Lower your Tax Liability with Deductions and Credits

Tax deductions and credits help taxpayers reduce their tax liability. The differences between the two are in their definitions:

  • A tax deduction reduces your gross income and arises from a deductible expense. Taxpayers can take a standard deduction up front or itemize expenses.
  • A tax credit is an amount of money applied directly to the tax liability. Tax credits are far less common.

About Tax Deductions

Say your adjusted gross income for 2014 was $75,000. If you filed jointly with a spouse and were born before January 2, 1950, your standard deduction would have been $14,800. You figure your income tax bill based on a reduced income of $60,200.

There are, however, other “above-the-line” deductions you can claim to lower the aforementioned $75,000 adjusted gross income. For tax year 2014, those deductions are listed on lines 16 through 21 on Form 1040A and lines 23 through 37 on Form 1040. Deductions common to both forms are:

  • Educator expenses
  • IRA deductions
  • student loan interest payments
  • tuition and fees

Taxpayers wanting to take advantage of business, health savings, moving, self-employment, alimony payments and other expenses, need to file Form 1040, fill out the additional IRS forms and hope for the best -- the “best” being avoidance of an IRS audit trigger.

small business accountant tax savingsThe alternative to taking the standard deduction is to fully itemize your expenses for the tax year. To be worth the trouble, your itemized expenses must exceed the standard deduction. Attach Schedule A to Form 1040 to document the following:

  • Medical and dental expenses that exceed 7.5% for seniors’ and 10% of younger taxpayers’ adjusted gross income
  • State and local taxes
  • Interest payments on home mortgages, etc.
  • Charitable gifts of at least $250 in cash or $500 in other than cash
  • Casualty or theft losses
  • Unreimbursed job expenses
  • Other miscellaneous deductions specified in the Schedule A instructions

If your adjusted gross income was not over $152,525 for 2014, your deduction was not limited. Wealthier taxpayers must use a worksheet that reduces the overall deduction that can be claimed.

About Tax Credits

If you can claim a tax credit (lines 31 through 38 on form 1040A and lines 48 through 54 on Form 1040), you can subtract that amount from the taxes you owe. It is a 100 percent, dollar-for-dollar tax relief, regardless of your taxable income. Tax credits for individual taxpayers are far less common and generally apply to the following:

  • earned income tax credit
  • education credits
  • child and dependent care credits
  • child adoption credits
  • saver’s credits

Business tax credits, on the other hand, run the gamut from general business, investment, electric vehicle and other energy credits to mine rescue team training. The credits are designed, among other things, as incentives for community development, research and energy savings.

The Bottom Line:

For the average taxpayer, tax deductions lower the amount of income subject to federal income tax. Unless you have had large deductible expenses during the tax year, taking the standard deduction is the easiest way to complete your tax return. If you can qualify for a tax credit, which will apply dollar-for-dollar to reduce your tax bill, you can offset your tax liability.

Contact Dmitry Dukhon at Dukhon Tax to help you get organized, file your returns and answer any questions you may have. We can be an invaluable resource for you to make the process as smooth as possible.

Use tax software or hire a human? -- DIY vs. DPB

Should you try to file that complicated tax return with using commercial tax software or get the help of a qualified tax preparer? Unless you're a qualified tax accountant, you should consider the pros and cons of DIY versus DPB. The former is fraught with pitfalls; the latter is more conducive to peace of mind.

A note on the aforementioned abbreviations: You probably recognize DIY as short for "do it yourself." DPB stands for "done by professionals." When it comes to preparing complicated tax returns, each method has its advantages. DIY will save tax preparer fees; DPB will add the focus of human attention on your unique circumstances.

efile taxes vs tax accountant

Two methods for DIY: The “stubby-pencil” and the tax software alternative

Before automation, the "stubby-pencil" method in preparing a tax return required a pencil with a good eraser, a calculator and a knowledge of the fine print in the tax instruction booklet. Tax software stores and automates all that complicated verbiage, catches mistakes and omissions and saves paper and effort. It is the weapon of choice in the DIY category.

On the other hand, tax software is programmed by experts to be used by the rest of us. So the software designers must make some reasonable assumptions about the end user:

  • The user clearly understands everything in the series of “interview” questions posted by the software.
  • The user also understands the tax jargon and terminology used in the software.
  • The user is reasonably adept at accessing and manipulating the software and has the patience to follow instructions and the sense not to override built-in warnings.

Pitfalls of tax software

Then there is the built-in caveat emptor -- buyer beware -- that is the small print of any software product:

  • The tax software product has no guarantee that the return will be error free. The vendor only guarantees an accurate calculation based on what the user enters.
  • If the taxpayer fails to answer or overlooks a deduction question while completing the return, the software won’t include a potential deduction in the return.
  • No software is disaster proof. Answer "yes" after the question "Are you sure you want to delete your entire tax return?" and the software will follow your directions precisely.

