by Jean Miller | Accounting News, News, Tax, Tax Planning, Tax Planning - Individual
Americans are no strangers to seeking out ways to legally minimize their tax burdens. Fortunately, there are several financial tools available that can help taxpayers slash their tax liability. In this article, we explore how these tools help you optimize your tax planning and maximize tax savings.
Pre-Tax Contributions to Retirement Plans
One of the most effective ways to reduce taxable income while securing your financial future at the same time is through pre-tax contributions to retirement plans. Traditional Individual Retirement Accounts (IRAs) and employer-sponsored 401(k)s allow taxpayers to contribute a portion of their income before it’s adjusted for taxes. Subsequently, your taxable income decreases, which lowers your immediate tax liability. Furthermore, you can defer taxes on these contributions until you withdraw the funds during retirement, allowing your investments to grow tax-deferred over the years.
Roth IRAs for Tax-Free Growth
Roth IRA contributions are made with after-tax dollars, meaning they do not reduce your taxable income in the year they are made. However, the growth and withdrawals from a Roth IRA are generally tax-free during retirement. This is different from a traditional IRA, which offers upfront tax benefits. Choosing between the two depends on individual circumstances and your current and projected future tax brackets.
Health Savings Accounts (HSAs)
HSAs are a tax-advantaged savings option for individuals with high-deductible health insurance plans. Contributions to HSAs are tax-deductible, and qualified medical expenses can be withdrawn tax-free. They also have no “use-it-or-lose-it” rule, meaning the funds can roll over from year to year. This makes an HSA an excellent long-term savings and tax-reduction tool. Additionally, after age 65, if the funds are used for non-medical expenses, they can be treated similarly to a traditional IRA, subject to regular income tax but without any penalty.
Tax Credits
Tax credits provide a dollar-for-dollar minimization in tax liability, making them a highly valuable tool for taxpayers. Some common tax credits include the Earned Income Tax Credit (EITC), Child Tax Credit, and education-related credits like the Lifetime Learning Credit and the American Opportunity Credit. Qualification and the amount of tax credits differ based on aspects such as income, family size, and educational expenses. Taking advantage of these credits can substantially shrink your tax bill or even result in a refund.
Charitable Contributions
Contributions to eligible charities can be itemized deductions, reducing taxable income. In order to claim the deduction, make sure the charity qualifies under the IRS guidelines, and keep detailed records of your donations. You can also donate appreciated assets, such as stocks or real estate to avoid capital gains and reap additional tax advantages.
Flexible Spending Accounts
Through an employer-sponsored FSA, employees can set aside pre-tax dollars for qualified medical expenses and dependent care expenses. This reduces taxable income and therefor reduces tax liability. Note that it’s important to plan FSA contributions thoughtfully. Unlike an HSA account, any unused funds remaining in an FSA by the end of the year may be forfeited.
by Stephen Reed | Accounting News, News, Tax, Tax Planning, Tax Planning - Individual
Understanding self-employment taxes can be intimidating, but it’s important to educate yourself so you don’t miss out on deductions that can lower your tax bill. Below is a list of 15 self-employment tax deductions you may be eligible for as a freelancer or a self-employed individual.
1. Self-employment tax deduction
Self-employment tax is the portion of Medicare and Social Security taxes that self-employed individuals are required to pay, but you can claim 50% of this as an income tax deduction. For example, a $1,000 self-employment tax payment reduces taxable income by $500.
2. Qualified Business Income (QBI) Deduction
As of January 1, 2018, self-employed taxpayers can deduct generally 20% of their qualified business income from qualified partnerships, S corporations, and sole proprietorships.
3. Home Office Deduction
If your home office is your primary place of business – and used solely for your business – you are permitted to deduct it from your taxes. You can also deduct a percentage of household expenses such as electricity, gas, water, trash, cleaning services, and certain repairs to the home.
4. Retirement Plans
If you use a qualified retirement plan, such as a 401(k), an IRA, or a simplified employee pension (SEP), you are able to deduct your contributions to that plan.
5. Office Supplies
Provided they are used solely for your business, materials such as tools, basic office supplies, and machinery (including service expenses) may be deducted.
6. Depreciation
Capital expenses that experience the gradual loss of value (particularly business equipment or buildings) through increasing age, natural wear and tear, or deterioration may be deducted if they are used to generate income for your business.
7. Educational Expenses
Business-related educational expenses, such as continuing education classes, seminars and conferences, conventions and trade shows, and subscriptions and dues for industry organizations can all be deducted.
8. Health Insurance
If you are self-employed or own more than 2% of your S Corporation, you can deduct health insurance premiums for yourself and any dependents under the age of 27.
9. Advertising and Promotion
Any materials or services used to promote your business, such as business cards, web hosting, full media advertisements, etc. are deductible.
10. Internet Fees and Communication Expenses
Internet costs can be deducted, but only the percentage of time that it’s used for business purposes. Cell phone services also may be deducted in the proportion that it relates to business usage. To keep the personal vs. business line clear, it’s recommended to have separate computers and phones for business when possible.
11. Mileage
If you use your car for your business, you can take a standard mileage deduction, or take a deduction based on actual costs of fuel, maintenance, licensing, and depreciation. Some public transportation expenses are also deductible. Good record and receipt keeping as proof of business is key here.
