Reducing Your Taxes & Wealth Building

 

Learn what you need to know (and do) to reduce your taxes and make your net worth grow…

 

In the current economy many consumers and taxpayers are trying to find ways to reduce or eliminate various taxes–when and where possible.

 

It is important that you have an understanding of what taxes may apply to you and your family (a comprehensive overview) so that you can know all areas of your taxes that may possibly need to be addressed in a more effective way.

 

Although taxes can be a broad and overwhelming concern for many, it can also be presented in a manner and style that can be readily understood and applied by you in a practical manner–and in a manner that could be more beneficial to you and your family at the various stages in your life.  In this discussion TheWealthIncreaser.com will focus on a number of tax concerns that many (those who earn $400,000 or less) face and could possibly be addressed from a more beneficial angle.

 

If you make over $400,000, that is a good problem (ok, it’s not really a problem) to have, just keep in mind that there may be other tax options available that can help you reduce your taxes in ways that may not be covered in this discussion.

 

When it comes to effective tax management, you don’t have to be a tax expert, however it is important that you know what areas of taxes that you need to address as well as areas where you can make improvements so that you can take the right action that can benefit you and your family for this tax year and throughout your lifetime.

 

Keep in mind that this discussion on taxes will be longer than most that you will encounter on the web, however your understanding of the content on this page can get you off to a solid understanding or enhance your current understanding of your taxes and help position you and your family for a lifetime of wealth building success.

 

Let’s take a look at areas of taxation that you may need to address now (or in the near future) and further explore ways that you can reduce your taxes in the coming years so that you can live a more bountiful life–and one without financial strife.

 

After-Tax Income versus Before Tax-Income

We start this discussion on reducing your taxes by presenting why you MUST understand the difference and importance of distinguishing between after-tax income and before tax-income so that you can truly build wealth more efficiently.

 

Your after-tax income is often used for daily living and to fund IRA ROTH accounts and IRA traditional accounts and other investment accounts that are outside of your retirement accounts.   In the case of a ROTH IRA, you would receive tax free distributions in the future (based on certain conditions) and in the case of a traditional IRA you could possibly deduct the contributions (up to a limit and based on certain conditions) when you file your federal taxes.

 

Your other after-tax income could be used for daily living and if you had discretionary income after the payment of your monthly bills, you could use that income to build wealth more efficiently.

 

Your before-tax income is often used for funding retirement accounts such as 401k, 403b, Thrift Savings Plans, health care accounts, health savings accounts, flexible spending accounts and the like–and those contributions have the effect of lowering your taxable income that would be stated on your w-2–thus lowering your overall taxes at the federal level and possibly state level as well.

 

Business Income & Deductions

If there is a connection between any income that you receive and your business if you had one, the income is business income.  A connection exists if it is clear that the payment of income would not have been made if you did not have the business.

 

The business income and deductions that follow are discussed from the vantage point of a schedule C, sole proprietor, and would be filed on your personal income taxes.

 

Other forms of business formation also exist and could be more beneficial to you from a tax, liability and financial point of view.  However, they are beyond the scope of this discussion on tax reduction strategies, but it is important that you know that they are available and may suit your needs better if you are–or desire to become a business owner.

 

By utilizing the schedule C, you qualify for the QBI pass-through credit where you can reduce your taxable income from the business by 20 percent, and if you have losses in your early years, you can use those losses to offset your personal income–thus reducing your personal taxes whether you have income or a loss on a qualified business!

 

Income from work that you perform on the side (in addition to your regular job) could be business income.

 

It includes amounts that you would receive that were properly shown on Forms 1099-MISC, including amounts reported as non-employee compensation in box 7 of the form, amounts received from customers or clients in the course of doing business and other income that was created as a result of the business.

 

Regardless of the amount of time you spend in a self-employed activity, you must file a tax return if your gross income is at least as much as the filing threshold for your filing status and age.

 

In addition, you must also file Form 1040 Schedule SE, Self-Employment Tax, if:

 

  • Net earnings from self-employment, excluding church employee income, were $400 or more; or

 

  • The taxpayer had church employee income of $108.28 or more.

 

Business expenses are the costs of operating your business. These expenses are costs that you don’t have to capitalize or include in the cost of goods sold but can deduct in the current year.

 

If you are involved in a partnership, S-corporation, or C-corporation, your income may also be taxable, however that is beyond the scope of this discussion on taxes.

 

Business Deductions

Your unadjusted basis immediately after acquisition (UBIA) of qualified property held by your trade or business is taken into account in determining the § 199A deduction (Qualified Business Income deduction).

 

Income earned as an employee or through a C Corporation, however, is ineligible for the deduction.

 

Furthermore, eligibility for the pass-through deduction authorized by the Tax Cuts and Jobs Act does “not” require that you itemize tax deductions.

 

However, the pass-through deduction is not available for Specified Service Trade or Business (SSTB ) if the taxpayer’s taxable income is equal to or greater than the applicable threshold amount plus $100,000 in the case of a taxpayer filing a joint tax return or the applicable threshold amount plus $50,000 for all other taxpayers.

 

In laymen’s term, if you are a SSTB and exceed a certain income level you cannot take the 20% income exclusion.

.

Home Office Deduction (you have 2 ways to calculate)

  1. Simplified method

 

When calculating the home-office deduction using the simplified method, the deduction is equal to the area of your home used for a qualified business use (not exceeding 300 square feet) multiplied by the prescribed rate.

 

The current prescribed rate is $5, but the Internal Revenue Service and the Treasury Department may update the prescribed rate at any time.  Therefore, the maximum deduction as of 2021 tax year would be 300 * $5 = $1,500.

 

If you elected to use the simplified method of determining your home-office deduction, neither depreciation nor any actual expenses other than those not related to use of the home, may be deducted.  If you had business expenses not related to the use of your home such as office expenses, computer purchases etcetera, they would continue to be deductible!

 

2.  Actual expense method

When using the actual expense method for figuring the home-office deduction, you or your tax professional must determine:

  • The nature of the expense, i.e., whether the expense is – A direct expense–An indirect expense, or–An unrelated expense; and

 

  • The percentage of the home used for business purposes.

 

Expenses that are deductible by all homeowners, whether or not the home is used for business purposes, include the following:

  • Real estate taxes, within prescribed limits

 

  • Deductible mortgage interest; and

 

  • Casualty losses from a federally declared disaster

 

If you qualify for the home-office deduction, these amounts should be multiplied by the percentage of your home used for business purposes to figure your total deduction for business use of the home.

 

The home-office deduction is not unlimited!

 

If you use the actual expense method for claiming a home-office deduction, the deduction of otherwise nondeductible expenses—expenses such as insurance, utilities and depreciation allocable to the business—is limited to the taxpayer’s gross income from the business use of the home minus the sum of the following:

 

1. The business portion of expenses that you could deduct even if you did not use the home for business purposes.

 

Those expenses include eligible mortgage interest, real estate taxes (not exceeding prescribed limits), and net qualified disaster losses allowable as itemized deductions on Schedule A (Form 1040); and

 

2. The business expenses that relate to the business activity carried on in the home but not to the home itself.

 

Those expenses include the costs of business telephone, supplies, and equipment depreciation.   If you are a self-employed taxpayer, you should not include the deductible one-half of self-employment tax in the business expenses that must be subtracted from gross income.

 

If you used the actual expense method to figure your home-office deduction in a previous year and you had an expense carryover because the deduction was limited in that year, no portion of the carried-over amount may be deducted in any year in which you used the simplified method.

 

In such a case, you would continue to carry over the disallowed amount to the next year in which you used actual expenses to figure your home-office deduction.

 

If you have expenses such as mortgage interest, real estate taxes and casualty losses—such expenses must be treated as personal expenses when using the simplified method of determining the home-office deduction.

 

Business Meals

The Consolidated Appropriations Act, 2021 provides for temporarily increased deductions for business meals.

 

Pursuant to the Act, businesses are permitted a 100% tax deduction for business meals—up from the current 50%—if the food or beverages are provided by a restaurant.  The increased business meal deduction is available for 2021 and 2022.

 

179 Expense Deduction

The dollar limitation on the value of property that may be expensed (written off or deducted in the current tax year) in the year in which it is placed in service is $1,050,000 for the 2021 tax year.

 

  • The phaseout threshold for your ability to expense eligible property is $2,620,000 (2021).

 

The definition of Code Section 179 property is “expanded” to include – Depreciable tangible personal property used principally to furnish lodging, such as:

 

  • Furniture

 

  • Appliances

 

  • Other equipment for use in the living quarters

 

  • Certain improvements to nonresidential real property, including

 

  • Roofs

 

  • Heating, ventilation and air-conditioning property

 

  • Fire protection and alarm systems, and

 

  • Security systems

 

It is important to note that improvements will not qualify if they are attributable to other than the building’s interior. 

 

Therefore, improvements attributable to:

 

  • Enlarging the building,

 

  • The internal structural framework of the building; or

 

  • An escalator or elevator–do not qualify for immediate expensing

 

Depreciation:

The 100% expensing permitted under the TCJA declines by 20% each year for qualified property purchased and placed in service after December 31, 2022.  Accordingly, the bonus depreciation deduction is reduced.

 

The bonus depreciation under the TCJA ends after 2026!

 

The additional “bonus” first-year depreciation deduction does not apply to a passenger car placed in service by you if you:

 

• Did not use the passenger automobile during 2020 more than 50% for business purposes.;

 

Elected out of the additional first-year depreciation deduction for the class of property including passenger automobiles

 

• Acquired the passenger automobile used and the acquisition of it failed to meet the acquisition requirements of section 168(k)(2)(e)(ii); or

 

Acquired the passenger automobile before September 28, 2017, and placed it in service after 2019.

Luxury Passenger Car Depreciation Caps

 

The depreciation caps for a luxury passenger car placed in service in 2021 are:

 

  • $10,200 for the first year without bonus depreciation
  • $18,200 for the first year with bonus depreciation

 

  • $16,400 for the second year

 

  • $9,800 for the third year

 

  • $5,860 for the fourth through the sixth year

 

A “luxury vehicle” is a four-wheeled vehicle regardless the cost of the vehicle, used mostly on public roads, and which has an unloaded gross weight of no more than 6,000 pounds.  It includes vehicles not normally considered “luxury” vehicles on the basis of their price.

 

The term “listed property,” as used in the tax law, is personal property used in a business which can also be used for personal purposes but no longer includes computers, peripherals and cell phones.

 

Because listed property can have application for both personal and business uses, the IRS wants to ensure that you are using the property for business, therefore you must have sufficient evidence to prove the property’s use in the business and the amount/date of the expense.

 

Thus, property considered listed property is subject to increased documentation and scrutiny so keep good records to prove your deduction.

 

Under prior tax law, listed property included:

 

• Passenger automobiles

 

• Other property used as a means of transportation

 

• Any property generally used for purposes of entertainment, recreation or amusement and

 

• Computers and related peripheral equipment (taken off list)

 

Cancelled Debt

Cancelled debt is generally taxable and if you anticipate having your debt cancelled be sure you know the tax ramifications upfront.  Cancelled mortgage debt continues to receive favorable tax (excluded from taxation) treatment as of the 2021 tax year.  If, at this time cancelled mortgage debt applies to you, the stars in the sky are much brighter going into tax year 2022.

