead to disallowed deductions and potential penalties.
Avoid Using Round Numbers
Entering rounded figures, such as $10,000 or $7,500, can appear suspicious. Ensure all amounts reflect actual expenses to the cent. For example, instead of reporting advertising expenses as $15,000, report the precise amount, like $15,347.23.
Use Specific Expense Categories
The “Other Expenses” section on tax forms allows for custom entries, but it’s not a catch-all for vague or personal expenses. Descriptions like “Reimbursement to Myself” or “Car Payment” can raise red flags. Allocate expenses to their appropriate categories and provide clear, legitimate descriptions for any entries under “Other Expenses.”
Ensure All Income is Reported
The IRS receives copies of all W-2s, 1099s, and other income forms. They cross-reference these with your return. If your reported income doesn’t match, it can trigger an inquiry. To verify what the IRS has on file, set up an account on IRS.gov and access your transcripts. This ensures all income is accounted for and helps identify any discrepancies.
Ignoring 1099-Ks Sent to Your Personal Name
Recent changes have lowered the reporting thresholds for Form 1099-K. For calendar year 2024, the threshold is more than $5,000; for 2025, it’s more than $2,500; and for 2026 and beyond, it’s more than $600.
If you receive a 1099-K under your personal name and Social Security Number (SSN) for business transactions, ensure this income is reported appropriately. If the income pertains to a business, include it on Schedule C and consider noting an offsetting expense with a description indicating the income was reported on the business’s tax return.
Do not ignore the 1099-K that you receive with your SSN on it.
If you’ve sold personal items at a loss and received a Form 1099-K, there’s a specific entry on Schedule 1 (Form 1040) to address this. At the top of Schedule 1, there’s a line labeled: “For 2024, enter the amount reported to you on Form(s) 1099-K that was included in error or for personal items sold at a loss.” By entering the amount from your 1099-K here, you ensure that you’re not taxed on sales where you didn’t make a profit. This step is crucial to prevent paying income tax on transactions that shouldn’t be taxable.
