TAX TIPS NEWSLINE _____________________
Produced monthly for clients of the Advisory Group Associates
Our Mission: Sharing ideas that make a real difference.
This “TAX TIPS NEWSLINE” is compiled by its founder, Frank Zerjav CPA and team of Professional Tax Associates, and then it is sent by email each month because you need tax and compliance knowledge. It’s a big part of your life and the entities that you operate.
ORGANIZE 2014 DATA: On January 22, 2015, we Emailed each client/taxpayer their 2014 Tax Organizer to be used to compile 2014 records and efficiently deliver this data and information for preparation of an accurate tax return. Please let us know right away if you did NOT receive this email.
Do not wait to send us your 2014 data. Often Schedules K-1 from partnerships etc. are not issued until April. Best practice is to bring us what you have by Saturday, February 7, 2015, even if your forms 1099 and brokerage statements have not yet been received. (See Client Appreciation Brunch.) The goal is to have adequate time to let us process an accurate tax return. If you have any questions, please do not hesitate to contact us. Please notify us promptly of any address, e-mail, and telephone contact changes!
Bring your data and “Tax Organizer” for discussion and preparation.
Saturday, February 7th, 10am until 2pm
At the offices of Advisory Group Associates, 1980 Concourse Drive, St. Louis, MO 63146.
Please R.S.V.P. At: 314-205-9595.
Inside this Month’s Issue
- Tips on Who should File a 2014 Tax Return
- Start Preparing for 2015 Now
- Office-In-Home Tax Breaks
- Tax Breaks for Students
- Health Care Reform – What You Need to Know
- Tax Savings Strategies Checklist
- Business Tax Strategies
- Tax Strategies – FAQ
- Wide Range of Solutions & Services Offered
TIPS ON WHO SHOULD FILE A 2014 TAX RETURN
Most people file their tax return because they have to, but even if you don’t, there are times when you should. You may be eligible for a tax refund and not know it. This year, there are a few new rules for some who must file. Here are six tax tips to help you find out if you should file a tax return:
- General Filing Rules. Whether you need to file a tax return depends on a few factors. In most cases, the amount of your income, your filing status and your age determine if you must file a tax return. For example, if you’re single and 28 years old you must file if your income was at least $10,150. Other rules may apply if you’re self-employed or if you’re a dependent of another person. There are also other cases when you must file. Contact us to find out if you need to file.
- New for 2014: Premium Tax Credit. If you bought health insurance through the Health Insurance Marketplace in 2014, you may be eligible for the new Premium Tax Credit. You will need to file a return to claim the credit. If you purchased coverage from the Marketplace in 2014 and chose to have advance payments of the premium tax credit sent directly to your insurer during the year you must file a federal tax return. You will reconcile any advance payments with the allowable Premium Tax Credit. Your Marketplace will provide Form 1095-A, Health Insurance Marketplace Statement, to you by Jan. 31, 2015, containing information that will help you file your tax return.
- Tax Withheld or Paid. Did your employer withhold federal income tax from your pay? Did you make estimated tax payments? Did you overpay last year and have it applied to this year’s tax? If you answered “yes” to any of these questions, you could be due a refund. But you have to file a tax return to get it.
- Earned Income Tax Credit. Did you work and earn less than $52,427 last year? You could receive EITC as a tax refund if you qualify with or without a qualifying child. You may be eligible for up to $6,143. Use the 2014 EITC Assistant tool on IRS.gov to find out if you qualify. If you do, you need to file a tax return to claim it.
- Additional Child Tax Credit. Do you have at least one child that qualifies for the Child Tax Credit? If you don’t get the full credit amount, you may qualify for the Additional Child Tax Credit.
- American Opportunity Credit. The AOTC is available for four years of post secondary education and can be up to $2,500 per eligible student. You or your dependent must have been a student enrolled at least half time for at least one academic period. Even if you don’t owe
taxes, you still may qualify. However, you must complete Form 8863, Education Credits, and file a return to claim the credit. Learn more by contacting us.
START PREPARING FOR 2015 NOW
The further we go into the future, the less certain we are about IRS rules and regulations.