 

Capital Gains

If the transaction involves personal use property, in contrast to property held for investment, any gain realized by you upon the sale of the property is a capital gain; however, “any loss” that results from the sale of personal use property cannot be deducted!

 

Most assets owned by you for personal purposes, pleasure or investment are referred to as “capital assets,” and the sale or exchange of a capital asset may result in a capital gain or loss!

 

If the sale or trade of investment property results in a gain or loss, such gain or loss is generally a capital gain or loss!

 

Capital losses can be used to offset capital gains (up to $3,000 per year) and unused losses can be carried forward!

 

Capital gains and losses are reported on Schedule D, Capital Gains and Losses, attached to your IRS Form 1040 or Form 1040-NR.  However, before completing Schedule D, one or more IRS Forms 8949, Sales and Other Dispositions of Capital Assets, normally need to be completed and attached to the IRS Form 1040 or 1040-NR along with Schedule D.

 

If all Forms 1099-B received by you show that basis was reported to the IRS and no correction or adjustment is required, you may not need to file Form 8949; instead, the totals may be entered directly on Schedule D, lines 1a or 8a, as appropriate (discussed above).

 

You need to file as many Forms 8949 as required to report all transactions!

 

Schedule D provides a summary of the transactions reported on IRS Form 8949 in addition to certain other information. Thus, if an IRS Form 8949 is completed for you, each of the columns (d), (e) and (h) should be totaled and the totals for all Forms 8949 should be shown in Schedule D on the following lines:

 

  • 1a, 1b, 2 and 3 for short-term capital gains and losses; and

 

  • 8a, 8b, 9 and 10 for long-term capital gains and losses.

 

In addition, any distribution of net realized long-term capital gains from a mutual fund should be shown on line 13.  Distributions of net realized short-term capital gains are shown on Form 1099-DIV issued by the mutual fund as ordinary dividends.   Schedule D should then be completed. If the amount shown on Schedule D, line 16 is a loss, the smaller of the following should be entered on Form 1040 or Form 1040-NR,” Capital gain or (loss)”

 

Be aware of the 3.8% additional tax on capital gains if you are a high-income earner such as single filers who make more than $200,000 and married couples who make more than $250,000, as well as certain estates and trusts. 

 

The net investment income tax (NIIT) is a 3.8% tax on investment income such as capital gains, dividends, and rental property income. 

 

Child and Dependent Care Credit

You may be eligible for a dependent care credit if you pay to have care for your children or other qualifying dependent.

 

Deductions

Standard Deduction

Taxpayers who are ineligible to take the standard deduction are the following:

 

  • Taxpayers whose filing status is “married filing separately” and whose spouse itemizes deductions

 

  • Taxpayers who are filing a tax return for a short tax year due to a change in their annual accounting period; and

 

  • Taxpayers who were nonresident aliens or dual-status aliens during the year

 

Standard Deduction Amounts for 2021 are:

 

  • $25,100 for married couples whose filing status is “married filing jointly” and surviving spouses;

 

  • $12,550 for singles and married couples whose filing status is “married filing separately”; and

 

  • $18,800 for taxpayers whose filing status is “head of household.”

 

A taxpayer who can be claimed as a dependent is generally limited to a smaller deduction, regardless of whether the individual is actually claimed as a dependent.    For 2021 returns, the standard deduction for a dependent is:

 

  • $1,100; or

 

  • The dependent’s earned income from work for the year plus $350 (but not more than the standard deduction amount, generally $12,550).

 

A taxpayer who can be claimed as a dependent is generally limited to a smaller standard deduction, regardless of whether the individual is actually claimed as a dependent.

 

The additional standard deduction for a blind taxpayer—a taxpayer whose vision is 20/200 or poorer with glasses/contact lenses or whose field of vision is 20 degrees or less—and for a taxpayer who is age 65 or older at the end of the year is:

 

  • $1,350 for married individuals; and

 

  • $1,700 for singles and heads of household.

 

For example, a 65-year-old single blind taxpayer would add $3,400 to his or her usual standard deduction: $1,700 for being age 65 plus $1,700 for being blind.  (Therefore, his or her standard deduction would normally be $15,950 ($12,550 + $3,400 = $15,950).

 

Standard deductions and other deductions have the effect of lowering your taxable income and thus increasing your tax refund or decreasing the amount of taxes that you owe, and the reduction amount is dependent on your tax bracket.

 

A tax credit–on the other hand–if you are eligible is dollar for dollar and is generally more valuable than a deduction.

 

ITEMIZED DEDUCTIONS

7.5% AGI limit for medical expense deductions

 

The medical deduction limit is 7.5% for 2021 tax year.  Be sure to keep adequate records for your medical premiums, out of pocket medical costs including hearing, eye and dental services as well as your mileage to and from medical providers if you plan to itemize when you file your taxes.

 

You are limited in the deduction amount meaning if your AGI is $100,000 for the year–you deduct amounts over $7,500 that you paid toward medical expenses.

 

Charitable Deduction

Charitable contributions made by you with payroll deductions, checks, cash and donations of goods and clothing are all deductible.

 

It is not unusual to forget about or overlook your charitable contributions, therefore from this day forward you want to establish a reliable record keeping system–as your charitable contributions can often add up over the course of a year and provide additional deductions so that you can reduce your taxes.

 

You generally need to itemize to claim a deduction, and since the 2017 tax reform nearly doubled the standard deduction, many people who once itemized, now choose not to itemize.

 

However, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, allows taxpayers who don’t itemize to deduct cash donations of up to $300 ($600 if MFJ) made before Dec. 31, 2020.

 

The maximum amount of charitable contribution a taxpayer is permitted to deduct in any year may be limited by the taxpayer’s contribution base—in most cases the contribution base is an amount equal to the taxpayer’s adjusted gross income— and further limited depending on the type of property contributed.

 

However, any charitable contribution exceeding the applicable tax deduction limit may be carried over to the following five years.

 

The TCJA increased the limit on your deductible charitable cash contributions from 50% under prior tax law to 60% of the taxpayer’s contribution base for qualified organizations to which the 50% limit normally applies.

 

The increased limitation for cash contributions applies to contributions made in any taxable year beginning after December 31, 2017 and before January 1, 2026. The CARES Act temporarily suspends some of the limitations imposed by the Internal Revenue Code with respect to certain individual taxpayer cash contributions.

 

In general, qualified contributions are disregarded in applying IRC section 170 as it pertains to percentage limits  and carryovers of excess contributions.

 

The TCJA eliminates the exception to a contemporaneous written acknowledgment of a donor’s gift, effective for gifts made after December 31, 2016. (Note: The effective date of the elimination of the exception to a contemporaneous written acknowledgment is retroactive to gifts made on and after 2016).

 

Record Keeping and Documentation of Deductions

The IRS advises that the length of time that you should keep a document, including the documentation of deductions, depends on the action, expense, or event which the document records.

 

As a general rule, you must keep records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out–roughly 3 years from filing or three years from the tax year filing deadline excluding extensions.

 

The period of limitations is the period of time in which you can amend your tax return in order to claim a credit or refund, or the time that the IRS can assess additional tax.

 

As mentioned earlier, as a result of the CARES Act (and extended by The Taxpayerypayer Relief Act of 2021) provision, a non-itemizing taxpayer can now take an above the-line deduction of up to $300 ($600 for married couples) for charitable cash contributions made in taxable years beginning in 2020.

 

A deduction that is “above the line” reduces AGI and can help lower your taxes and can be taken even if you don’t itemize deductions.

 

State and Local Tax Deduction

State and local taxes paid by an itemizing taxpayer have generally been a deductible item on the taxpayer’s federal income tax return without limit. The TCJA limits the federal income tax deduction for state and local taxes to $10,000 ($5,000 for married taxpayers filing separately) beginning in 2018.

 

Property taxes and sales taxes cannot exceed $10,000 when itemizing on schedule A.

 

Home Mortgage Interest, Home Equity Loans and Indebtedness Refinancing

The tax treatment of refinanced existing mortgage debt is treated, for purposes of the applicable dollar limits, as incurred on the date the original indebtedness was incurred, but only to the extent the amount of the indebtedness resulting from the refinancing does not exceed the amount of the refinanced indebtedness.

 

Mortgage Interest deduction limit reduced from 1 million to $750,000 as a result of the Tax Cuts & Jobs Act of 2017.

 

Sales and real estate tax deduction capped at $10,000.

 

Itemized deduction for mortgage insurance premiums and exclusion from income” of qualified principal residence when debt cancellation, occurs continues for the 2021 tax year.

 

Mortgage Insurance Premiums Deduction when mortgage lenders require the additional security of having its loan secured not only by the home but also by an insurer–is still on the IRS books.

 

Qualified mortgage insurance premiums that are tax-deductible—include mortgage insurance provided by:

 

• The Department of Veterans Affairs (commonly known as a “funding fee” or “VA funding fee”)

 

• The Federal Housing Administration (commonly known as “Mortgage Insurance Premium or MIP“)

 

  • The Rural Housing Service (or successor organizations); and

 

  • Private Mortgage Insurance (commonly known as PMI)

 

Except in the case of mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service, qualified mortgage insurance premiums may be prepaid by the taxpayer.

 

In such a case, premiums allocable to periods after the close of the tax year must be allocated over the shorter of:

 

  • The stated term of the mortgage; or

 

  •  84 months beginning with the month the insurance was obtained. Premiums are treated as paid in the year to which they are allocated. If the mortgage is satisfied before its term, no deduction is allowed for the unamortized prepaid mortgage insurance premiums.

 

Mortgage Cancellation Debt

The Consolidated Appropriations Act, 2021 also extended the exclusion from income of certain qualified principal residence indebtedness. Under the five-year tax extender, a taxpayer may exclude income arising from discharge of qualified principal residence indebtedness provided one of the following applies:

 

  • The debt was discharged before 2026; or

 

  • The debt was discharged after 2020, and the discharge is subject to an arrangement entered into and evidenced in writing before January 1, 2026. Properly reporting qualified principal residence indebtedness discharge requires preparation of IRS Form 982 and its attachment to the taxpayer’s federal income tax return.

 

Points paid in association with a home mortgage may also be eligible for deduction or amortization over the life of the mortgage loan.

 

Unreimbursed Employee Expenses

Unreimbursed Employee Expenses are no longer deductible as part of reforms under the Tax Cuts & Jobs Act of 2017.

 

Dependent Credit

If you have dependent care expenses, you may be eligible for a credit.  The amount of your credit is based on the type and age of the dependent and is based on the expenses you pay and your earned income for the year.

 

Depreciation

Unless the taxpayer elects to use ADS or is required by law to use ADS, a taxpayer must use GDS.

 

The straight-line method of depreciation is used for a taxpayer electing to use ADS, and such a taxpayer must make the election in the first-year residential rental property and nonresidential real property is placed in service; once made, the taxpayer cannot revoke the election.

 

If you have business and/or rental property, it is important that you know that you can use depreciation to help lower or reduce your tax burden.  In many cases it is important that you bifurcate your depreciation in order to maximize your deduction and tax savings.

 

Earned Income Credit or EIC

You may be eligible for the Earned Income Credit of varying amounts based on your earned income and number of dependents.