So with the DIY approach the taxpayer is alone in the process and could easily overlook deductions and credits. Any problems that might result from errors and the taxpayer must face the IRS alone. Yes, tax software vendors "are standing by" as long as you're willing to "wait for the next available customer service representative" -- who probably isn't a tax expert. (Well, what do you expect for your $40 to $60 investment?)

The peace of mind of the DBP approach

  • The professional tax preparer knows the answers to questions you might not have thought of, or simply don't know to ask.
  • You'll be confident that you have included every deduction and gotten the best result from your tax filing.
  • Any IRS questions or audits will be handled by the professional you hired.
  • The savings in time and the increased tax savings/refund are positive return on the fee you pay the professional.

Then there’s the valuable but intangible peace-of-mind factor knowing that everything was done by an actual person -- and correctly. Also, when you hire a tax professional you get the benefit from advice on tax strategies that could save more money in the future by avoiding the mistakes of the past.

Contact Dmitry Dukhon at Dukhon Tax to help you get organized, file your returns and answer any questions you may have. We can be an invaluable resource for you to make the process as smooth as possible.

Plan Ahead for Your 2015 Tax Filing

Experience can be a good teacher, but we shouldn’t learn everything through our mistakes. For example, if the IRS penalized you last April because you underpaid your taxes, you can fix that for this tax year. Consider having your employer deduct more from your wages, or at least going the estimated tax payment route.

assistance with filing taxesWe may be halfway through 2015 but there is still time for you to map out a strategy for this year. Here are 3 things you can start doing right now:

  1. Get organized.Getting organized might not cut your taxes, but good record keeping avoids the number 1 and number 2 hassles of tax preparation: 1) Bad records keeping makes it impossible to do a thorough and timely job on your tax return; and 2) The IRS requires documentation if you get audited.To get organized, at a minimum you should:
    • keep last year’s tax return handy
    • use personal finance software to keep track of tax-related income and expenditures
    • throughout the year collect and group receipts and papers that affect your taxes and keep everything in a separate file
    • safeguard the W-2s, 1099s, bank interest, mortgage statements, etc., that typically arrive in January
    • plan to store your files for at least 3 years (7 years is optimum, since IRS audits can go back that far.)


  2. Itemize your tax deductions.
  3. Visit the IRS website and see Topic 500 - Itemized Deductions. You will need Form 1040, Schedule A and its accompanying instructions. Before you get to Schedule A, however, there are deductions like IRA contributions that don’t need to be itemized and can reduce your taxable income. You’ll find them in items 31 through 38 on IRS Form 1040A and 48 through 54 on Form 1040. For each deduction you’ll need to attach a corresponding IRS Form.Don’t forget to look into tax credits, which can also reduce your tax bill dollar-for-dollar. They are, however, less common than tax deductions.
  4. Gather the tax forms you need.
  5. Go right to the source on this one. The IRS has a complete catalog of forms and publications on its website. While there’s still time, it won’t hurt to review the forms and instructions for changes or additional documentation. Make a list of the forms you need; download them and shake your head in wonderment at the enormously complex tax code we live under.Above all, be on time.The end result of all that planning is that you have a complete and accurate tax return ready for submission on or before the tax-filing deadline. Even if unforeseen circumstances keep you from meeting the due date, you still must make a reasonable estimate of your tax liability and pay any balance due with your extension request. Even though the IRS holds all the cards, your ace in the hole will be your preparation and planning.…And Get Help.If after reading all the advice above, you’d rather leave tax planning to experts so that you can get on with your life and business, consider working with a knowledgeable tax advisor. Contact Dmitry Dukhon at Dukhon Tax to help you get organized, file your returns and answer any questions you may have. We can be an invaluable resource for you to make the process as smooth as possible.

Reduce Your Tax Liability With These 3 Often Overlooked Tax Deductions

As the tax year matures, it is not too late to find ways to reduce your personal or small business income tax bill. Below are three areas to pay attention to throughout the year:

1. Take more charitable deductions.

You are probably aware that you can deduct the cash or value of property you give to charitable organizations. However, you might not be taking full advantage of this benefit. For example, you can deduct:

  • Out-of-pocket costs for volunteer charitable work; e.g., cost of food ingredients for those pastries you donated, or stamps you bought for event mailings
  • Childcare (babysitting, etc.) expenses you incurred while you did unpaid volunteer work

Make sure you fully document any charitable expenses, especially the unusual ones. A large number of deductions in this area could trigger an IRS audit.

2. Look out for unusual business expense deductions

A junkyard or scrapyard owner could, for example, deduct the cost of cat food to lure neighborhood cats and keep the rat population down. It is an unusual, but valid business expense.

More traditionally, self-employed business travelers can deduct those aggravating extra charges that airlines love to add to the cost of your ticket. Extra fees for baggage, online booking or ticket changes earn commercial air carriers billions each year. Don’t forget to add those charges to your deductible business expenses.

Again, for obvious reasons, save your receipts.