We know how things are now – and we know something about what is planned – but if the
Affordable Care Act (Obamacare) is any indicator, those plans are subject to change.
Tax year 2015 rules may not be clear yet but here is what we know now along with ways to make your finances more tax efficient.
Affordable Care Act. Several parts of the Affordable Care Act, also known as Obamacare, will go into effect and they could impact your tax situation. (See article “Health Care Reform – What You Need to Know”).
Investments as Tax Strategy. We may not know precisely what the IRS has in store for 2015, but when it comes to investments, thinking long-term is definitely a tax advantage.
Hold on to investment positions at least one year to avoid short-term capital gains taxes and speak with an investment advisor about making your investment portfolio more tax-efficient.
Also, be mindful of the fact that allowable contributions to IRAs, 401(k) s, and other tax advantage accounts are adjusted each year for inflation.
Tax Law Changes. Did you know there is a free service you can subscribe to that will provide information about tax law changes, provide helpful tips, and send you IRS announcements as they’re published?
Subscribe to IRS Tax Tips at the IRS website or download the IRS2Go mobile app. If you have an Apple mobile device, you can download the app at the iTunes app store. If you have an Android device, visit Google Play.
OFFICE-IN-HOME TAX BREAKS
If you operate a business from home, you may qualify for valuable tax-saving home office deductions. But using the computer in your home office for personal reasons could cost tax deductions.
Strategy: Buy a separate computer or laptop for personal use. To qualify for home office deductions, a portion of your home must be used “regularly and exclusively” as your principal place of business.
If you qualify, you can deduct expenses directly associated with your home office, like painting or repairs, in addition to a proportionate share of the home’s expenses. This includes utilities, insurance, mortgage interest and property taxes as well as a depreciation deduction.
If you buy computer equipment for business use in a home office, the cost and related fees are deductible, but there are several special rules to consider.
The IRS has developed a new optional safe harbor method for taxpayers claiming office in home expenses. This safe harbor method is an alternative to the calculation, allocation, and substantiation of actual expenses under section 280A. For tax years beginning on or after January 1, 2013, taxpayers have two choices for deducting office-in-home expenses, these are:
- Continue to use the actual expense method, or
- Use the new optional safe harbor act
General rule. Section 280A generally disallows any deduction that is otherwise allowable as a business expense if it is related to a dwelling unit that is used as a residence by the taxpayer during the year. This is true even if the dwelling unit is used in the taxpayer’s trade or business. An exception applies for mortgage interest, property taxes, and casualty losses, which are deductible regardless of whether the residence is used for business purposes.
Another exception to the general rule is if the taxpayer uses the residence for business and meets all the following requirements.
Exclusive use test. An area of the home is used exclusively for business and not for personal purposes. Exceptions to the exclusive use test include an area used for the storage of inventory or product samples and areas used as a day care facility.
Trade or business test. The area used for business must be used in connection with a trade or business. A profit-seeking activity for investment purposes, such as buying and selling stocks or managing a rental unit, that is not conducted as a trade or business does not qualify.
Principal place of business test. The trade or business can have more than one location. However, the area in the home used for business must be the principal place of business for that trade or business. For this purpose, space used for administrative or management activities qualifies if there is no other fixed location where substantial administrative or management activities are conducted
Employee use. In addition to the above general rules, an employee can deduct office in home expenses if the home office is for the convenience of the employer.
Substantiation rules. As with any business expense deduction, the taxpayer must be able to substantiate the cost. For office-in-home deductions, the cost must also be allocated between the amount used for business and the amount used for personal purposes. For example, after adding up all the costs for home utilities, the taxpayer must use a reasonable method to determine how much of that cost is for business. A method comparing the square footage of the business area business area with total livable square footage in the home, and then multiplying total costs by that percentage, is one reasonable method for allocating costs.
The IRS recognizes that the calculation, allocation, and substantiation of allowable deductions attributable to an office-in-home can be complex and burdensome for small business owners. Accordingly, the IRS has developed this optional safe harbor method to reduce the administrative, record keeping, and compliance burdens of determining the allowable deduction for business use of the home under section 280A.