 

Education Deductions/Credits

529

ABLE

Coverdell

The education savings bond program

IRA when used for educational purposes may avoid the early withdrawal penalty

 

Education Credits

American Opportunity Credit or AOC–first 4 years of higher education—max $2,500

Lifetime Learning Credit or LLC–max $2,000

Tuition & Fees–Tuition and Fees Deduction Eliminated

 

Educational credits for those who qualify can help lower the amount of taxes that are owed or increase the amount of your refund.

 

Student loan interest that you pay may also be deductible on your tax return!

 

Energy & Other Credits

The Credit for Nonbusiness Energy Property was Extended

If you replaced windows and doors in 2021 or had energy improvements to your HVAC, water heater and possibly other energy related purchases you may be eligible for a tax credit, therefore be sure to inform your tax professional at tax time and organize your receipts of purchase at this time if you did repairs or improvements to your home. 

 

Estimated Tax Payments

Estimated tax payments are generally due in four installments.

 

Although an installment may be due on the following business day if the normal due date falls on a weekend or legal holiday, the estimated tax payment due dates are April 15, June 15, September 15 and January 15.

 

You would generally be required to pay estimated taxes if you had a qualified business, you were an employee and you did not have adequate withholding, you are an employee and you have a sideline business and you file as self-employed, and you expect or have income after all of your deductions from your business.

 

Estimated income taxes may be paid using any of the following methods:

 

  • Crediting an over-payment of tax on the previous year’s tax return to the current year’s estimated tax

 

  • Payment of the estimated tax by direct transfer from the taxpayer’s bank account using the Electronic Federal Tax Payment System (EFTPS), making payment by use of a credit or debit card, by using a pay-by-phone system, or via the Internet; or

 

  • Remitting a payment using a check or money order along with a payment voucher Form 1040-ES

 

Individuals wishing to take advantage of the cash payment option should visit the IRS.gov payments page, select the cash option in the “Other Ways You Can Pay” section of the web page and follow the instructions:

 

  • Taxpayers will receive an email from ACI Payments, Inc. (acipayonline.com) confirming their information

 

  • Once the IRS has verified the information, the Cash Processing Company sends the taxpayer an email with a link to the payment code and instructions

 

  • Individuals may print the payment code provided or send it to their smart phone

 

  • The retail store listed in the Cash Processing Company’s email provides a receipt after accepting the cash. The receipt is confirmation of the taxpayer’s payment and should be kept for the taxpayer’s records. The payment usually posts to the taxpayer’s account within two business days

 

  • Payment frequency and amount limits and fees apply

 

Taxpayers who are due a tax refund also have several choices with respect to its receipt!

 

The options available to a taxpayer owed a refund include that the refund:

 

  • Be applied to the taxpayer’s estimated tax for the following year

 

  • Be deposited to a prepaid debit card

 

  • Be deposited into two or three accounts at a bank or other financial institution (such as a mutual fund, brokerage firm, or credit union) in the United States; (See Limit on Direct Deposit Refunds below)

 

  • Be deposited directly to a traditional, Roth or SEP IRA; or

 

  • Be sent to him or her in a check. If the taxpayer is due an income tax refund but has not paid certain amounts owed, the refund may be used to pay any past-due amounts. Thus, a tax refund may be used to pay:

 

  • Past-due federal income taxes

 

  • Federal debts, such as student loans

 

  • State income taxes

 

  • Child and spousal support payments; and

 

  • State unemployment compensation debt

 

Taxpayer’s who are owed a refund can even have the refund credited to a TreasuryDirect® online account in order to buy U.S. Treasury marketable securities or savings bonds!

 

Recovery rebate payments will not be reduced to pay past-due taxes under a payment agreement with the IRS or to pay other state or federal debts.  In general, creditors cannot get access to the money for reduction or offset and direct payment to themselves.

 

The CARES Act only allows offsets to cover past due child support payment!

 

Tax return preparers are prohibited from negotiating client refund checks or accepting such payments in an account owned or controlled by the preparer.

 

No direct deposits of tax refunds should be requested to an account not in the taxpayer’s name.

 

For taxpayers who use the calendar year, the due date for filing the federal income tax return is generally April 15th of the year following the end of the calendar year for which the tax return is being filed, although 2021 tax return due date is delayed until Monday, April 18, 2022, because of Good Friday falling on April 15th.

 

The federal income tax returns for taxpayers who use a fiscal year, i.e., a year ending on the last day of any month except December, are due by the 15th day of the fourth month after the close of the taxpayer’s fiscal year.

 

For example, the federal income tax return of a taxpayer whose fiscal year ends on June 30th is due on the following October 15th.  A taxpayer’s failure to file a timely income tax return may subject the taxpayer to a failure-to-file penalty and interest.

 

The federal income tax return of a decedent, i.e., a taxpayer who died during the year, must be filed by the decedent’s representative.  The return is due by the 15th day of the fourth month after the end of the decedent’s normal tax year.

 

Even if you obtain an extension of the time to file, any tax due must generally be paid by the regular due date.

 

Failure to pay any tax due by the regular date will result in the imposition of interest and possible penalties on the unpaid amount from the date due until the date actually paid.

 

A taxpayer who is unable to file a federal income tax return by the normal due date may be able to get an automatic six-month extension of the time to file. The automatic extension may be obtained by:

 

• Using IRS e-file; or

 

• Filing a paper form.

 

The AMTI exemption amount is reduced (but not below zero) by 25 percent of the amount by which the taxpayer’s alternative minimum taxable income exceeds:

 

• $1,047,200 for taxpayers whose filing status is “married filing jointly” or “qualifying widow(er)”

• $523,600 for taxpayers whose filing status is “single,” “head of household,” “married filing separately” and

• $85,650 for trusts and estates.

 

Health Savings Account

Health FSA’s enable workers to contribute before-tax amounts to an account that may then be accessed tax-free to pay various out-of-pocket health-related expenses. Although annual caps on the amount that can be contributed to a health FSA are generally imposed by employers—usually as a way to limit their risk of pre-funding—no limit was previously imposed by the federal government.

 

That changed for years 2013 and later and the limit for 2021 is $2,750.

 

Although the tax penalty for a taxpayer’s failure to maintain health coverage has been reduced to zero, individuals who meet specified income, coverage, and other criteria are eligible to receive a refundable tax credit to enable them to purchase a qualified health plan.

 

Since the tax credit is a refundable tax credit, the taxpayer may receive the credit even though he or she has no income tax liability.

 

ARPA, § 9661, significantly expands the subsidies provided under the ACA in two ways:

 

1. By increasing the level of subsidy to those taxpayers who currently qualify for a subsidy; and

 

2. By including taxpayers who, solely because their income, would not qualify for a subsidy under the law prior to passage of ARPA.

 

Under ARPA, for tax years 2021 and 2022:

 

  • A taxpayer can claim a tax deduction for contributions made to the HSA even if he or she does not itemize deductions.

 

  • Contributions made to the HSA by the taxpayer’s employer, including contributions made through a cafeteria plan, may be excluded from the taxpayer’s gross income.

 

  • The earnings on amounts contributed to the HSA are tax deferred.

 

  • Distributions from an HSA to pay qualified medical expenses are entirely tax free.

 

  • A taxpayer’s contributions and earnings, if any, remain in the HSA from year to year until the taxpayer uses them.

 

  • An HSA is non-forfeitable and portable, so that it remains with the account holder if he or she changes employers or leaves the work force; and

 

  • Distributions from an HSA for other than qualified medical expenses—if taken after the account holder reaches age 65, becomes disabled, or dies—are taxable but not subject to tax penalties. 1.1.9.2 HSA Eligibility

 

An individual eligible to establish an HSA is one who meets the following requirements.

 

The individual:

 

  • Is covered under a high deductible health plan (HDHP) on the first day of the month

 

  • Has no other health coverage except for certain specified coverages

 

  • Is not enrolled in Medicare; and

 

  • Cannot be claimed as a dependent on another person’s tax return for the year.

 

If a taxpayer meets these eligibility requirements, he or she is an HSA-eligible individual even if the taxpayer’s spouse has non-HDHP coverage, provided the spouse’s coverage does not cover the taxpayer.

 

High Deductible Health Plan Requirement

For 2021, the IRS defines a high deductible health plan as any plan with a “deductible” of at least $1,400 for an individual or $2,800 for a family.

 

An HDHP’s total yearly out-of-pocket expenses (including deductibles, co-payments, and co-insurance) can’t be more than $7,000 for an individual or $14,000 for a family.

 

A taxpayer who is an HSA account holder must file Form 8889, Health Savings Accounts (HSAs), and attach it to Form 1040 or Form 1040-NR if: 26

 

  • The taxpayer or employer made contributions to the taxpayer’s HSA during the year

 

  • The taxpayer files a joint return and his or her spouse or spouse’s employer made contributions to the spouse’s HSA during the year; or

 

  • The taxpayer (or spouse, if filing jointly) acquired an interest in an HSA because of the death of the account holder

 

When HSA contributions not exceeding the maximum permitted are made by an individual account holder, they are deducted by the individual from his or her income for purposes of determining the account holder’s adjusted gross income.

 

Hobby Income

A hobby, for tax purposes, is an activity not engaged in for profit or income.  Any income from a hobby is reported on Form 1040 as “Other income.”  However, because of the loss of the miscellaneous itemized deductions as a result of passage of the Tax Cuts and Jobs Act, hobby expenses not exceeding hobby income—at least through 2025—are no longer deductible.

 

Long Term Care

Qualified long term care premiums and benefits;

 

Long Term Care premiums may be tax deductible and the tax-deductibility of qualified long-term care insurance premiums can be itemized and deducted on schedule A.  For individuals deemed to be chronically-ill, there are tax-exemption of long-term care insurance benefits within certain limits.

 

Those limits generally change yearly.

 

In order for long term care benefits to receive favorable tax treatment, the individual on whose behalf they are paid must meet the “chronically-ill” definition included in HIPAA.

 

A chronically-ill individual is defined as an insured individual who has been certified by a licensed health care practitioner within the previous 12 months as an individual who:

 

  • Is unable, for at least 90 days, to perform at least two activities of daily living (ADLs) without substantial assistance from another individual, due to loss of functional capacity; or

 

  • Requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.

 

Tax-qualified long term care insurance policy premiums are included in the definition of “medical care” and are, therefore, eligible for income tax deduction within certain limits!

 

In short, tax-qualified long term care insurance policy premiums are 100% tax-deductible for self-employed taxpayers to the extent they don’t exceed the dollar limits or the self-employed individual’s net earnings.

 

The amount of any long-term care insurance premium that may be included in medical care expenses is limited by certain dollar maximums that are indexed for inflation and which change as the insured’s attained age changes.

 

There are dollar limitations applicable to tax-qualified long term care premiums in 2020 and 2021!

 

So, if the benefit does not exceed the per diem limitation, all benefits are tax-free even though the benefits exceed the actual costs incurred.

 

Similarly, if the benefit does not exceed the actual costs incurred, all benefits are tax free even though the benefits exceed the per diem limit.

 

Luxury Tax

In 1991, Congress enacted a 10% federal luxury tax on the first sales price of a number of items that sold for more than a specific amount:

  • Furs and jewelry that sold for $10,000 or more
  • Vehicles that sold for $30,000 or more
  • Boats that cost more than $100,000
  • Aircraft with price tags of more than $250,000

The Omnibus Budget Reconciliation Act repealed this tax in 1993, and it was phased out by 2003.

