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.
Anyone 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.
Sources:
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 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!
Buying Time and Clearing up Your Tax Debt to the IRS
The IRS is like a collection agency on steroids. Each passing day that you owe back taxes accrues additional penalties and interest on the amount due. But you still have options -- a tax filing extension and installment plan, to name two -- if you want to avoid compounding your problems with ruinous IRS levies and liens.
The tax is due on April 15th, regardless
If your tax situation is so muddled or complicated that you cannot gather up what you need to file by April 15th, you can submit an extension request -- IRS Form 4868 -- online or by mail. Your new due date will be October 15th. However, filing the form does NOT EXTEND your due date to pay what you owe. According to a piece on the US TaxCenter website:
“[A] tax extension gives you more time to file your income tax return, but it does not extend the deadline …. This means that you need to know how much tax you owe and be ready to submit payment by April 15, whether or not you are requesting a tax extension.”
Consider filing your taxes on time if you can
So your best approach is that if you can meet the filing deadline, but don’t have the funds to pay your tax bill, file anyway. The penalty for failing to file is usually more than penalty for failing to pay your taxes. If the IRS judges that you used the extension request simply to kick the problem down the road, your request for an extension could be denied and you could be faced with additional penalties for failure to file.
Setting up a time payment plan for taxes
The good news is that according to the IRS, you can work out a monthly payment schedule through an installment plan. You are eligible for an extended time payment plan if:
- you owe no more than $50,000 in individual taxes
- you owe $25,000 or less in payroll taxes if you run a business
- have filed all required tax returns
Other conditions apply
The not-so-good news is:
- Setting up a payment schedule is not free. The IRS currently charges $120 to set up a standard agreement or payroll deduction plan -- $52 for a direct debit arrangement.
- Any future tax refunds will be applied to your debt until it is paid in full.
- You must pay your minimum monthly bill when it is due.
- You must also file future tax returns and pay all your taxes in full and on time.
To recap
So April 15th is when the IRS expects you to file your tax return and settle your tax bill. File an extension request if your situation is so complicated that you need time to gather the information you need for a complete and well-documented return. Otherwise, file on time and pay what you can and pay the rest later -- with penalties. If you want to avoid most or all of the late penalties, work out an installment payment schedule. The IRS will work with you.
Turbo Tax and Do-It-Yourself VS. Professional Tax Preparer
Tax time brings a multitude of financial decisions, including whether to hire a tax professional or prepare your own taxes using software like TurboTax. While the low cost and advertised ease of do-it-yourself tax products may be tempting, they aren’t always what they claim to be. In fact, many tax filers find them frustrating and time consuming with very little actual cost savings. These drawbacks and increased stress often makes hiring a professional tax preparer a smart move.
The Dangers of Do It Yourself Taxes
When people consider using do-it-yourself tax filing software, they typically focus on the positives, like the low cost and ability to use them from their couch. However, these programs have quite a few negatives as well, which could wind up causing an audit, late penalties and even interest charges. Here are a few problem areas:
- They’re time consuming and stressful- Tax software promises to walk you through all the steps, but what happens when you don’t understand the steps? Online help systems and FAQs are often insufficient to help you understand what to enter. For example, health insurance premiums can be deducted in some instances but not all.
- You can enter any numbers into the return – The ability to enter any number into the software may seem like a good idea, but it can be dangerous. A higher charitable contribution amount or inflated IRA may get you a bigger return, but it can also get you into serious trouble down the line.
- You don’t know if you did it correctly – There are few tax topics that apply to everyone. Most only apply to some people in some cases. Many software programs don’t ask enough questions to find out if you are truly qualified for a deduction, for example mileage deduction for a vehicle.
- There’s no continuity- Even if you use the same tax program every year, it can make errors. Most programs say that they import information from the previous year, but would you know if they didn’t? Most people don’t and end up losing deductions or credits that they qualify for.
Big Box Drawbacks
Some people know that they don’t have the skills or patience to do their own taxes. However, to save on costs they go to a big box tax service like H &R Block or Liberty Tax Service. While the price may be right for these services, there are some things you should know. Primarily, they use untrained staff to prepare taxes. Most of their preparers have only taken a four to six-week course in taxes. They aren’t even required to have previous experience in accounting and rely on software programs to do most of the work. That means they aren’t any more knowledgeable than you are. In addition, many of these stores close on April 17th, which means they aren’t around if you are audited by the IRS.
Benefits of Professional Tax Preparers
Professional tax preparers have years of knowledge, advanced degrees and certifications, such as Master’s Degrees and CPA and EA licenses. Their experience and education is what will ensure that their clients get all of the deductions and credits that they deserve.
Here are a few more advantages that these tax professionals can put to work for you:
- They can often represent you if you are audited and help you handle collection matters.
- They provide tax planning to help you make tax saving decisions early.
- They spot opportunities to help you make smart tax decisions like converting ordinary income into capital gains.
