Self-Employed Professionals Can Keep More Money by Implementing These Tax Strategies

Self-Employed Professionals Can Keep More Money by Implementing These Tax Strategies

Navigating the complex landscape of taxes as a self-employed professional can be overwhelming, but implementing effective tax strategies can help you shift from paying an excess of taxes to retaining more of your income. In this article, we’ll explore some key tax strategies that will help you keep more of your hard-earned money.

Choosing the Right Business Structure

Selecting the appropriate business structure is foundational to optimizing your tax situation. Sole proprietorship, partnership, limited liability company (LLC), S corporation, and C corporation each have distinct tax implications.

For many self-employed professionals, an LLC offers a balance of liability protection and tax flexibility. It combines a corporation’s limited liability aspects with a sole proprietorship’s simplicity, allowing for pass-through taxation while safeguarding personal assets.

On the other hand, an S-Corp can be advantageous for self-employed individuals aiming to minimize self-employment taxes. By structuring income into a reasonable salary and distributions, S-Corp owners can potentially save on taxes. Furthermore, the flexibility in offering fringe benefits, which can include health and life insurance, retirement plan contributions, and other perks makes an S-Corp structure a strategic choice for tax optimization and fostering business growth.

Itemized Deductions vs Standard Deductions

Understanding the differences between itemized deductions and standard deductions is crucial for self-employed professionals. While the standard deduction provides a fixed reduction in taxable income, itemized deductions can potentially yield greater tax savings if you have significant qualifying expenses. Common deductible items include business-related travel, home office expenses, and professional development costs. Carefully tracking and documenting these expenses can contribute to substantial savings during tax season.

Maximizing Retirement Accounts

Taking advantage of various retirement accounts can reduce taxable income and secure a financial future. Contributions to Individual Retirement Accounts (IRA) and Simplified Employee Pension (SEP) IRAs are tax-deductible, providing an immediate benefit. Solo 401(k) plans, designed for self-employed individuals, allow for higher contribution limits, enabling professionals to save more for retirement while minimizing their tax liability.

Understanding Constructive Receipt

The tax concept of constructive receipt states that income is taxable when it’s made available to you, even if you haven’t physically received it. Self-employed professionals can optimize tax planning by strategically timing invoices and income recognition. For instance, deferring income to a later tax year can help minimize current tax liability. Keep in mind that effectively leveraging this flexibility requires maintaining precise records and compliance with tax regulations.

Investing in Real Estate and Rentals

Incorporating real estate rental properties into an overall tax strategy offers diverse opportunities for tax benefits and savings. Property owners can capitalize on depreciation deductions, enabling them to deduct a portion of the property’s cost annually. This deduction can substantially lower taxable income, effectively reducing the overall tax liability.

Health Insurance Plans and Premiums

Health insurance premiums for self-employed professionals are generally deductible, reducing taxable income. Alternatively, S-Corp owners can generate significant tax savings by establishing a group health insurance plan, allowing the S-Corp to cover premiums through payroll. The utilization of Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) provides additional avenues for entrepreneurs to reduce taxable income, offering tax-free contributions, growth, and withdrawals for qualified medical expenses.

Amid Soaring Inflation, IRS Releases Higher Tax Brackets and Standard Deductions for 2023

Amid Soaring Inflation, IRS Releases Higher Tax Brackets and Standard Deductions for 2023

In response to soaring inflation, the IRS has released higher tax brackets and standard deductions for tax year 2023 and subsequent returns filed in 2024. This means that more taxpayers’ earnings will remain in lower tax brackets, which should reduce their income taxes.

Higher Tax Brackets for 2023

Tax brackets are the income ranges used to determine how much American’s owe in federal income tax. The IRS adjusts these brackets to reflect the impact of inflation on workers’ earnings with the aim of preventing inflation from pushing individuals into a higher tax bracket and potentially subjecting them to higher tax rates. The IRS is essentially trying to alleviate some of the financial strain caused by inflation.

Here Are the Newly Released Tax Brackets for Year 2023

The change in tax brackets means more taxpayers’ earnings will stay in lower tax brackets next year, which should reduce their income taxes.

Married filing jointly:

10% – $0 to $22,000

12% – $22,001 to $89,450

22% – $89,451 to $190,750

24% – $190,751 to $364,200

32% – $364,201 to $462,500

35% – $462,501 to $693,750

37% – Over $693,750

Single filers:

10% – $0 to $11,000

12% – $11,001 to $44,725

22% – $44,726 to $95,375

24% – $95,376 to $182,100

32% – $182,101 to $231,250

35% – $231,251 to 578,125

37% – Over $578,125

Standard Deductions

In an effort to acknowledge the recent rise of living costs and provide taxpayers with a bit of financial relief, the IRS has also increased the standard deductions for 2023. The standard deduction is a fixed amount that taxpayers can subtract from their taxable income tax.

The standard deduction is increasing for tax year 2023 to $27,700 for married couples filing jointly (up from $25,900 in 2022). Single filers can claim $13,850 (up from $12,950 in 2022).

Additional Deductions

Among the other deductions that will increase in 2024 are the foreign earned income exclusion, which rises from $120,000 to $126,500. This is a tax benefit that allows eligible U.S. citizens working abroad to exclude a certain amount of their foreign earned income from their U.S. federal income tax in order to prevent double taxation. Additionally, the annual exclusion for gifts will increase from $17,000 to $18,000.

Benefits to Taxpayers

These adjustments help to ensure that workers’ wages, which may have risen to keep up with inflation, are not eroded by higher tax rates. This means that individuals will not be penalized for earning more money to combat rising living costs. In fact, the changes can help stimulate the economy by putting more money in the hands of consumers.