 

The federal government doesn’t collect a sales tax, only states do, and they would normally impose a luxury tax at this time (tax year 2021), therefore if you plan on making a major purchase of a luxury nature–check with your state taxing authority in advance if you have concerns about paying additional taxes.

 

A luxury tax is a sales or transfer tax imposed only on specific goods.  The products taxed are considered non-essential or are affordable only to the wealthiest consumers. The mansion tax and sin taxes both fall into the category of luxury taxes.

 

The luxury tax may be charged as a percentage of the purchase price, or as a percentage of the amount above a specified level. For example, a luxury tax might be imposed on real estate transactions above $1 million, or car purchases over $70,000.

 

Luxury taxes generally fall into two categories:

 

  • So-called “sin taxes” are imposed on products like cigarettes and liquor and are paid by every buyer, regardless of income. Anyone who objects can just stop buying it. In imposing the tax, the government is both discouraging the use of these products and raising revenue from those who keep buying them.

 

  • Taxes on items that can be purchased only by the wealthiest consumers, who presumably can afford to pay the premium.

 

Luxury taxes generally do not apply to the entire price of the vehicle, rather the tax typically only applies to the difference between the total cost of the car and the tax threshold amount.

 

RECOVERY REBATE CREDIT

If you are one who received the recovery rebate credit, you probably want to know the tax implications of receiving the recovery rebates and advance credit payments that began in July of 2021 to eligible recipients.

 

Recovery rebates, authorized by the CARES Act and Taxpayer Relief Act of 2020 (TRA 2020), were issued in 2020.   And, in 2021, recovery rebates were authorized under the American Rescue Plan Act (ARPA).

 

As a tax credit, the recovery rebate is nontaxable and is not counted as income with respect to determining a taxpayer’s eligibility for income-based programs such as Medicaid or Health insurance Marketplace subsidies.

 

Recovery Rebates – The American Rescue Plan Act (ARPA) provides tax-free, refundable, recovery rebate tax credits in 2021 of up to $1,400 for each eligible individual ($2,800 for married taxpayers filing jointly), plus $1,400 for each dependent, as defined in IRC § 152, including qualifying relatives and college students.

 

Retirement Account Contributions

Retirement account contributions are a top tax-reduction tool, as they serve two major purposes.

 

Your contributions to traditional 401(k), 403b, Thrift Savings Plan and IRA accounts (among others) can be deducted from your taxable income and, as a result, reduce the amount of federal tax you owe.

 

These funds also grow tax-free until retirement.  If you start early, saving money in these accounts can help secure your retirement!

 

Even if you haven’t executed your plan by the end of the year, you may still have time as you can set up and contribute to your IRA up until April 18, 2022 and still deduct on your 2021 taxes if you are eligible..

 

The retirement savings contribution tax credit—typically referred to as the saver’s credit—is a nonrefundable credit that is limited to the “applicable percentage” of your eligible retirement savings contributions.

 

The credit is determined by your adjusted gross income and tax filing status.

 

The saver’s credit cannot exceed $1,000 per taxpayer!

 

The retirement savings contribution tax credit, if any, for for those who are eligible does not affect the tax treatment to which the contribution would normally be subject.

 

For example, if your contribution to a traditional individual retirement account made you eligible for the credit, you would still normally be able to take a tax deduction for the IRA contribution.

 

In other words, retirement savings contributions made by you would not offset other tax advantages for which you are eligible!  Yes, if you qualify–you can DOUBLE-DIP–so to speak!

 

Despite the number of plans to which the taxpayer makes contributions and the amount of those contributions, the total saver’s credit will not exceed $1,000 per taxpayer for the year.

 

Standard Mileage Rate versus Actual Expense rate for Automobiles

The standard mileage rates enable a taxpayer using a vehicle for specified purposes to deduct vehicle expenses on a per-mile basis rather than deducting actual car expenses that are incurred during the year.

 

The rates vary, depending on the purpose of the transportation.

 

Accordingly, the standard mileage rates differ from one another depending on whether the vehicle is used for:

 

  • Business purposes

 

  • Charitable purposes; or

 

  • Obtaining medical care or moving

 

Rather than using the optional standard mileage rates, however, you may choose to take a deduction based on the actual costs of using the vehicle.

 

The 2021 alternative standard mileage rate applicable to eligible business use of a vehicle is 56¢ per mile, down from 57.5¢ in 2020.

 

In order for such expenses to be deductible, they must have been: 

 

  • Paid or incurred during the tax year

 

  • Use for the purpose of carrying on the taxpayer’s trade or business; and

 

  • Ordinary and necessary

 

  • Traveling between workplaces

 

  • To meet with a business customer

 

  • To attend a business meeting located away from the taxpayer’s regular workplace; or

 

  • From the taxpayer’s home to a temporary place of work

 

In addition to using the standard mileage rate, you may also deduct any business-related parking fees and tolls paid while engaging in deductible business travel.

 

However, parking fees paid by you to park your vehicle at the usual place of business are considered commuting expenses and are not deductible.

 

The standard mileage rate applicable to your use of a personal vehicle for charitable purposes is based on statute and is 14¢ per mile. You may also deduct parking fees and tolls regardless of whether the actual expenses or standard mileage rate is used.

 

In addition, you may also deduct medical and dental expenses to the extent they exceed the applicable percentage of your adjusted gross income (AGI).

 

The vehicle expenses may be included as medical and dental expenses are the amounts paid for transportation by you to obtain medical care for yourself, your spouse, or a dependent.  You may also include as medical and dental expenses those transportation costs incurred!

 

If you use a personal vehicle for such medical reasons you are permitted to include the out-of-pocket vehicle expenses incurred—the expenses for gas and oil, for example—or deduct medical travel expenses at the standard medical mileage rate.

 

For 2021, the standard medical mileage rate is 16¢ per mile, down 1¢ from 2020.

 

You may also deduct any parking fees or tolls, regardless of whether actual expense or the standard mileage rate is used!

 

Synopsis 2021 Mileage Rates:

 

Business–56¢ per mile

Charitable–14¢ per mile

Medical & Moving–16¢ per mile

 

Taxable Compensation

In addition to wages and salaries, there are other types of compensation received by a taxpayer that may or may not be taxable and they include the following:

 

  • Advance commissions and other earnings

 

  • Allowances and reimbursements

 

  • Back pay awards

 

  • Bonuses and awards

 

  • Differential wage payments

 

  • Government cost-of-living allowances

 

  • Non-qualified deferred compensation plans

 

  • Notes received for services

 

  • Severance pay

 

  • Sick pay

 

  • Social Security and Medicare taxes paid by the taxpayer’s employer; and

 

  • Stock appreciation rights

 

Retirement income includes income derived from a range of sources, both private and public.

 

Although some retirement income is excludable, in whole or part, from income, most retirement income is taxable as ordinary income in the year received.

 

It is important that you realize that distributions received from the following are often taxable in whole or part at the federal and state level, however there may be credits or exclusions that are available:

 

  • Social Security

 

  • Pensions

 

  • Annuities; and

 

  • 401(k) plans

 

The U.S. tax code provides for a substantial number of tax credits, generally designed to meet various societal objectives.

 

Tax Credits are categorized as:

 

  • Refundable tax credits that are treated as having been withheld from the taxpayer’s income and payable to the taxpayer regardless of income tax liability; and

 

  • Nonrefundable tax credits that are payable to the taxpayer only to the extent of any income tax liability.

 

Among the most frequently claimed tax credits are:

 

  • 1. Child tax credit
  • 2. Credit for other dependents
  • 3. Child and dependent care tax credit
  • 4. Education tax credit
  • 5. Earned income tax credit.

 

Lifetime Learning Credit–unlimited number of years—max $2,000

Virtual Currency–is now taxed

If you have financial interests abroad with financial accounts–those interests must be disclosed.  Virtual currency must  also be reported as it too is now fair game for taxation by the IRS.

 

AMT–The Alternative Minimum Tax is still in effect!

 

Keep in mind that a number of other Affordable Care Act provisions, including the refundable tax credits to assist taxpayers in purchasing qualified health plans, small business health insurance premium tax credit, and large employer shared responsibility requirement went into effect in 2021.

 

An in-depth discussion of these topics are beyond the scope of this discussion, however it is important that you realize that they exist.

 

W-4 Adjustment

Information previously provided by the taxpayer to his or her employer on Form W-4 may change during the year.

 

Although you can submit a new W-4 at any time, you are required to provide the employer with a new Form W-4 within 10 days following any change that would affect withholding.

 

If events during the current year will “decrease” the number of withholding allowances for the following year, you must provide the employer with a new Form W-4 by December 1 of the current year.  If the event affecting the number of allowances occurs in December of the current year, a new Form W-4 must be submitted within 10 days following the event.

 

W-2–Issued by your employer and used to file your federal and state and possibly local taxes in the U.S.

W-9–Form that requests taxpayer information for tax reporting purposes–normally social security number or Tax ID number

1099 series–number of uses but most common is for non-employee compensation and retirement income reporting

1096–For those who issue 1099-MISC non-employee compensation the total amount paid on 1099’s that are issued to all non-employees are grouped on this form

 

Mandatory withholding when you win the lottery, take early retirement withdrawals and penalties for early withdrawal must be a part of your consciousness.  Borrowing against your 401k could also have tax and financial consequences as well.

 

There may also be mandatory withdrawals on certain retirement accounts once you reach age 72.

As a taxpayer you can use the free estimator, found at www.irs.gov/W4App, if you:

 

  • Expect to work only part of the year

 

  • Have dividend or capital gain income, or are subject to additional taxes, such as Additional Medicare Tax

 

  • Have self-employment income; or

 

  • Prefer the most accurate withholding for multiple job situations

 

You may claim an “exemption from income tax withholding” if both the following situations apply:

 

1. You had a right to a refund of all federal income tax withheld because of having no tax liability in the current year; and

 

2. You expect a refund of all federal income tax withheld in the next year because of having no income tax liability.

 

The IRS can impose interest and penalties against you for being under withheld, and you could also be subject to a penalty of $500 if both the following apply:

 

  • You made statements or claimed withholding allowances on Form W-4 that reduced the amount of tax withheld; and

 

  • You had no reasonable basis for those statements or allowances at the time Form W-4 was prepared.

 

If you don’t pay enough tax, either through withholding or by paying estimated tax (or a combination of both), he or she may be subject to a penalty.

 

A criminal penalty may also apply for willfully supplying false or fraudulent information on the form or for willfully failing to supply information that would increase the amount withheld.

 

The penalty upon conviction can be a fine of up to $1,000 or imprisonment for up to one year, or both.

 

Conclusion

 

It is important that you use your best judgment and the use of professionals where appropriate to make the best possible moves as it relates to reducing or eliminating the various taxes that have been discussed above.

 

Successfully navigating the tax maize and building wealth is not as difficult as you think if you have the right view, and you are willing to do what you need to do–and you work alongside your tax professional in a helpful manner.

 

The time to learn about taxes and how they affect you and your family is at the earliest time possible in your “life stage” so that you can make the right or best decisions in a proactive manner!

 

Key Takeaways on Taxes

 

Below you will find a number of topics that you can run through your mind at this time to find areas of taxation that you can address at this time or in your future to help reduce or eliminate your tax liability.  They have all been presented above, however they are presented again so that you can have a quick reference point on what you can do to reduce your taxes.