- Their office is open year-round to answer your questions
At Dukhon Tax, we understand taxes down to a theoretical and statutory level, which is much better for our clients! Visit our website for a free, no obligation consultation! We even offer a special package for students!
Reporting Your Affordable Care Act ("ObamaCare") 2014 Taxes
Confused by the tax filing requirements under the Affordable Care Act (ACA)? You are not alone. Filers for 2014 must report healthcare coverage on form 1040 in the taxes section on page 2.
Read more
Strategies for Avoiding or Reducing the new 3.8% Net Investment Income Tax
Dukhon Tax shares strategies for Avoiding or Reducing the new 3.8% Net Investment Income Tax
As of the beginning of 2013, new Code section 1411 imposes an additional tax of 3.8% on unearned net investment income. The so-called "Net Investment Tax" or "NIT" kicks in after certain thresholds effectively pushing up the top marginal tax rate for individuals, trusts, and estates. The tax is actually a Medicare tax that is newly imposed upon investment income as of 2013 by the "fiscal cliff deal" or The American Taxpayer Relief Act of 2012. Some people may not remember that specific government delay amongst the many we've had this year but it was the reason many people could not file their returns until mid to late February in 2013. Also, the legislature extended many favorable deductions, credits, and provisions of the tax code but also introduced some increased rates and additional taxes (such as the "NIT").
"Net investment income includes, but is not limited to: interest, dividends, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and business that are passive activities to the tax payer. Net capital gains are also included, as well, including gains from the sale of real estate and gains from the sale of interests in partnerships and S corporations as to which the taxpayer is a passive owner." Short-term capital gains are taxed at ordinary income rates but can be offset by long-term capital losses. Income from S corporations or partnerships in which the taxpayer actively participates is not included as well (more on that in just a bit).
How is net investment income computed?
In short, the tax is equal to 3.8% of the lesser of a) your net investment income for such taxable year or b) the excess (if any) of your MAGI over the threshold amount. Got that? Let's simplify this a bit. First, MAGI is modified adjusted gross income and, for purposes of this section, it's equal to Adjust Gross Income (see the bottom of your 1040) increased by your foreign income that would otherwise be reduced by your foreign income tax credit. Basically, you have to include your foreign source income regardless of the foreign tax credit. For most people, MAGI is equivalent to AGI. Now, the thresholds are $250,000 for married filers, $200,000 for individual filers, and $125,000 for married filing separate filers. Once your MAGI goes above those thresholds you become "open" to the tax. You must then compare your net investment income against the amount of MAGI over the threshold and the lesser of those two, multiplied by 3.8%, is your net investment tax. Easy enough, right?
Pitfalls and how to avoid them
For most people, this isn't a major concern. However, for individuals that invest in stocks, in real estate, have interest, and passive income, this can add up pretty fast. Your investment income may not be much but if your MAGI is high (for higher wage earners for example) then you're possibly subject to paying an extra 3.8% on every dollar of your other net investment income. If you have a modest stock portfolio or bought into a few partnerships, then you could see a noticeable increase in your tax over the prior year. If you're tax adviser has not mentioned this to you, it may be wise to make a phone call and see if this is something with which you should be concerned. Of course, the staff at Dukhon Tax and Accounting would be more than glad to help. Give us a call or e-mail: 617 651 0531 or [email protected].
Deductions
The reason we keep saying "net" when we talk about your investment income is that you are allowed deductions before you have to make the above calculations. Deductions allocable to rents and royalties are deductible, passive income deductions, investment interest are a few of the major ones. For example, the interest on a loan you took to invest in a partnership in which you are passive, that's a great deduction that will get you to the "net" amount of your investment income. Non-deductible items include many of your other miscellaneous itemized deductions and deductions attributable to non-passive trade or business.
Planning
The big question is: how can we be creative within the confines of the tax code and avoid this thing? There are several strategies, too numerous to list here, but the idea is to balance your current MAGI against your future MAGI with income shifting or other tax deferral strategies. Tax-exempt vehicles like municipal interest might be a great idea (compare your taxable to non-taxable net gains after the tax and it may cover the lower interest rates on the Muni-bonds). Tax deferred annuities may be something to consider; maybe your income is higher now and you want to try to push some of those gains out a few years. Retirement options like 401k and IRA are always a great choice. In some cases, ROTH conversions (turning a regular IRA into a Roth) may make sense for retirees who are expecting their RMDs to push them into the realm of NIT at retirement (not to mention the otherwise increased ordinary income tax rates). Installment sales are a good hedge against capital gain increases (which are also subject to the tax) and could provide savings of up to 8.8% in the event that you are subject to the new higher 20% capital gain rate AND the 3.8% Net Investment Tax versus the 15% otherwise favorable rate.
In conclusion, there's a lot to consider here and your tax adviser should be talking and thinking about these things. Once again, we welcome you to contact Dukhon Tax and Accounting to find out how we can help you reduce your tax liability and navigate the increasingly complex system of taxation we have in our great US of A.
All the best,
The Staff at Dukhon Tax