Optional safe harbor method for calculating office-in-home deduction. To use the optional safe harbor method, the taxpayer must otherwise qualify for deduction of office-in-home expenses under prior rules. (Exclusive use test, regular use test, business use test, etc.)
- Under the new optional method, deductible expenses are calculated by multiplying the allowable square footage of the office in home by the prescribed rate.
- The allowable square footage is the area used for business, but not more than 300 square feet.
- The prescribed rate is $5 per square foot (300 x $5 = $1,500) maximum deduction.
Itemized deductions. In addition to the above method for calculating office-in-home expenses, a taxpayer who itemizes deductions can deduct mortgage interest paid, property taxes, and casualty losses without regard to whether there is a qualified business use of the home for the year.
Election. If the taxpayer elects to use the above method to calculate deductible costs, then the taxpayer cannot deduct any actual expenses related to the office-in-home. This optional method does not apply to an employee with a home office if the employee receives advances, allowances, or reimbursements for expenses related to the qualified business use of the home.
The election to use the optional safe harbor method is made on a year-by-year determination. The election is made by using the optional method on a timely filed, original tax return. Once made, the election is irrevocable. A change from using the optional method one year to actual expenses in another year is not considered to be a change in an accounting method and does not require consent from the IRS.
TAX BREAKS FOR STUDENTS
Filing a tax return is important for college students. First, filing a tax return is helpful while filling out the FAFSA form to see what type of grants and student aid you qualify for, including if you qualify for the work study program through your school. Also, you may qualify for a tax deduction or credit that can give you a tax refund. You can put your refund towards next semester’s tuition to avoid further student loans.
Claim your tuition deduction. Your 1098-T will tell you how much you paid in tuition expenses and will also report any scholarships or grants you received through your school. This is important information you will need while filling out your taxes and taking the Tuition & Fees Deduction.
Qualified expenses are the tuition and any other fees, materials, supplies, or equipment that is paid directly to the school. This can include books needed for the course, supplies, and equipment that were purchases as part of the required tuition along with health and wellness fees.
Things that do not qualify as expenses include any late charges, application fees, processing fees, books or materials bought at the bookstore or other places besides directly to the University.
So here’s an example of how this works. If you paid $1,000 for a course at your college and that $1,000 included a camera to take pictures and a workbook required for the class, it can count for a qualified expense. However, if you get a syllabus and the syllabus says you are required to buy a book, this book does not count. Even though you need it, if you aren’t purchasing it directly through the school, even the bookstore, it does not count.
In addition to reporting what your tuition and qualified expenses are, you will have to write down the amount of any money you received for scholarships and grants.
You can fill this out and claim your deduction if your gross income is less than $80,000 or $160,000 if you’re filing a joint return with your spouse. You also must be or have been enrolled in an eligible educational institution.
You can’t claim any tuition expense if you or your spouse were a nonresident alien for any part of the year.
Filling this out and claiming your deduction can reduce your income subject to tax by up to $4,000.
In most cases, your college will mail you a copy of your 1098-T or send you an e-mail containing the official file. This is a great reason to be sure both your current mailing address and e-mail address is up to date. If you haven’t received it, check your official school e-mail address since this is probably where the document was sent. If you still can’t find it, contact your financial aid office, a record office, or any other administrative office that is going to have this on file for you.
Get a tax credit. Use Form 8863 to claim your education credits, either the American Opportunity Credit or the Lifetime Learning Credit.
The American Opportunity Credit is a refundable credit that can help you receive up to $2,500 per student. You must be enrolled at least halftime for at least one of the academic periods and enrolled in an accredited university where you are trying to earn a degree.
The Lifetime Learning Credit is a nonrefundable credit, which means it can reduce your tax, but it will not give you additional money, unlike the American Opportunity Credit. Also unlike the American Opportunity Credit, you do not need to be pursuing a degree for this. So any classes you are taking to enhance your work skills can qualify towards this credit. Keep in mind you cannot claim both of these credits for the same student during the same year. In addition, you must decide between the tuition deduction and the tax credit.
Be sure to discuss your dependency status with your parents, as it will impact the tuition tax breaks on both of your tax returns.