 

By reviewing the following topics in a careful, critical and accurate manner, you may be able to improve your tax and wealth building position immediately–or at a later date!

 

Open a Health Savings Account

If you have an eligible high-deductible medical plan, contribute to a health savings account.

 

Contributions to these accounts offer an immediate tax deduction, grow tax-deferred and can be withdrawn tax-free for qualified medical expenses.  Any balance left at the end of the year can roll over indefinitely, similar to the assets in a retirement account.

 

Use Your Side Job to Claim Business Deductions

Self-employed individuals (full time or part time) are eligible for scores of tax deductions. That means your freelance projects or side gig as a ride-share driver, starving artist and other areas of interest to you–could land you considerable tax savings if you approach the activity from a business perspective.

 

A few of the business deductions available include business-related vehicle mileage, shipping, advertising, website fees, percentage of home internet charges used for business, professional publications, dues, memberships, business-related travel, office supplies, phone, computer and basically any reasonable expenses incurred to run your business.

 

If you pay for your own health, dental or long-term care insurance, those premiums may be deductible too.

Just be sure to maintain proper records, as many people lose their deductions due to their lack of preparedness by not keeping proper records.

 

Tax deductions are often disallowed because taxpayers don’t keep the right documentation, so it is important that you keep receipts, mileage logs or other records that you can produce in the event of an audit.

Claim a Home Office Deduction

If you work for yourself or have a side business, don’t be afraid to take the home office deduction.

 

To qualify for the deduction, the space must be used regularly and exclusively for business purposes.

 

For instance, if an extra bedroom is used exclusively as a home office and it constitutes one-fifth of your home or apartment’s living space, you can deduct one-fifth of mortgage/rent payment and utility fees.  Keep in mind there may be recapture provisions that could cause you to owe taxes at the time you sell your home in the future.

Write Off Business Travel Expenses, Even if You are on Vacation

Did you know that you can possibly combine a vacation with a business trip, and you could reduce vacation costs by deducting the percent of the expenses spent for business purposes?

 

This could include airfare and part of your hotel bill, proportionate to the time spent on business activities. Talk to your tax professional about how you can make this calculation according to IRS guidelines.

Don’t Forget to Deduct Half of Your Self-Employment Taxes

The IRS assesses a 15.3% Federal Insurance Contributions Act tax (FICA) on all earnings to pay for the Social Security and Medicare programs.

 

While employers split the cost with their workers, self-employed individuals are responsible for paying the entire amount themselves. To compensate for the extra expense, the government will let you deduct 50% of the amount paid from your income taxes.  This is an above the line deduction, therefore you don’t have to itemize to claim this tax deduction.

 

 

Get a Credit for Higher Education

The government offers valuable tax credits to offset the cost of higher education. The American Opportunity Tax Credit (AOTC) can be claimed for the first four years of college and provides a maximum credit of $2,500 per student per year.

 

Since it’s a credit, that amount is deducted from whatever tax you might owe the government.  If it exceeds the amount of taxes you owe, up to $1,000 may be refundable to you.

Meanwhile, the Lifetime Learning Credit is great for adults boosting their education and training and those pursuing post graduate study.  This credit is worth up to $2,000 per year and helps pay for college and educational expenses that improve your job skills.

 

Utilize Rental Property for Tax Benefit

You can use rental property to shelter your taxes and help to possibly reduce your taxes if done properly.  By properly deducting the various expenses related to the rental you can in many cases reduce your tax bill on an annual basis for years.

 

Keep in mind there may be recapture provisions that could cause you to owe taxes at the time you sell your rental property in the future.

 

See if You Qualify for an Earned Income Tax Credit or Saver’s Credit

Even if you aren’t required to pay federal income taxes, you could get a refund from the government.

 

The earned income tax credit (EITC) is a refundable tax credit of up to $6,660 for tax year 2020 and is usually adjusted annually.

 

The EITC is calculated with a formula that takes into consideration income and family size and the income limits for the credit range from $15,820 for single taxpayers with no children to $56,844 for married couples filing jointly who have three or more children.

 

If you contribute toward your retirement savings and meet income eligibility you may qualify for a “savers credit” that is based on your income threshold and the amount you contribute toward your retirement savings.

Itemize State Sales Tax

Taxpayers who itemize their deductions can include either their state income tax or state sales tax on their Schedule A form.

 

The state sales tax break is a great option if you live in a state without income taxes!

 

You can use a table provided by the IRS to easily claim the sales tax deduction, however if you had a major purchase during the year such as a car, boat or Recreational Vehicle–be sure to add that sales tax.

 

The federal tax deduction for state and local taxes is capped at $10,000 from all sources as a result of the Tax Cuts & Jobs Act of 2017.

 

Deduct Private Mortgage Insurance Premiums

If you have less than 20% equity in your home, chances are you pay private mortgage insurance  or MIP if you have an FHA loan. This coverage is required by lenders as a way to protect them in the event you stop making payments.

 

Until 2017, taxpayers could deduct the cost of private mortgage insurance on their itemized deductions.

 

While the Tax Cuts and Jobs Act eliminated the deduction, it was reinstated at the end of 2019 and is available for the 2020 and 2021 tax years.  It was made retroactive for 2018 as well. Therefore, you could amend your 2018 tax return to claim PMI–if it made good financial sense to do so.

 

Whenever you amend an older return, you generally put yourself at greater IRS scrutiny of the filed return–so use caution.

 

Make Charitable Donations

Charitable contributions made with payroll deductions, checks, cash and donations of goods and clothing are all deductible.

 

These deductions add up and are often overlooked by many taxpayers.

 

You generally need to itemize to claim a deduction, and since the 2017 tax reform nearly doubled the standard deduction, many people choose not to itemize.

 

However, if you do, it could be more beneficial to you and your family.

 

As a result of the CARES Act (the Coronavirus Aid, Relief, and Economic Security Act), those who don’t itemize can deduct cash donations of up to $300 ($600 if MFJ) made before Dec. 31, 2020–and 2021.

 

Adjust Your Basis for Capital Gains Tax

When calculating the cost basis after selling a financial asset, make sure to add in all of the reinvested dividends.

 

That increases the cost basis and reduces your capital gain when you sell the investment.

 

If you sell your house, you may end up paying capital gains tax as well, particularly if your property’s value has risen significantly–over $250,000 if single and $500,000 if married filing jointly and you meet the criteria for exclusion from taxation.

 

You can reduce or eliminate the amount you owe if you’ve made home renovations or improvements, therefore keep adequate records.

Avoid Capital Gains Tax by Donating Stock

Another way to avoid capital gains is by using stocks to make charitable gifts.  You can also offset your capital gains against your losses up to a limit.

 

Utilize the Social Security Taxable Earnings Limit to Your Advantage  

The Social Security taxable earnings limit;

Social Security taxes are comprised of two components:

 

1) OASDI (Old Age, Survivors and Disability Income) and

 

2) HI (Health Insurance) taxes. OASDI is a tax imposed on a worker’s wages up to the applicable Social Security taxable earnings limit

 

That limit is $142,800 in 2021 and generally increases annually. The employee tax rate for the OASDI part of Social Security is 6.2%. HI, the second component of Social Security taxes, is a tax of 1.45% imposed on all taxpayer wages— no earnings limit applies, in other words—to fund Medicare Part A.

 

The taxability of Social Security benefits received by a taxpayer depends on the recipient’s total income. Social Security benefits may be entirely tax-free or partially taxable depending upon whether the total of:

 

  • Half the net Social Security benefits received during the year by the taxpayer (total benefits received during the year less any Social Security benefits repaid during the year); plus

 

  • All other income received by the taxpayer (including tax-exempt interest)

 

Set Up an IRA or Contribute to Your Retirement Plan

Individual retirement arrangements (IRAs), qualified plans and annuity contracts enjoy certain tax benefits, including tax deferral, while funds are being accumulated within the plans.

 

Although there are some exceptions, distributions from these tax-favored plans are generally taxable as ordinary income.

 

An individual retirement account (IRA) is a personal retirement savings plan, funded by an annuity or a trust, provides for tax-deferral of earnings and may permit either tax-deductible contributions or tax-free qualified distributions!

 

Individual Retirement Accounts are fundamentally of two types:

 

  • Traditional IRAs that may permit tax-deductible contributions and generally taxable distributions, and

 

  • Roth IRAs whose contributions are not deductible but whose qualified distributions are entirely tax-free.

 

Yearly contribution limits for 2021 are $6,000 plus $1,000 catch up provision if you are age 50 or more.

 

A taxpayer who is “not an active participant” in an employer-sponsored qualified plan may deduct a traditional IRA contribution he or she is eligible to make–regardless of income.

 

Traditional IRA distributions of after-tax contributions are received tax-free as a return of basis on a pro-rata basis, and the remainder of the distribution is taxable.

 

Although, tax penalties generally apply to IRA distributions before age 59½, there are certain premature distributions to which the 10 percent penalty tax doesn’t apply.

 

Those distributions include distributions:

 

  • Made at the taxpayer’s death

 

  • Attributable to the taxpayer’s disability

 

  • Made for medical care to the extent allowable as a medical expense deduction

 

  • Made for the payment of health insurance premiums by unemployed taxpayers

 

  • Made to pay qualified higher education expenses for the taxpayer, his or her spouse, child or grandchild

 

  • Considered “first-time home buyer distributions” up to a lifetime maximum of $10,000

 

  • That are part of a series of substantially equal periodic payments made for the life of the taxpayer or the joint lives of the taxpayer and his or her beneficiary; or

 

  • That are qualified birth or adoption distributions not exceeding $5,000.

 

The Internal Revenue Code requires that minimum distributions from a traditional IRA begin no later than the owner’s age 72. The law permits the individual to delay taking these first required minimum distributions (RMD) until April 1st of the year following the year in which he or she turns age 72.

 

The date on which RMDs must commence is known as the “required beginning date.”

 

Lifetime distributions never need to be taken from a Roth IRA.

 

A “qualified” distribution from a Roth IRA is one that is made no earlier than the fifth year following the year for which the owner made his or her first Roth IRA contribution and:

 

  • The taxpayer is age 59½ or older

 

The distribution is a qualified first-time home buyer distribution

 

  • The taxpayer is disabled; or

 

  • The distribution is made to a beneficiary on or after the taxpayer’s death

 

There is an additional tax advantage on distributions that Roth IRA owners enjoy, even when the distribution isn’t a qualified distribution: a non-qualified distribution—one that fails to meet the requirements to be a qualified distribution—from a Roth IRA receives FIFO tax treatment under which all contributions are deemed to be distributed tax free before any earnings are distributed.

 

It was noted earlier that a premature distribution—one made prior to the owner’s age 59½—from a traditional IRA would result in a 10 percent tax penalty. The 10 percent premature distribution tax penalty is based on the amount that must be reported as a taxable distribution.

 

The same is true of a Roth IRA and just as in the case of a Traditional IRA, the penalty for a distribution of earnings before age 59½ from a Roth IRA is waived if the distribution is:

 

  • Attributable to the IRA owner’s death or disability

 

  • Made for medical care to the extent allowable as a medical expense deduction

 

  • Made by unemployed taxpayers for the payment of health insurance premiums

 

  • Used to pay qualified educational expenses

 

  • A qualified first-time home buyer distribution

 

ROTH required minimum distributions must be made following the owner’s death!