12. Bank Fees and Interest Charges
As long as your business bank account is separate from your personal account, some bank fees connected to your business account may be deductible. Likewise, you can deduct interest on credit card balances and loans that are directly linked to your business.
13. Travel
Some business travel expenses can be deducted by 100% if they occur away from your home office and are considered necessary. Under the new Tax Cuts and Jobs Act, certain entertainment write-offs have been removed, but the 50% deduction on food and beverage expenses is still applicable.
14. Security System
If you work from a home office, you can deduct a percent of the expenses of a total home security system, and the purchase and installation of the system can be included when calculating depreciation.
15. Moving Expenses
If you move more than 50 miles from your location for business purposes, you are able to deduct most incurring expenses, such as transportation, packing, and utility connection fees.
by Jean Miller | Accounting News, Healthcare, News, Resources, Tax, Tax Planning, Tax Planning - Individual, Tax Preparation - Individual
The Trump administration has wasted little time taking action on many of the promises that were made throughout the campaign. One major proposition made by President Trump was the immediate repeal and replacement of Obamacare. While the replacement of our current healthcare system seems to be pending, the repealing of the current system is certainly at the top of the administration’s list. Although the insurance aspect of the current system would seemingly stick around until the GOP and the Trump administration develop a suitable alternative, the tax aspects of Obamacare could be subject to immediate repeal. Thus, the insurance industry may have until 2018 or 2019 before they saw changes, but the tax industry (and therefore taxpayers) could see effects as early as this year.
How exactly the current administration chooses to repeal the tax aspects of Obamacare could be positive or negative for most taxpayers though. Under current law, there is an individual insurance mandate that penalizes monthly those who do not have insurance coverage, as well as an employer mandate penalizing employers (with more than 50 full-time employees) who do not offer affordable health care. However, if individuals obtain coverage through the state marketplaces and their income is between 100% and 400% of the federal poverty level, they receive a tax credit to assist in paying for their insurance premiums. Additionally, Obamacare levies a 0.9% Medicare tax and a 3.8% net investment income tax on certain high wage earners, or the wealthiest 2% of Americans.
Where repealing taxes associated with Obamacare could be positive for Americans is if Congress removed all taxes while maintaining the premium tax credit (until a replacement system is established). This would mean employers are no longer charged for not providing insurance coverage, taxpayers are not penalized for not having insurance and high wage earners will not be levied the additional taxes discussed above. If Congress chose this route, tax experts estimate that low to middle income wage earners could receive a tax break in the hundreds of dollars, whereas high end wage earners could receive a break in the thousands of dollars.
However, if Congress chose to repeal all tax aspects, including the premium credit, certain tax brackets would most certainly see negative effects. Without the credit, lower income brackets could see their taxes rise by an average of $4,000, middle income brackets could see their taxes rise by an average of $6,000, but higher income brackets would still see their taxes lowered by the thousands of dollars. But, these negative changes would only exist for lower or middle income brackets who currently claim the premium tax credit. Fortunately, at this point, Congress nor the Trump administration has made any claims about what they will do in terms of repealing Obamacare-related taxes, so Americans will simply have to wait and see what direction our nation’s leaders choose and how their wallets will be affected.
by Pete McAllister | Accounting News, News, Resources, Tax, Tax Planning - Individual, Tax Preparation - Individual
“New Year, New Me.” This phrase is often uttered in the early parts of a new year as individuals prepare to make changes in their health, career, relationships or a variety of other personal traits. This phrase could ring true for 2017 as America prepares to inaugurate our 45th President and witnesses many political and policy shifts. One proposition that may enact some major adjustments is President-Elect Trump’s new tax plan. If you’d like to learn more about his tax proposals, check out our article highlighting major changes for individuals and businesses here. However, Trump’s plans have the potential to cause more shifts than just tax cuts; researchers believe it could have an impact on the housing market, specifically on mortgage interest deductions.
The President-Elect’s current plans include a rise in standard deductions for both individual filers and those filing jointly. Under current laws, many filers itemize their deductions rather than taking the standard deduction of $6,300 in order to receive additional tax breaks. But now, single filers could see a rise in exemption from $6,300 to $15,000 and joint filers could see a rise double that, at $30,000. Therefore, previously, those paying $10,000 in mortgage interest would have benefited from itemizing, but under Trump’s new proposals, in many cases, taxpayers would benefit more by taking the new standard deduction rather than itemizing. Although these propositions could simplify the filing process, they could also discourage individuals from buying. If homeowners no longer have an incentive to itemize and deduct their mortgage interest, then many may feel that renting is just as advantageous as buying.
Many economists would suggest that mortgage interest deduction does not actually motivate individuals to buy, but just encourages them to spend more or buy larger homes. However, limiting tax preferences for homeownership could cause a drop in the value and price of homes, a potential benefit to buyers, though a definite negative for sellers. One positive the market may have to look forward to is lower tax rates for many tax brackets, which has the potential to encourage individuals to spend more money on a variety of things, including housing. While the President-Elect’s tax changes could cause shifts to housing and homeownership, his proposals are ever changing and still being ironed out in many places. Current homeowners (who aren’t looking to sell in the next year) may have nothing to worry about, but future homeowners might consider what unfolds in the coming months before purchasing a home in 2017.