Write off your student loan interest. If you have been making payments towards your student loans this past year or at least paying the interest on any of your loans, you may be able to deduct any amount of your payment that went towards your loan’s interest.
Form 1098 E will give you the information you need to fill it out. Your student loan lender will provide you with this document. They mail a paper document of this, so be sure that your correct information is on file. You may also be able to attain a copy online by logging into your account. If you can’t find the document or have not received it, be sure to contact your lender as soon as possible so they can send out another copy to you as soon as possible.
When you are looking at Form 1098-E, box 1 will show how much interest the lender received. This is the amount you report on your taxes.
HEALTH CARE REFORM – WHAT YOU NEED TO KNOW
As anyone who watches the news realizes, there are quite a few changes taking place within the next eight years due to the health care reform bill, the Affordable Care Act, also known as Obamacare. It’s important to understand at least the basics of the bill.
Cost and requirement to buy health insurance. The health care reform bill will cost approximately $940 billion over ten years, but according to the Congressional Budget Office (CBO) it will not only pay for itself, but it is also expected to reduce the federal deficit by $143 billion over the first ten years. Note: the health care bill also included student loan reforms which ended government subsidies to banks for managing private student loans.
The goal of the health care reform bill is to require everyone in the US to have health insurance by 2014 (or face an annual fine of $95). This will be accomplished by several methods. It will require some businesses to provide health insurance to their employees or face large fines per employee, and other individuals will be required to pay for their own insurance.
What if I can’t afford health insurance or can’t get approved for health insurance? These are common questions – there are an estimated 32 million Americans without health insurance. These topics are addressed several ways, most notably through health insurance exchanges and subsidies. People who are self-employed or do not currently have health-insurance will be able to purchase health insurance via state health insurance exchanges. There will be subsidies available to those whose income is between 100% and 400% of the Federal Poverty level (Federal Poverty level for family of four is $22,050).
Obamacare Penalty to Be Owed by as Many as 6 Million Taxpayers who will have to pay a penalty of as much as 1 percent of income because they went without health insurance in part or all of 2014, the Treasury Department said recently.
The penalty, part of the Patient Protection and Affordable Care Act, is designed to encourage people to sign up for health insurance using the expanded options and financial assistance available under the law, known as Obamacare. The penalty would apply to about 2 percent to 4 percent of all taxpayers for 2014.
Tax filing for 2014 opened Jan. 20, and the Internal Revenue Service’s Form 1040—for 2014 federal income tax—includes a new Line 61 asking if the taxpayer has health insurance. Three-quarters of taxpayers won’t have to do anything more than check that box, said Mark Mazur, the department’s assistant secretary for tax policy. The remainder will have to take additional steps, though most won’t pay a penalty, he said on a conference call with reporters.
The IRS has been preparing for additional strain during the tax season as people adjust to the rule, warning that about half the people who call its toll-free phone lines won’t be able to get through.
About 3 percent to 5 percent of taxpayers got tax credits last year to help them absorb the cost of paying premiums on Obamacare insurance plans, Mazur said. Ten percent to 20 percent weren’t insured for all or part of the year but will be able to claim an exemption. People who owe a penalty “will pay a fee because they made a choice not to obtain health insurance that they could have afforded, and they’re not eligible for one of the exemptions,” he said.
About 8 million people purchased health-care policies through the insurance exchanges in 2014. About 85 percent of those who initially enrolled received subsidies, which went directly to insurance companies during 2014. The U.S. gets about 150 million income tax returns a year.
How health care reform affects taxes. There is no magic bullet here, health care is not cheap and the only way we can pay for this is through taxes. The Congressional Budget Office made the statement that not only will this plan pay for itself, but also work toward reducing the federal deficit. Here are some of the tax changes we will see in the coming years:
- 2010 – 10% federal excise tax for using indoor tanning facility.
- 2013 – Medicare payroll tax increase from 1.45% to 2.35% for couples earning more than $250,000 a year, and individuals earning more than $200,000 a year.
- 2013 – Flexible spending account contributions will be limited to $2,500 for medical expenses.
- 2013 – The threshold for itemized deductions for health care expenses will increase to
10% from 7.5%.