 

Trustee-to-trustee transfers from one IRA to another IRA are not subject to the one per-year limit and, thus, may be made at any time, however you may have termination and other fees–depending on the trustee.

 

Know the Standard Mileage rates for the 2021 Tax Year

Business 56 cents per mile

Charitable 14 cents per mile

Medical 16 cents per mile

 

Use Stepped-Up Basis when Applicable

Upon death many assets may receive favorable stepped-up basis in valuation–thus lowering your or your heir’s taxes.

 

Understand your state, local, sales and other taxes, state Income taxes, state business taxes etcetera

If you live in the United States, you will normally have a variety of taxes (or a variation of taxes that go by other names) at the state and local level.

 

State ad valorem taxes, state transfer taxes and stamps, property taxes at the local and state level, hotel and special use tax, rental car taxes and the like are not uncommon as states try to ensure a steady flow of income to provide and pay for various state and local functions.

 

Whether state income taxes, sales tax, property taxes, transfer taxes and other fees that are in effect taxation, it is important that you are aware of those taxes, and you do your best to avoid or reduce them.

 

There could be “income exclusions” on your state taxes if you qualify, homestead and other exemptions may be available to help you reduce your property taxes, you may be able to avoid sales tax by making your major purchases during “tax holidays” if your state offers them.

 

Use your imagination and the tax codes to find ways to reduce taxes wherever they may exist at the state, local and federal level.

 

Below you will find a number of taxes in the state of Georgia.

 

They are provided so that you can get a feel of state and possibly local taxes–however always keep in mind each state and country will have their own unique set of taxing authorities and collection practices.

 

GA TAVT https://eservices.drives.ga.gov/_/

https://dor.georgia.gov/title-ad-valorem-tax-tavt-faq

 

How is fair market value determined for a USED motor vehicle?

 

A used motor vehicle is any motor vehicle, which has been the subject of a sale at retail to the general public.

 

For a used motor vehicle, the fair market value is the value identified in the state motor vehicle assessment manual. This value is calculated by averaging the current wholesale and retail values of the motor vehicle pursuant to O.C.G.A. § 48-5-442. Accordingly, the fair market value for a used motor vehicle for purposes of TAVT will generally be the same as the value that was used in the old annual ad valorem tax system.

 

A reduction is made for the trade-in when the sale was made by a dealer, but not when the sale was made by a private individual.

 

Where do I apply for my title and pay TAVT?

 

  • The application for title and TAVT payment must be submitted to the county in which the buyer resides. The TAVT must be paid at the time of initial title application.

 

  • If you purchase your vehicle at a dealership, the dealer must accept the application for title and TAVT payment on your behalf and deliver the title application and TAVT payment to the County Tag Office where the buyer resides.

 

What sales are subject to sales tax in Georgia?

 

In general, Georgia imposes tax on the retail sales price of tangible personal property and certain services. While most services are exempt from tax, Georgia does tax the sale of accommodations, in-state transportation of individuals (e.g., taxis, limos), sales of admissions, and charges for participation in games and amusement activities. O.C.G.A. §§ 48-8-2(31), 48-8-30(f)(1).

 

In addition, Georgia imposes tax on charges by the seller that are necessary to complete the sale of taxable property.  O.C.G.A. § 48-8-2(34)(A). For example, if a seller charges $20 for a shirt and $5 to deliver the shirt, sales tax is imposed on $25 ($20 for the shirt plus $5 for delivery).

 

If a provider of a nontaxable service makes sales of tangible personal property, the service provider must collect and remit sales tax as appropriate. Service providers are, in most instances, end users and liable for sales or use tax on all tangible personal property used by them to provide their service. O.C.G.A. § 48-8-63.

 

What is use tax?

 

Use tax is tax imposed on non-exempt items brought into Georgia. “Use tax” is also a term commonly used to refer to the tax imposed on taxable goods and services that were not taxed at the point of sale.

 

Tax imposed on non-exempt items brought into Georgia

 

Use tax is imposed upon the first instance of use, consumption, distribution, or storage in Georgia of non-exempt tangible personal property purchased at retail outside of Georgia. (Note that property brought into Georgia as a result of a change of domicile is generally exempt as long as the property is not brought into Georgia for use in a trade, business, or profession. O.C.G.A. § 48-8-3(19).)

 

Property used longer than six months outside of Georgia prior to its first use inside Georgia is taxed at the state and local sales tax rate on the lesser of the purchase price or the fair market value of the property. O.C.G.A. §§ 48-8-30(c)(2), 48-8-82(a), 48-8-102(b)(1), 48-8-109.3(b), 48-8-110.1(c), 48-8-201(b), 48-8-241(d), 48-8-269(a).

 

Generally, the applicable local sales tax rate is the rate imposed in the county where the buyer receives the goods. O.C.G.A. § 48-8-77. A taxpayer’s use tax liability will be reduced by like taxes previously paid in another state. O.C.G.A. §§ 48-8-30(c)(3), 48-8-30(e), 48-8-42(a).

 

Example: A contractor buys a bulldozer in another state and pays state sales tax but no local sales tax. The following week the contractor transports the bulldozer into Georgia and performs a job in Hall County.

 

The contractor now owes Georgia state use tax on the purchase price of the bulldozer at a rate of 4%. His Georgia state use tax liability will be reduced by the sales tax previously paid in the other state. In addition, he owes Hall County use tax on the purchase price of the bulldozer at the Hall County sales tax rate.

 

Tax imposed on non-exempt items and taxable services that were not taxed at the point of sale

 

If a taxpayer purchases taxable goods or services in Georgia without the payment of tax, the taxpayer must accrue and remit the tax. O.C.G.A. § 48-8-30(g).

 

Example: A retailer buys light bulbs tax free under terms of resale to sell in her store. She takes the light bulbs out of inventory to light up the store. She now owes sales tax on the price for which she purchased the bulbs. The sales tax in this case is commonly referred to as “use tax” because it is not paid at the point of sale, but accrued at the time of use.

 

Example: Joe purchases a bicycle online. The seller does not charge sales tax. The bicycle is delivered to Joe in Georgia. Joe now owes “use tax” on the bicycle’s sales price.

 

$1.00 per tire disposal fee

 

Charges made for delivery, transportation, freight, or shipping and handling are part of the sales price and subject to sales tax in the same manner as the underlying sale. Thus, if a taxable item is sold, and the seller makes a separate charge for delivery, transportation, freight, or shipping and handling, the separate charge is taxable. O.C.G.A. §§ 48-8-2(34). Charges for delivery that are not associated with the sale of taxable property are not taxable.

 

Is property tax on leased personal property subject to sales tax?

 

The question of whether a tax should be included in the sales price (and therefore subject to sales tax) depends on whether the legal incidence of the tax falls on the seller or the purchaser. If the legal incidence of the tax falls on the seller, the tax is included in the sales price, like any other portion of the price designed to recoup the seller’s expenses. O.C.G.A. § 48-8-2(34).

 

Therefore, if a tax on personal property that is held for lease is imposed on the seller/lessor and the seller/lessor requires the customer/lessee to pay this amount, such amount must be included in the sales price and is subject to sales and use tax.

 

Itemized charges made for repair labor or installation labor are not subject to sales tax. O.C.G.A. §§ 48-8-2(34)(B)(iv), 48-8-3(23).

 

Mandatory gratuities associated with a taxable sale are subject to sales tax. Voluntary gratuities are not taxable. O.C.G.A. § 48-8-2(34)(A), Ga. Comp. R. & Regs. r. 560-12-2-.115.

 

Are restocking fees subject to sales tax?

 

At times, when a customer returns an item, the seller requires the customer to pay a restocking fee, thus resulting in only part of the original sale price being refunded to the customer.

 

Because sales tax can only be refunded to the extent the original sales price was refunded, when a restocking fee is charged, tax can only be refunded on the amount of the sales price refunded to the customer. Therefore, amounts designated as “restocking fees” are subject to sales tax because such amounts are refund reductions.

 

Retail sales of newspapers, magazines, periodicals, etc. are subject to Georgia sales and use tax. O.C.G.A. § 48-8-30(b). Publications sold by subscription are subject to sales tax based on the subscription price. Ga. Comp. R. & Regs. r. 560-12-2-.77.

 

Newspapers are often sold for a single amount, with sales tax included in this amount (i.e., the stated price of the newspaper includes the taxable sales price of the paper and the sales tax).

 

Aircraft and watercraft sales are taxable in the same manner as the sale of any other tangible personal property. Tax is due at the rate of the jurisdiction where the buyer takes delivery. O.C.G.A. §§ 48-8-30, 48-8-77.

 

Does Georgia have an exemption for aircraft or watercraft purchased in this state when the aircraft or watercraft will be immediately removed from this state?

 

The sale of aircraft and watercraft in Georgia is subject to the tax even when the aircraft or watercraft sold will be immediately removed from this state.

 

However, there is a specific exemption for aircraft, watercraft, motor vehicles, and other transportation equipment manufactured or assembled in this state when

 

1. sold by the manufacturer or assembler for use exclusively outside this state and

 

2. possession is taken from the manufacturer or assembler by the purchaser within this state for the sole purpose of removing the property from this state under its own power when the equipment does not lend itself more reasonably to removal by other means. O.C.G.A. § 48-8-3.

 

Can the sale of an aircraft or watercraft be excluded from the tax when the transaction meets the requirements of a casual sale?

 

Yes. The sale of aircraft or watercraft is not subject to sales tax when the sales transaction meets the requirements of a casual sale. Ga. Comp. R. & Regs. r. 560-12-1-.07.

 

Are sales and use tax due on motor vehicles?

 

If the vehicle is subject to Title Ad Valorem Tax (TAVT), no sales and use tax is due on the vehicle. When applying for a Georgia title and license plate for a vehicle that was not subject to TAVT and purchased from an out-of-state or country dealer or an out-of-state business or a Georgia business, Georgia sales tax must be paid at the time of registration or proof submitted that the sales tax has already been paid.

 

If the selling dealer used an incorrect sales tax rate to calculate the amount of Georgia sales tax due, then any additional sales tax due must be paid at the time of registration or proof of payment submitted.

 

A Georgia title and license plate will not be issued until any Georgia sales tax due is paid. The amount of sales tax due is based on the vehicle’s purchase price or the vehicle’s fair market value if a sales invoice is not submitted.

 

See the sales tax rate in your county as the published sales tax rates for counties include the State of Georgia’s sales tax rate.

 

Please visit the webpage When & Where to Register Your Vehicle for more information about the vehicle registration process. For additional information regarding sales tax, please contact the Department of Revenue’s Regional office serving your county.

 

Use Caution when Choosing your Tax Professional

Tax return preparers are held to a high standard of conduct in their preparation of clients’ income tax returns.

 

To prevent filing returns with stolen identities, tax preparers should ask taxpayers not known to them to provide two forms of identification—preferably forms of identification containing the individual’s picture–that include the taxpayer’s name and current address.  In addition, tax return preparers must confirm the identities and Social Security numbers of taxpayers, spouses and dependents.

