How to do your taxes**

**Haha, just kidding. I am not a tax professional, although I hope to be one day. Pretty sure there is still no licensing process for that, by the way. You don't have to be a CPA to prepare taxes for money. Crazy. Anyhow. This post is not to be construed as professional advice, and you should contact a tax professional if you have concerns about your taxes.

I did want to just write a bit about how my self-employment has complicated our tax situation. Folks who work freelance may benefit from this information. Folks with relatively simple tax situations may be bored by this post, and you're welcome to skip it if you like.

Last year, we received income from several sources:

1. Dan's salary (income taxes withheld)
2. Dan's royalties from mineral rights in ND (production taxes withheld)
3. My income from babysitting/nannying/daycare/whatever (no taxes withheld)

For the first two, we'll receive lovely forms with instructions on how to enter them into the tax software we'll purchase, but for the third, I am depending on my own record keeping. There are a couple of forms involved, the first being a W-10 that I provided to my client. Then I need to have a complete record of my revenue and expenses for the year. For this, I kept receipts from every time I deposited a check and every time I made a purchase for the daycare, then popped those numbers into a spreadsheet.

For example, I'll be subtracting from my gross receipts the costs of the baby carriers I purchased, the double stroller, the baby monitor, a first aid kit, my training classes, and various other consumable supplies used exclusively for Maggie. If I had purchased any furniture or durable gear "new", I might have had to calculate depreciation, which would have been a pain. I also decided against trying to claim anything for the use of my residence, but there are formulas to figure that out. If you have a home office used almost exclusively for work, you may be able to subtract a certain amount from your taxable income if you are self-employed OR claim a business expense if you are employed by someone else, provided they don't compensate you for the use of your residence already.

When it comes to forms I'll actually have to submit to the government with my 1040, I'll need a Schedule C and a Schedule SE. The formulas and math on the SE can get a bit complicated, so we use tax software. (I am capable of doing taxes by hand, now, but I just don't because I don't have to--it's a more efficient use of my time to use a software program.) We'll also need to use Schedule E for the royalty income, and to prepare nonresident state taxes for ND as well as our normal state tax return for MN. I'll be doing the ND taxes by hand, since it's just two forms (3 pages, total) that pull information off of your 1040, plus you reference the ND tax table. Not too tough.

State taxes must be paid to the state in which the income was earned, and any income tax paid to nonresident states can be deducted from the state in which you lived most of the year.* Local taxes, if any, are also owed to the locale in which the income was earned. Some people refer to this as the "jock tax"--it's why cities which host professional sports events typically charge local tax so they can get a chunk of the ridiculous amount of money some pro athletes and other entertainers make. This is also what got Al Franken in trouble for "not paying his taxes". He mistakenly paid all of his state income tax in his home state of MN as an entertainer, when he should have paid each individual state where he had gigs. When made aware of his error, he fixed it. We made the same mistake for a number of years, based on bad advice from a lawyer. Even though we may have never set foot in ND during the course of a year, we still owe taxes there because that's where the land is. The same would be true if we had income from a rental property in another state. We just finished fixing this issue and paying back taxes to ND with interest last fall. The auditor who we worked with us kindly made sure that all penalties were waived (other than interest) since it was an honest mistake. We filed amended returns with MN, but they haven't paid us back yet. :(

Because so much of our income did not have taxes withheld last year, we may owe a penalty. This year I'll be prepaying some estimated taxes on my income quarterly throughout the year so that we can avoid that in the future. In general, we do have to "pay-in" rather than get a refund, just because the mineral royalties are so impossible to predict.

Good things to know: honest tax mistakes may cost you money, but not generally jail time. However, tax fraud can land you in prison, and there is no statute of limitations on tax fraud. When they couldn't get Al Capone on anything else, they locked him up for tax fraud. So. Don't do it; it's not worth it. Be sure to claim all of your income and be sure to keep good records. If you itemize deductions, be sure your deductions qualify and that you have written proof of them. Since we are not homeowners and do not pay mortgage interest, we've never itemized because it's never been worth it. For curiosity's sake, I might collect all the receipts from our "year of giving" and see if it even comes close to being claimable. I doubt  it, though. The standard deduction for a married filing jointly couple is pretty high compared to what we'll probably be donating. (Don't get me started on the 10% tithe thing...we may get there someday, but right now, we're just starting out.)

That's about it! We pay student loan interest which gets plugged into the tax software, but that's all. Renters sometimes qualify for a property tax refund, but it's based on income and we haven't qualified in years.

Taxes don't have to be scary, and I find them pretty fascinating, for some reason. Probably the math nerd in me. Once I finish my degree, you can totally pay me to do your taxes. My career end-game is to do taxes part of the year and have the rest of the time to spend with my kid(s).

*An exception is that certain states have reciprocity with neighboring states for folks who cross the border to work and have income from wages, salaries, and tips. Other forms of income are generally not part of reciprocity, and policies vary from state to state.