- 2018 – 40% excise tax on the portion of employer-sponsored “Cadillac plans’ that exceeds $10,200 a year for individuals and $27,500 for families.
Summary of health care changes in 2010:
- Anyone under the age of 26 will be covered under their parents’ insurance, regardless of their school status.
- Insurance companies must provide coverage for children regardless of pre-existing conditions.
- Adults with pre-existing conditions will be covered in a high risk health insurance pool. They’ll remain in this pool until another plan is in place.
- Annual and lifetime insurance limits will be prohibited.
- New health insurance plans will be required to cover preventative services in full.
- New insurance plans must follow the new regulations appeals process when a claim is denied.
- Companies with less than 50 employees will receive tax credits equal to 35% of their health care premiums.
Summary of health care changes in 2011:
- Wellness visits will be offered free for Medicare patients and new Medicare plans will include preventative coverage with no out of pocket expense.
- Those enrolled in the Medicare Advantage or prescription plan will receive a 50% discount for name brand drugs.
- There will be a 10% increase on the penalty tax when Health Savings Accounts are distributed before the age of 65 on non-qualified medical expenses.
- Small businesses will be offered tax free benefits when they use alternatives to cafeteria plans.
- Those who make more than $200,000 will be assessed a Medicare payroll tax increase of 9%.
Summary of health care changes in 2013:
- A $2,500 per year cap will be placed on flexible spending accounts.
- Tax deductions for employers who have employees participating in Medicare part D will be eliminated.
- Medical devices will have a 2.9% excise tax added to the cost.
- Those earning more than $200,000 will see a 9/10% increase on hospital insurance tax.
- Uniform standards will be in place for those who need to exchange health care information. This will include electronic communication and other means that will reduce administrative costs.
- The threshold for itemized deductions for health care expenses will increase to
Summary of health care changes in 2014:
- Beginning in 2014, anyone who does not have insurance will be fined.
- Eligibility standards for newly formed health care exchanges will be put into place.
- Businesses with 50 or more employees, who don’t offer insurance, will be fined.
- Pre-existing conditions must be covered and higher health insurance rates will not be allowed for them.
- Medicaid eligibility standards will be increased to provide only for those less than 133% above poverty level.
- Health care providers will see annual fees levied based on their total premiums.
Summary of health care changes in 2018:
- Excise taxes will be levied on employers who provide plans that cost more than $27,500 for families and $10,200 for individuals.
There are many more changes that will take affect between now and 2018, but these are the major issues. If you’re concerned about the changes, talk to your health care provider about how the health care reform bill will affect your health coverage.
TAX SAVING STRATEGIES CHECKLIST
This article provides tax saving strategies for deferring income and maximizing deductions, and includes some strategies for specific categories of individuals, such as those with high income and those who are self-employed.
Before getting into the specifics, however, we would like to stress the importance of proper documentation. Many taxpayers lose worthwhile tax deductions because they have neglected to keep receipts or records. Keeping adequate records is required by the IRS for employee business expenses, deductible travel and entertainment expenses, charitable gifts and travel. But don’t do it just because the IRS says so. Neglecting to track these deductions can lead to overlooking them. You also need to maintain records regarding your income. If you receive a large tax-free amount, such as a gift or inheritance, make certain to document the item so that the IRS does not later claim that you had unreported income.
The checklist items listed below are for general information only and should be tailored to your specific situation. If you think one of them fits your tax situation, we’d be happy to discuss it with you.
- Avoid or Defer Income Recognition. Deferring taxable income makes sense for two reasons. Most individuals are in a higher tax bracket in their working years than they are during retirement. Deferring income until retirement may result in paying taxes on that income at a lower rate. Additionally, through the use of tax-deferred retirement accounts you can actually invest the money you would have otherwise paid in taxes to increase the amount of your retirement fund. Deferral can also work in the short term if you expect to be in a lower bracket in the following year or if you can take advantage of lower long-term capital gains rates by holding an asset a little longer.
Tip: You can achieve the same effect of deferring income by accelerating deductions. For example, by paying a state estimated tax installment in December instead of at the following January due date.