 

The Federal Trade Commission (FTC) is the lead federal agency for identity theft, and the agency recommends the following steps for an identity theft victim:

 

1. Report the identity theft to the FTC at www.identitytheft.gov.

 

2. Contact one of the major credit bureaus to place a fraud alert on the victim’s records.

 

The contact information for the credit bureaus is as follows:

www.Equifax.com 800-525-6285

www.Experian.com 888-397-3742 and,

www.TransUnion.com 800-680-7289.

 

3. Be sure to close any financial or credit accounts that were opened fraudulently.

 

Additional suggested steps may be found on the FTC Website.

 

Be sure your tax professional understands the importance of meeting their obligations with respect to safeguarding your data and be sure that you too do all you can to safeguard your own data!

 

Be aware of how your tax professional handles the following:

 

  • Administrative activities

 

  • Facilities security

 

  • Personnel security

 

  • Information systems security

 

  • Computer systems security

 

  • Media security

 

  • Certifying information systems for use; and

 

  • Reporting incidents

 

Due diligence is the care and attention to detail appropriate to the subject to which it refers.

 

Thus, due diligence with respect to the preparation and safeguarding of your taxes is the care and attention to detail required of each tax professional in their preparation of your tax return.

 

In the end when it comes to reducing your taxes, remember that the tax laws “are what they are” however there are actions that you can take to reduce or lessen the tax burden that you and your family now face or could potentially face by getting “out in front” of your taxes and tax planning so that you can achieve more throughout your lifetime.

 

Doing a comprehensive review of your tax position or potential tax position is not a walk in the park–but it is worth it for those who desire true wealth building success.

 

All the best….

 

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Tax Projections & Wealth Building

Learn what you must know about short term and long term individual tax planning if you desire to build wealth more efficiently…

More on Tax Strategies…

In the current economy tax planning is critical as proper planning could allow you to avoid costly mistakes that many make without even realizing that they are making mistakes.

 

It is important that you have a conceptual understanding of what you can do now to help improve your tax position when you file your 2019 taxes in 2020.

 

However, a conceptual understanding is only the starting point.

 

You must put into action tax moves that can help you in the short term (12 months or less) and the long term (12 months or more) so that you can benefit optimally as you move along at the various stages in your life.

 

After doing tax projections for many during the 2019 tax year the creator of TheWealthIncreaser.com realized that he had not done tax projections for the creator of TheWealthIncreaser.com.

 

Ok, now is a great time to show  you what you can possibly do to lighten your tax burden and also a time that the creator of TheWealthIncreaser.com could also take inventory and make positive moves as well “before” the 2019 tax year ends.

 

*Determine your current financial position

 

You must at this time determine where you are financially and that all starts with creating a budget or cash flow statement so that you can know your inflows and outflows of cash on a monthly basis.

 

By knowing what you take in and pay out you put yourself in a better position to make tax moves that you can benefit from for the current and future tax years.

 

Or another way of looking at it is–in order to know where you want to go–you must first know where you are at. By looking at your finances in advance of your tax planning you put yourself in position for “more” effective tax planning.

 

*Determine if you are maximizing your credit effort

 

Your credit or debt level must be at an acceptable level and there are moves that you can make to get to a level where you are maximizing your credit effort.

 

Are you managing your debt load effectively?  Do you have a debt payoff or debt pay down plan that is realistic and doable by you?

 

By maximizing your credit effort you put yourself in a much better position for short and long term tax planning.

 

Are you using mortgage interest, real estate taxes and other housing related deductions in a way that maximizes your tax position.

 

*Thoroughly analyze all areas of your finances including tax moves that you can make now to help in the short and long term

 

You must know how to review and effectively analyze your insurance, investments, taxes, education planning, estate planning/wills and retirement panning in a way that benefits you and your family the most.

 

You must look at the taxes that you pay to the IRS in an overall and comprehensive manner to see where and if improvements can be made.

 

Did you know that if you sell your personal residence you can receive tax-free treatment on the gain as long as several conditions are met?

 

In the following paragraphs you can learn about tax moves that you could possibly make to help lighten your tax burden now–and in your future!

 

Short Term Tax Moves

 

You can in the short term make charitable donations (the creator of TheWealthIncreaser.com will be donating a car this year as a result of reviewing tax moves at this time), possibly pay medical expenses in a way that allows you to maximize the 10% of AGI deduction for the 2019 tax year–and if you are self-employed–plan your growth in a manner that maximizes your tax position.

 

You may be able to adjust your w-4 to ensure that you don’t owe taxes or you get the tax refund or pay the amount (when you owe taxes) that you are comfortable with.

 

It is important that you know your state income tax withholding and sales tax payment position now–so that you can plan accordingly.  If you are self-employed or make some of your income from self-employment you can plan more effectively and know in advance if you will have to pay estimated taxes that are normally due if you earn income during the year (January 15, April 15, June 17 and September 16–in 2019).

 

By knowing your current or expected income, your federal and state withholding and your tax projections for the 2019 tax year and beyond you can plan for success and win in your financial life.

 

If you invest “outside of your retirement accounts” during the year you can use capital losses to offset capital gains up to $3,000 per year and carry forward the rest.

 

If you invest “inside your retirement account(s)” you can possibly avoid and/or delay the payment of your taxes.

 

You can plan your family size and educational ambitions with the current and possibly future tax advantages in mind.

 

Long Term Tax Moves

 

You can in the long term make retirement contributions in a wise manner by contributing at least to the match level of your employer, and even higher if your financial position allows you to do so.

 

You must know your federal and state withholding and tax projections for the 2020 tax year and beyond where possible.

 

If you own rental property  or other depreciating assets you can accelerate or decelerate depreciation so that it will benefit you now—and/or in future years.

 

Be sure to deduct student loan interest and use education credits in a way that benefits you and your family the most!

 

Be sure to invest both inside and outside of your retirement accounts in a manner that provides a balance between what you need and your tax position.

 

Again, if you invest “inside your retirement account(s)” you can possibly avoid and/or delay the payment of your taxes.

 

Be sure to use pre-tax accounts such as Retirement Accounts, HSA’s and MSA’s and other tax advantage accounts including both ROTH and traditional IRA’s.

 

If you invest “outside of your retirement accounts” during the year–you can use capital losses to offset capital gains up to $3,000 per year–and carry forward the excess into future year(s).

 

You can use a start up business or farm to possibly help offset your personal income taxes–if you file as a business or farm on your personal tax return.

 

If your income is too high or too low you can do short and/or long-term planning to correct that situation in a way that makes the tax system work for or with you—not against you!

 

Conclusion

 

The above strategies are proven ways that tax burdens have been lifted or eliminated and if you get a handle on your finances now and look out into the horizon you can discover more effective ways of minimizing your taxable income and lowering your taxes for the 2019 tax year and beyond.

 

Keep in mind that what is considered short or long term planning will depend on your individual and family situation as what might be short term planning for you could be long term planning for others—and vice-versa.

 

Also realize that all tax filing situations are unique so what might be effective for your neighbor or co-worker might not be effective for you.

 

And with the new tax law changes many middle class tax filers who were getting larger refunds in the past are seeing a difference–and in many cases a reduction.

 

Likewise many who got a smaller refund are seeing an increase, particularly younger families with children and household income under $100,000.

 

Almost all of those in the $400,000 and up categories have seen an increase in their refund or a decrease in the taxes that they pay.

 

Always try to maximize your retirement contributions (401k, 403(b), Federal TSP or other employer provided retirement plan) as you are allowed (2019) to contribute up to $19,000–and if age 50 plus an additional $6,000.

 

By doing so you can not only ensure that you have your retirement funds that allow you to enjoy retirement–you can also get a pre-tax benefit and lower your current taxable income–and possibly pay a lower tax rate during your retirement years, (your AGI will also be lower  when you file your 2019 tax return–thus your taxable income will be lower–giving you both a long-term and short-term benefit)!

 

Even if you don’t have a retirement plan at your job you can still contribute to a ROTH or Traditional IRA up to $6,000 per year and $7,000 if age 50 plus (income thresholds apply).

 

If you are self employed you can contribute up to $56,000 ($62,000 if age 50 plus) by setting up a solo 401k  by December 31st of this year–and you can contribute up until April 15, 2020–the filing deadline!

 

Keep in mind your contributions cannot exceed your self-employment income for the year.

 

Or you can set up a SEP-IRA which is limited to 20% of your self-employment income up to a maximum contribution of $56,000.

 

You must always know about marginal tax rates which has been reduced for many, however “more of their income” such as pension and social security is now possibly taxable–thereby increasing the amount of taxes they owe even though they are paying a lower marginal tax rate.

 

What you really must be aware of is your effective tax rate  as that is the actual taxes that you will pay based on your unique filing position.

 

Always consider how tax moves at the “federal level” will affect your tax position at your “state and local level”–where applicable.

 

Your goal is to maximize your tax refund or minimize your tax liability in an overall (state and federal) manner–now–and in future tax years.

 

All the best toward your short and long term tax success…

 

 

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Taxing Subjects & Wealth Building

Learn more about taxes and how you can use that knowledge to build wealth…

Understanding your income taxes at a basic level is important in the current economy and with recent changes to the tax laws it is more important than ever that you understand your taxes at the state and federal level and know some of the ways that you can minimize your taxes and build wealth more efficiently.

 

In this discussion TheWealthIncreaser.com will briefly discuss a number of individual tax topics as it relates to the IRS that could possibly be of benefit to you or a loved one.

 

It is important that you understand that you have a “bill of rights” that came into effect in 2014 (give thanks to National Taxpayer Advocate Nina Olson) that outlines what you can and can’t do as it relates to filing your federal income taxes and your relationship with the IRS if you are a U.S. citizen or subject to taxation by the IRS.

 

Your Rights:

 

*Be Informed *Quality Service *Pay no more than the correct amount of tax * Challenge the IRS’s position and be heard *Appeal an IRS decision in an independent forum *Finality *Privacy *Confidentiality *Retain representation *A fair and just tax system

 

Go to taxpayeradvocate.irs.gov/taxpayer-rights to learn in more detail about your rights…

 

What is the difference between injured spouse and innocent spouse?

 

Injured Spouse

A: An injured spouse is simply someone whose tax refund is used to cover the past-due debts of a spouse or exspouse. When married taxpayers file a joint return, each spouse has an interest in the jointly reported income and in the debt.

 

Generally: If you file Form 8379 with a joint return electronically, the time needed to process it is about 11 weeks. If you file Form 8379 with a joint return on paper, the time needed is about 14 weeks. If you file Form 8379 by itself after a joint return has already been processed, the time needed is about 8 weeks.

 

It will primarily benefit you if you file form 8379 and you are the spouse who is injured (the injured spouse) on a jointly filed tax return when the joint over-payment was (or is expected to be) applied (offset) to a pastdue obligation of the other spouse.  By filing Form 8379, as the injured spouse you may be able to get back your share of the joint refund that was initially taken by the IRS to settle a debt that was owed by your spouse.

 

To qualify for an injured spouse claim, you must meet the following conditions:

 

You are not required to pay the past-due amount.

 

This means that the debt is one which your spouse incurred before you got married or that the debt is one for which only your spouse is liable.

 

Form 8379 lets you (the “injured spouse“) get back your portion of a jointly-filed refund if it’s seized or offset to pay your spouse’s debt. You must file jointly to use this form. Filing an 8379 will delay your federal refund by up to 14 weeks.

