This week I have been participating in the grand spring ritual of “getting ready for the tax man.”
For a lot of people that means gathering up records, documents, and receipts and handing them over - in some form or another - to their tax person. I do that too, but my tax person is me. Either way, it’s still a sobering rite.
Let me put my own personal take on taxes up front: I believe it is the responsibility of each and every one of us to pay our fair share. (We won’t try to define “fair” here, use your own definition.) Take all the deductions and credits to which you are entitled, and I will gladly cheer you on. But NEVER tell me what a slick way you found for declaring your car a dependent, or your hamster an employee, or your mistress as a charity. Don’t make me lose respect for you.
One other caveat: I am not a tax professional, or a lawyer. NOTHING I say can in any way be construed as financial advice. If anything I say might apply to you, put it on the list of questions for your own experts. If they’re good at what they do they’ve probably already asked you about them; but if they haven’t, or the question just hasn’t come up yet, these are a few things I realized while digging through my own files.
I was a bit more organized than this. But some years it really has been like this!
OK, with that out of the way, let’s talk about this process as it applies to your creative life.
First off, if you are trying to make some supplemental income from your creations, then you will have to declare what you earn as income. Bad news: this means it will be taxed. Good news: you can deduct your expenses involved in its creation. If you are generating income, let your tax person know about it, and keep close track of what you earn and what you spend.
This seems like such a basic concept to those of us who have done this for years - my husband has been self-employed for the entire time we have been together - but if you haven’t been independent it is a new concept. Make sure your tax person takes your concerns seriously and is willing to take the time to explain to you what they want and how they want your records organized. Following their procedures will save you a ton of money on your tax prep, since you won’t be paying for their employee to re-sort your records to fit their processes.
I would also recommend that you take a little time to take a basic class in bookkeeping, or a simple tax prep course. AARP provides training classes for their volunteer tax preparers. For the cost of a few hours time during tax season you can volunteer and get the training. While it won’t make you a tax whiz, it just might help your own tax anxieties, and give you a better understanding of taxes in general.
But what if you aren’t really trying to make money? If your creative outlet is just that, an outlet for your creative energy, and you are content to create items for yourself or to give as gifts? If that is the case, you can ignore the information above - except maybe that part about taking the AARP class and volunteering. That part’s still a great idea.
The thing that I noticed most this year is that my taxes have become more complicated in this year, the one where so much changed. I do think it will be better next year, but there are some changes that will take some adjusting.
This year I have both W-2 income (wages, from that job I couldn’t leave behind) and Social Security. My husband quit his job at the end of 2021 after his hospitalization, and he started receiving Social Security. He became eligible for Medicare. We earned a little money from our investment.
Each of these changes means a new form, or a new line on an existing form. It means learning what each thing means and how it impacts our financial health. These changes come from retirement, not creativity, but they are still things to be aware of as you plan for retirement. They will all have an impact on how you live your creative retirement.
Yeah, it kind of feels like this!
The other big change for us with the final termination of that paycheck is the loss of the tax withholding. Over all the years of our marriage I made sure that I withheld additional funds with every paycheck, hedging against those years when we had enough writing income to create a tax bill. Those years when we did we already had enough paid in to cover the taxes, and we didn’t have to write a big check come April 15.
That enforced savings comes to an end this year. For the first half of the year, while I was still getting a paycheck, I socked away extra money - a lot of extra money - because that was the only tax prepayment we would have. Even then I ended up with only about half of my normal tax deposits.
We are fine for this year. But I am now looking ahead to the taxes for 2023 and trying to figure out how much I need to put away to pay my income taxes next spring. It’s not that I want to set that money aside, but that I want even less to write a big check next spring. It’s probably time to drag out my crystal ball and see if I can figure it out.
My point here is that a lot about your money and taxes change when you leave the job market, whether by going independent, taking retirement, severely cutting your hours, or whatever means. I thought I was completely prepared, that I knew absolutely everything I needed to about planning for my retirement finances - and I have had several surprises.
The time to plan for your creative financial retirement is well in advance of your projected retirement date, says the voice of experience.