- Max Out Your 401(k) or Similar Employer Plan. Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account. For most companies these are referred to as 401(k) plans. For many other employers, such as universities, a similar plan called a 403(b) is available. Check with your employer about the availability of such a plan and contribute as much as possible to defer income and accumulate retirement assets.
Tip: Some employers match a portion of employee contributions to such plans. If this is available, you should structure your contributions to receive the maximum employer matching contribution.
- If You Have Your Own Business, Set Up and Contribute to a Retirement Plan.
If you have your own business, consider setting up and contributing as much as possible to a retirement plan. These are even allowed for sideline or moonlighting businesses. Several types of plans are available which minimize the paperwork involved in establishing and administering such a plan.
- Contribute to an IRA. If you have income from wages or self-employment income, you can build tax-sheltered investments by contributing to a traditional or a Roth IRA. You may also be able to contribute to a spousal IRA – even where the spouse has little or no earned income. All IRAs defer the taxation of IRA investment income and in some cases can be deductible or be withdrawn tax free.
Tip: To get the most from IRA contributions, fund the IRA as early as possible in the year. Also, pay the IRA trustee out of separate funds, not out of the amount in the IRA. Following these two rules will ensure that you get the most possible tax-deferred earnings from your money.
- Defer Bonuses or Other Earned Income. If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the portion withheld) for another year. If you’re self-employed, defer sending invoices or bills to clients or customers until after the new year begins. Here, too, you can defer some of the tax, subject to estimated tax requirements. This may even save taxes if you are in a lower tax bracket in the following year. Note, however, that the amount subject to social security or self-employment tax increases each year.
- Accelerate Capital Losses and Defer Capital Gains. If you have investments on which you have an accumulated loss, it may be advantageous to sell it prior to year-end. Capital losses are deductible up to the amount of your capital gains plus $3,000. If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements). For most capital assets held more than 12 months (long-term capital gains) the maximum capital gains tax is 20 percent. However, make sure to consider the investment potential of the asset. It may be wise to hold or sell the asset to maximize the economic gain or minimize the economic loss.
- Watch Trading Activity in Your Portfolio. When your mutual fund manager sells stock at a gain, these gains pass through to you as realized taxable gains, even though you don’t withdraw them. So you may prefer a fund with low turnover, assuming satisfactory investment management. Turnover isn’t a tax consideration in tax-sheltered funds such as IRAs or 401(k) s. For growth stocks you invest in directly and hold for the long term, you pay no tax on the appreciation until you sell them. No capital gains tax is imposed on appreciation at your death.
- Use the Gift-Tax Exclusion to Shift Income. You can give away $14,000 ($28,000 if joined by a spouse) per donee in 2015 (same as 2014), per year without paying federal gift tax. You can give $14,000 to as many donees as you like. The income earned on these transfers will then be taxed at the donees tax rate, which is in many cases lower.
Note: Special rules apply to children under age 18. Also, if you directly pay the medical or educational expenses of the donee, such gifts will not be subject to gift tax. The 2015 federal estate tax exemption rises to $5.43 million per person.
Invest in Treasury Securities. For high-income taxpayers, who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings. The interest on Treasuries is exempt from state and local income tax. Also, investing in treasury bills that mature in the next tax year results in a deferral of the tax until the next year.
- Consider Tax-Exempt Municipal Bonds. Interest on state or local municipal bonds is generally exempt from federal income tax and from tax by the issuing state or locality. For that reason, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality. However, for individuals in higher brackets, the interest from municipal bonds will often be greater than from higher paying commercial bonds (after reduction for taxes). Gain on sale of municipal bonds is taxable and loss is deductible. Tax-exempt interest is sometimes an element in computation of other tax items. Interest on loans to buy or carry tax-exempts is non-deductible.
- Give Appreciated Assets to Charity. If you’re planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity, instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash prevents you from having to pay capital gains tax on the sale, which can result in considerable savings, depending on your tax bracket and the amount of tax that would be due on the sale. Additionally, you can obtain a tax deduction for the fair market value of the property.
Tip: Many taxpayers also give depreciated assets to charity. Deduction is for Fair Market Value (FMV).