Furthermore, the increased standard deductions provide financial relief by lowering the overall tax burden on taxpayers. This extra money can be used to offset the rising costs of everyday expenses, such as housing, transportation, and groceries.

 

 

Inflation Catches Up with Taxes: Here are the Tax Adjustments Released by the IRS for 2023

Inflation Catches Up with Taxes: Here are the Tax Adjustments Released by the IRS for 2023

The IRS makes tax adjustments every year but because of high inflation, the adjustments for the 2023 tax year are more significant, including changes to standard deduction amounts and tax brackets. Read on for an understanding of the most significant changes in order to plan your finances through 2023.

Standard Deduction

The standard tax deduction, which is based on filing status, is a fixed amount that the IRS allows taxpayers to deduct from their taxable income, thus reducing their tax liability. It is adjusted each year for inflation. Most taxpayers already take the standard deduction rather than itemizing their deductions, and with the inflation adjustments for 2023, even more taxpayers may move into claiming the standard deduction.

For single taxpayers and married couples filing separately, the standard deduction increased from $12,950 in 2022 to $13,850 in 2023. For married taxpayers filing jointly, the standard deduction increased from $25,900 in 2022 to $27,700 in 2023. For those filing head of household, the standard deduction increased from $19,400 in 2022 to $20,800 in 2023.

Additionally, taxpayers who are blind or at least age 65 can claim a further standard deduction of $1,500 per person (an increase of $1,400 from tax year 2022) or $1,850 if they are unmarried and not a surviving spouse.

Tax Bracket Thresholds

Because of inflation, the federal income tax brackets for both ordinary income and capital gains increased by roughly 7% for tax year 2023. For example, the top tax rate of 37% applies to individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly, which is up from $647,850 in 2022), and the lowest tax rate of 10% applies to individual single payers with incomes of $11,000 or less ($22,000 for married couples filing jointly, which is up from 20,550 in 2022).

Retirement Plan Contribution Limits

The IRS has also increased contribution limits for several retirement plans in 2023. For 401(k), 403(b), and most 457 plans, the contribution limit will increase to $20,500 in 2023 (up from $19,500 in 2022). For catch-up contributions for taxpayers age 50 and older, the limit will increase from $6,500 in 2022 to $7,500 in 2023. Traditional and Roth IRA accounts will also see an increase in contribution limits from $6,000 in 2022 to $7,000 in 2023 (the catch-up contribution limits for taxpayers age 50 and older will not change).

Gift Tax Exclusion

In 2023, the annual exclusion for gifts increases by $1,000, from $16,000 in 2022 to $17,000 in 2023. This means that taxpayers can now give up to $17,000 to each recipient without having to pay gift tax.

Earned Income Tax Credit

The maximum EITC amount for qualifying taxpayers who have three or more qualifying children was $6,935 for tax year 2022. In 2023, this amount increases to $7,430 for qualifying taxpayers.

Alternative Minimum Tax

This tax for high-income earners is imposed on taxpayers who make a certain income. In addition to their income tax, the AMT ensures that they pay their fair share in taxes even when taking many deductions. The AMT exemption amount increases from $75,900 for tax year 2022 to $81,300 for tax year 2023. The AMT for joint filers is $126,500.

Health Flexible Savings Account

For tax year 2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050. For cafeteria plans that approve of the carryover of unused amounts, the maximum carryover amount will be $610.

Small Businesses Can Dodge the Attention of the IRS by Avoiding These Tax Mistakes

Small Businesses Can Dodge the Attention of the IRS by Avoiding These Tax Mistakes

Filing taxes puts stress on small business owners, because most know that mistakes on business tax returns can affect your business’s success. Here are some common tax mistakes to avoid.

Mixing Business and Personal Expenses

Be sure not to report personal expenses on your small business’s tax return. It’s always a good idea to have separate credit cards, bank accounts, and filing folders for each. Sometimes an expense isn’t as cut-and-dry and you may have difficulty determining if it is indeed business or personal. In this case, turn to the IRS’s Publication 535 at www.irs.gov, which provides an overview of expenses that are and are not deductible.

Being Disorganized with Recordkeeping

This may seem like second nature to some business owners, but staying on top of tax documents, receipts, and copies of bank and credit card statements will go a long way toward avoiding overwhelm at tax time. While you don’t need to submit receipts or other proof of tax deductions to the IRS, you will need them on hand if the IRS decides to probe into your taxes further. If you get audited and you don’t have required documentation on hand to prove any claimed deductions, your tax bill could increase significantly.

Filing the Wrong Tax Forms

There are different types of tax forms required for different types of businesses (C corporations, S corporations, etc.), and if you have employees, you’ll need to fill out additional forms that document their payment through the year. Simply put, it can be a lot to track. A tax advisor can help you determine which forms you should be filling out.

Taking Too Many Deductions

Simply stated, taking deductions means that you get money back for certain purchases that assisted your business. Just keep in mind that too many deductions could raise a red flag for the IRS. If you’re unsure, a tax advisor can ensure that you’re adhering to deduction limitations and only claiming expenses that qualify.

Forgetting or Underestimating Your Tax Payments

Many small business owners are required to make quarterly estimated tax payments. Typically, the deadlines for these payments are the 15h of April, June, September, and January of the following year. How much you owe is based on your income. If you miss a payment, or if your payment falls short of your actual tax liability for the year, the government could saddle you with penalties, thereby increasing your tax liability. Furthermore, if the IRS suspects an intention to defraud it, the fine can be as high as 75%, and you could face criminal tax fraud charges.