3. Deduct those job-hunting expenses.

little known tax deductionsAnyone who has lost a job and has gone to the excruciating effort of finding a new one knows that job-hunting can be as expensive as it is exhausting. If during your job search you were looking for a position in the same line of work as your most recent job, and if you’re willing to itemize and document those expenses, you can deduct them -- even if your job hunt was not successful.

Below are some deductible expenses: (The list is by no means exhaustive)

  • transportation expenses incurred as part of the job search (cabs, auto, commercial, etc.)
  • food and lodging expenses for out-of-town job interviews
  • fees paid to an employment agency
  • printing costs for résumés, business cards, advertising and postage

The foregoing deductions do not apply to a first-time job hunt. However, any moving expenses involved in landing that first job are deductible, even if you don’t itemize deductions.

Below are three more miscellaneous deductions that not many people know about.

You can deduct:

  • the additional extra 7.5 percent you had to pay for self-employed Social Security tax
  • health insurance premiums -- deductible at 100 percent of the premium cost for self-employed tax payers
  • alternative energy equipment such as solar hot water heaters, geothermal heat pumps and wind turbines -- This tax credit is a whopping 30 percent write-off of the total cost (including labor) for those systems up through 2016.

Don't miss out

There are many more deductions and credits you should know about before you send off your next tax return. Don’t wait until next April 1st to discover that you are eligible for an array of deductions and credits, but you failed to keep the records and receipts. Contact us for the tax planning, guidance and professional tax preparation that will mean more money for you and your business.

Principal sources for this article was the irs.gov web page, Credits & Deductions at http://www.irs.gov/Credits-&-Deductions and an online information page from TurboTax entitled "9 Things You Didn't Know Were Tax Deductions"

4 Questions You Should Ask Your Tax Advisor This Tax Year

According to a piece in Business News Daily, tax year 2015 brings some new challenges and opportunities for small business owners in Boston and throughout the U.S. business landscape. If you want to stay ahead of the curve, you probably should ask our tax advisor a few questions.

Here are four to get you going:

Question 1. How does The Affordable Care Act (aka: Obamacare) affect my business?

The challenge: The act added another 2,400 pages to the already prodigious tax code. The IRS is now the gatekeeper for employee insurance coverage rules, which go into effect as follows:

  • January 1, 2015: Businesses with 100 or more workers must offer health insurance to 70 percent or more of their full-time employees.
  • January 1, 2016: The minimum number of employees drops from 100 to the 59-99 range.

tax planning services bostonTax penalties include up to $2,000 per non-covered employee. The IRS will audit employees’ W2 forms as employers report the cost of health coverage they provide. One tax expert from a Los Angeles-based tax advisory firm puts it succinctly: “It’s going to be a big regulatory nightmare.”

Question 2. I rely on online sales to out-of-state buyers. Will I have to report and collect sales taxes for states other than my own?

The short answer:  If you do business on line, your days of out-of-state “tax-free clicks” are probably numbered.  The reintroduction of the so-called “Marketplace Fairness Act” gives each state the authority to force out-of-state businesses to collect sales tax from online or catalog purchases.

The bill is now in the Senate and has bipartisan support. (See https://www.congress.gov/bill/114th-congress/senate-bill/698/actions for updates.)

Question 3.  How will Republican control of both houses affect the tax laws that regulate my business?

Again, the short answer: The Republicans are in charge and  “everything is on the table.”   Now in control of both houses of Congress, the Republicans could have significant impact on taxes.  According to the chairman Senate Finance Committee, there could be “new momentum” for overhaul of the U.S. tax code in 2015, which could impact the business tax burden.

Stay tuned to find out if Republican election promises materialize beyond the bluster, inaction and finger pointing that has characterized the U.S. Congress for so long.

Question 4. What can I do to keep from being overwhelmed by tax laws and IRS regulations?

A partial answer involves staying ahead of the curve.  Business owners don’t have to become overwhelmed. Take the following steps to go from reactive to proactive:

  • Keep taxes top of the mind all year long. Tax planning has to be a year-round effort. Just as in personal tax returns, waiting until the last minute complicates the process and limits options.
  • Avoid business decisions based on assumptions that existing tax breaks will continue. One expert advises clients “to make sure the tax tail isn’t wagging the dog.” Don’t make business decisions based solely on taxes. Keep the business in the forefront. If the tax breaks come, that is definitely a bonus.
  • Stay aware, and informed. Business owners need to keep up with laws and the myriad IRS regulations. Even with expert help, business owners need to stay alert to stay ahead.

Finally, if you haven’t already done so, hire a pro. If you overlooked business tax credits and deductions because of poor record keeping, or you are simply unready to cope with the burden of Obamacare, it’s not too late to catch up. Make 2015 the year you finally got the year-round tax planning, guidance and professional tax practice can provide.

Contact Dukhon Tax about all your tax concerns and start tax planning in advance to increase your bottom line!