- Keep Track of Mileage Driven for Business, Medical or Charitable Purposes. If you drive your car for business, medical or charitable purposes, you may be entitled to a deduction for miles driven. For 2014, its 56 cents per mile for business, 23.5 cents for medical and moving purposes, and 14 cents for service for charitable organization. You need to keep detailed daily records (mileage log) of the mileage driven for these purposes to substantiate the deduction.
- Take Advantage of Your Employer’s Benefit Plans to Get an Effective Deduction of Items Such as Medical Expenses. Medical and dental expenses are generally only deductible to the extent they exceed 10 percent of your adjusted gross income (AGI). For most individuals, particularly those with high income, this eliminates the possibility for a deduction. You can effectively get a deduction for these items if your employer offers a Flexible Spending Account, sometimes called a cafeteria plan. These plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars. Another such arrangement is a Health Savings Account. Ask your employer if they provide either of these plans.
- Check Out Separate Filing Status. Certain married couples may benefit from filing separately instead of jointly. Consider filing separately if you meet the following criteria:
- One spouse has large medical expenses, miscellaneous itemized deductions, or casualty losses.
- The spouses’ incomes are about equal.
Separate filing may benefit such couples because the adjusted gross income “floors” for taking the listed deductions will be computed separately. On the other hand, some tax benefits are denied to couples filing separately. In some states, filing separately can also save a significant amount of state income taxes.
- If Self-Employed, Take Advantage of Special Deductions. Self-employed individuals can deduct 100% of their health insurance premiums as business expenses. You may also be able to establish a Keogh, SEP or SIMPLE PLAN, or a Health Savings Account, as mentioned above.
- If Self-Employed, Hire Your Child in the Business. If your child is under age 18, they are not subject to employment taxes from your unincorporated business (income taxes still apply). This will reduce your income for both income and employment tax purposes and shift assets to the child at the same time; however, you cannot hire your child if they are under the age of 7 years old.
- Take Out a Home-Equity Loan. Most consumer related interest expense, such as car loans or credit cards, is not deductible. Interest on a home-equity loan, however, can be deductible. It may be advisable to take out a home-equity loan to pay off other nondeductible obligations.
- Bunch Your Itemized Deductions. Certain itemized deductions, such as medical or employment related expenses, are only deductible if they exceed a certain amount. It may be advantageous to delay payments in one year and prepay them in the next year to bunch the expenses in one year. This way you stand a better chance of getting a deduction.
BUSINESS TAX STRATEGIES
Business owners and professionals can minimize taxes by proper planning and execution of simple tax strategies. Though taxation is different for various types of business entities (sole proprietorship, partnership or corporation), proper expense reporting, amortizing and depreciating company assets can go a long way toward reducing tax liabilities.
Record Keeping. Business owners should keep all tax records and related documents needed for tax preparation and employee logs and receipts for at least seven years in the event there is a tax audit. These records become your proof of deductions. Beyond maintaining the records after filing, proper record keeping helps you to maximize deductions that you might otherwise forget. Use a calendar or diary to keep track of all meetings, trips and costs associated with the meeting. A ledger or software program can organize mileage, names and expenses. Another option is to use a receipt storage organizer for all invoices, bills and sales slips. Keeping a record of canceled checks and bank deposit slips documents the sources of your cash flow.
Depreciation. Equipment assets owned by the business qualify for depreciation of the initial investment over several years. Vehicles are not the only items you can depreciate. Computers, software, copiers and office furniture may also be depreciated. One depreciated value easily overlooked is the amount spent on leasehold improvements such as storefronts and remodeling.
Use of Home Facilities. According to IRS Publication 583, business owners and professionals who have a designated portion of their home devoted to business use can deduct some costs under certain circumstances. If your home is the exclusive place of business, then you may qualify for a business deduction. If your home is used for regular administrative activities, you can make partial deductions for mortgage and utilities. Deductions may also be taken by those who use part of their home for storage of samples or inventory. Daycare providers may also get a home deduction.
Carry-Over Losses. If your business is able to depreciate and deduct enough to document that it is operating at a loss, the loss can be carried over into the next tax year. This offsets gross revenues in future years. This strategy is especially important to young businesses where initial investments are high but revenues streams are still evolving. Carrying over the Net Operating Loss (NOL) allows the business to reduce the tax liabilities as revenues increase. Another option is to carry-back the NOL to claim a refund from prior years.
Defer Income. This is an end of the year trick that defers some of your income until the next year. At the end of the year, wait a few extra days to send out invoices. This delays money coming in until after the first of the year and thus keeps your income from increasing. You can also use this in similar fashion with bills and pay them early so that they are included in the closing year’s taxes, particularly business expenses.
Accountable Plans. If you regularly reimburse your employees for using their own vehicles, work with your accountant to set up an accountable plan. This helps both you and the employee. You don’t have to pay payroll taxes on the money and the employee doesn’t have to pay income taxes. You can reimburse business expenses such as vehicle use, mileage, lunches and more. IRS Publication 463 has more information on what can be covered under this account.
Tax strategies are important for keeping taxes as low as possible. There are many deductions that can be used by a business to offset income. Purchasing equipment and spreading the deduction over multiple years or ensuring that you purchase any necessary equipment at the end of the year when you see that you need deductions is one method. You can also use retirement plans and accountable plans to help keep taxes lower. If you own a business, the best thing you can do is to work with our professional tax advisors who works with business owners and professionals to come up with your best practices.
TAX STRATEGIES – FREQUENTLY ASKED QUESTIONS
What’s the best way to borrow to make consumer purchases? For homeowners, it’s the home equity loan. Other consumer related interest expense, such as from car loans or credit cards, is not deductible. Interest on a home-equity loan can be deductible. So avoid other nondeductible borrowings and use a home-equity loan if you plan to borrow for consumer purchases.
Why should I participate in my employer’s cafeteria plan or FSA? Medical and dental expenses are deductible to the extent they exceed 10% in 2015 (same as 2014) of your adjusted gross income (AGI). As such, many people are not able to take advantage of them. There is, however, a way to get around this if your employer offers a flexible Spending Account (FSA), Health Savings Account or cafeteria plan. These plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars.
What’s the best way to give to charity? If you’re planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity, instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash avoids capital gains tax on the sale, and you can obtain a tax deduction for the full Fair Market Value of the property.
I have a large capital gain this year. What should I do? If you also have an investment on which you have an accumulated loss, it may be advantageous to sell it prior to year-end. Capital losses are deductible up to the amount of your capital gains plus $3,000. If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements).
What other tax-favored investments should I consider? For growth stocks you hold for the long term, you pay no tax on the appreciation until you sell them. No capital gains tax is imposed on appreciation at your death.
Interest on state or local bonds (“municipals”) is generally exempt from federal income tax and from tax by the issuing state or locality. For that reason, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality. However, for individuals in higher brackets, the interest from municipals will often be greater than from higher paying commercial bonds after reduction for taxes.
For high-income taxpayers, who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings. The interest on Treasuries is exempt from state and local income tax.
What tax-deferred investments are possible if I’m self-employed? Consider setting up and contributing as much as possible to a retirement plan. These are allowed even for sideline or moonlighting businesses. Several types of plans are available: the Keogh plan, the SEP and the SIMPLE.
How can I make tax-deferred investments? Through the use of tax-deferred retirement accounts you can invest some of the money you would have otherwise paid in taxes to increase the amount of your retirement fund. Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account. For most companies these are referred to as 401(k) plans. For many other employers, such as universities, a similar plan called a 403(b) is available.
Some employers match a portion of employee contributions to such plans. If this is available, you should structure your contributions to receive the maximum employer matching contribution.
Why should I defer income to a later year? Most individuals are in a higher tax bracket in their working years than during retirement. Deferring income until retirement may result in paying taxes on that income at a lower rate. Deferral can also work in the short term. If you expect to be in a lower bracket in the following year or if you can take advantage of lower long-term capital gains rates by holding an asset a little longer. You can achieve the same effect of short-term income deferral by accelerating deductions. For example, paying a state estimated tax installment in December instead of at the following January due date.
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