 

But it could — if you file the injured spouse form allow you to get back a portion of the refund.

 

As an injured spouse, you are in essence asking the IRS to pay attention to whether you or your spouse has the refund and who has the debt. 

 

It’s not just federal tax debt that gets collected. A potential refund could be used to offset past-due child support, defaulted student loan payments, state or local taxes, or any other money owed to a state or federal agency. The IRS will inform you and your spouse if an offset takes place. A formal Notice of Offset will be mailed to the taxpayer’s address, which gives the taxpayer time to respond by filing Form 8379 as an injured spouse [source: IRS].

 

For example, if you were newly married, and were filing taxes jointly for the first time and you always filed individually in the past and you were used to getting a nice refund and your spouse doesn’t usually receive a refund because the IRS garnishes any tax over-payments to cover past-due student loans–you could potentially file as an injured spouse using form 8379.

 

Once you file as a couple, your refund will be used to cover your spouse’s back student loan payments. By filing for injured spouse relief, you are asking the IRS to keep your refund away from your spouse’s debt.

 

The IRS takes many things into account when calculating how much the injured spouse might be due. There are two formulas used, including subtracting your share of joint liability from your share of the credits and income. There is also a separate tax formula, which looks something like this [source: IRS]

 

IRS Formula:

 

(Injured spouse’s separate tax liability / Total of spouses’ separate tax liabilities)
x Joint tax liability shown on return= Injured spouse’s share of liability

Instructions for filing…

Innocent Spouse

By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse (or former spouse) “improperly reported items or omitted items” on your tax return.

 

The IRS will figure the tax you are responsible for “after” you file Form 8857!

 

In contrast, as mentioned above an injured spouse is someone “whose tax refund is used to cover financial obligations” of a current or former spouse.

 

Please note that the financial obligations can be outside of your federal income taxes as mentioned above!

 

You are an injured spouse if “your share of the over-payment” shown on your joint return was, or is expected to be, applied (offset) against your spouse’s legally enforceable past-due debts.

 

IRS Definition:

 

Innocent spouse relief provides you relief from additional tax you owe if your spouse or former spouse failed to report income, reported income improperly or claimed improper deductions or credits.

 

If you qualify for Innocent Spouse Relief, you “will not” be held responsible for your spouse or ex-spouse’s unpaid taxes.

 

You may qualify as an Innocent Spouse if all of the following are true:

 

*You filed a joint tax return.

*Due to the circumstances, it would be unfair to hold you liable for the unpaid taxes.

 

Am I responsible for my spouse’s debt?

 

If you were married when your spouse incurred the back taxes, then yes.

When you file jointly, then you assume “joint and several” liability.

 

Instructions for filing…

You must file Form 8857, Request for Innocent Spouse Relief, to request any of the methods of relief. Publication 971, Innocent Spouse Relief, explains each type of relief, who may qualify, and how to request relief.

 

What is the benefit of purchasing a home as it relates to the filing of my income taxes?

 

If you purchase a home you will enjoy the benefits of your own dwelling (privacy, equity build up, peace of mind and the like) along with a number of potential tax advantages at the federal and possibly state level as well.

 

Those advantages will be unique to you based on your income, family size, state of residence, loan amount, real estate taxes paid, interest paid, whether you have mortgage insurance and the timing of your purchase among other factors.

 

It is important that you put yourself in position for success by knowing on the front end whether you are properly prepared to purchase and you know how you will benefit in a proactive way–not after your purchase.

 

What effect does interest and investment income have on my taxes?

 

It depends on the amount and whether the interest and/or investment income was earned inside or outside of your retirement account.

 

If earned outside of your retirement account(s) you may have to pay annual taxes at your ordinary income or capital gains tax rate depending on the type of account and the amount of your income.

 

Your family size and whether you itemize deductions and other factors will have some effect on the overall taxes that you will pay or the amount of refund you will receive.

 

If earned inside of your retirement account(s) you may defer or possibly avoid taxation until your retirement years or possibly later depending on the “type” of investment and your (including your spouse if filing jointly) overall income at the time of retirement and the years thereafter.

 

Conclusion

 

Taxing Subjects can be a broad area and this discussion only touched the surface as far as taxes are concerned.

 

Even so, your high level of comprehension and proper application of the subject matter that you learned in this discussion that you can use in your life at this time (or later on down the road) can put you far ahead of those who go about their daily life with no real concern or understanding of their tax position and where they want to go in life.

 

Also be aware of and look for ways that you can improve your tax position in other areas outside of your income taxes.  Can you improve on the payment of your real estate taxes, ad valorem taxes, sales taxes, utility fees, telecommunication fees and other taxes or fees that are not defined as taxes but have the same effect?

 

All the best toward paying less and continued success…

 

 

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Qualified Business Income & Taxation

Learn how you can use QBI (Qualified Business Income) to lower your taxes…

 

After the tax cuts and jobs act of 2017, a popular buzzword or acronym that has crept up in the American lexicon is QBI or Qualified Business Income as it has the potential to lower the taxes for those who qualify.

 

In this discussion TheWealthIncreaser.com will try to explain what QBI is and show you ways that you can use this new tax change that occurred as a result of the tax cuts and jobs act of 2017 to reach your future goals more efficiently.

 

What exactly is QBI and why should I be concerned about QBI?

 

QBI stands for Qualified Business Income!

QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business as the result of the 2017 tax cuts and jobs act that occurred in the United States.

In  laymen terms if you have income from a sole proprietor, partnership or other pass through entity you could potentially deduct 20% of the income and lower the taxes that you pay on your tax return.

The pass-through deduction is a personal deduction that you may take on your Form 1040 whether or not you itemize and the deduction is taken on line 9 (second page) of your Form 1040.

It is not an “above the line” deduction on the first page of Form 1040 that reduces your adjusted gross income (AGI).

Furthermore, the deduction only reduces income taxes, not Social Security or Medicare taxes so keep that in mind.

 

Can QBI be used for rental property?

 

The new Section 199A regulations make it clear that merely owning rental real estate that generates rental income is not a trade or business of being a real estate investor, and as such, wouldn’t qualify for the QBI deduction.

However, if you actively manage your rental real estate—there is the potential for some or all to be classified as QBI.

 

Who qualifiies for the QBI deduction?

 

If you are self-employed or your business qualifies as a pass-through entity, the Tax Cuts and Jobs Act says you may deduct up to 20% of your QBI on your federal income tax return if you meet the qualifications.

The QBI deduction is known as the pass-through entity deduction that you may have heard about!

 

The following would have to be subtracted out of your business income when calculating the QBI deduction:

 

* capital gains and losses

* dividends or interest

* annuity payments

* foreign currency gains or losses

* reasonable compensation for owner/employees of S-Corps

* guaranteed payments to partnerships and LLCs

 

Are there Income Thresholds?

 

The QBI Thresholds for the 2018 tax year are:

  • $157,500 for single filers, and

 

  • $315,000 for people filing joint returns

 

The numbers will be adjusted for inflation after the 2018 tax filing season.

 

Also, keep in mind that  for certain businesses that provide services such as law firms, accounting firms, and doctors’ offices, the limitations are steeper and the deduction is phased out altogether when taxable income reaches $207,500 ($415,000 for joint filers).

 

Example 1:

You formed a new company in 2018 and operated as a sole proprietor.

During 2018, your w-2 wages total $82,183, you itemize, make IRA contributions and pay tuition and fees (both of which would be non-deductible due to your combined income exceeding the threshholds) and your businesses generates a loss of ($11,763) from business 1 and a gain of $196,987 from business 2.

Your QBI deduction would be $34,956 calculated as follows:

$196,987 gain from business 2 minus ($11,763) loss from business 1 equals net gain of $185,224 less 1/2 of self employment tax paid of $10,442 equals QBI deduction of $34,956.

You file jointly with your spouse for 2018, and the combined “taxable income” for the year for both you and your spouse, after subtracting out your itemized deductions of $24,765 and the QBI deduction or qualified business income deduction, is $198,084.

You have two dependents that allow you to claim the “credit for other dependents” of $1,000, and your other taxes total $20,912 which consist of self-employment tax of 20,883 and an additional medicare tax of $29 since AGI exceeded the $250,000 threshold for married filing jointly.

Your total tax would be $56,031 and with federal withholding of only $3,198 you would owe taxes in the amount of $52,833 for the 2018 tax year.

 

Deduction for Income Above $315,000 ($157,500 for Singles)

 

If your taxable income exceeds $315,000 if married, or $157,500 if single, calculating your deduction is much more complicated and depends on your total income and the type of work you do.

 

Your first step would be to determine whether your business falls within one of the following service provider categories:

 

  • health (doctors, dentists, and other health fields)
  • law
  • accounting
  • actuarial science
  • performing arts
  • consulting
  • athletics
  • financial services
  • brokerage services
  • investing and investment management, or
  • trading and dealing in securities or commodities.

 

There is a final catchall category that includes any business where the principal asset is the reputation or skill of one or more of its owners or employees such as that of TheWealthIncreaser.com’s.

 

This likely includes many individuals who provide services not listed above.

 

Architecture and engineering services are expressly not included in the list of personal services.

 

Pass-through owners who provide personal services are not favored under the pass-through deduction.

 

They lose the deduction entirely at certain income levels.

 

There are no such limitations on pass-through owners who do not provide personal services and that discussion follows.

 

Deduction for Non-Service Providers (Income Over $315,000/$157,500)

 

If your business is not included in the list of service providers, and your taxable income is over the $315,000/$157,500 thresholds, how you figure your deduction depends on your taxable income.

 

Non-service Provider Taxable Income Above $415,000 ($207,500 for Singles)

 

If you’re a non-service provider and your taxable income is over $415,000 if married filing jointly, or $207,500 if single, your maximum possible pass-through deduction is 20% of your QBI, just like at the lower income levels.

 

However, when your income is this high a W2 wage/business property limitation takes effect.

 

Your deduction is limited to the greater of:

 

  • 50% of your share of W-2 employee wages paid by the business, or
  • 25% of W-2 wages PLUS 2.5% of the acquisition cost of your depreciable business property.

 

Therefore, if you have no employees or depreciable property, you get no deduction.

 

This is intended to encourage pass-through owners to hire employees and/or buy property for their business in order to stimulate the economy.

 

The business property must be depreciable long-term property used in the production of income—for example, the real property or equipment used in the business (not inventory).

 

The cost is its unadjusted basis—the original acquisition cost, minus the cost of the land, if any.

 

The 2.5% deduction can be taken during the entire deprecation period for the property; however, it can be no shorter than 10 years.

 

Example 2:

Example: David and Monica are married and file jointly. Their taxable income this year is $1,000,000, including $800,000 in QBI they earned from their nightclub business they own through an LLC or limited liability company.

 

They employed eight employees during the year to whom they paid $300,000 in W2 wages. They own their nightclub building outright and are not leasing.

 

They bought the nightclub building  two years ago for $1.2 million and the land is worth $200,000, so its unadjusted acquisition basis is $1 million.

 

Their maximum possible pass-through deduction is 20% of their $800,000 QBI, which equals $160,000.

 

However, since their taxable income was over $415,000, their pass-through deduction is limited to the greater of:

 

(1) 50% of the W2 wages they paid their employees $150,000, or,

 

(2) 25% of W2 wages (75,000) plus 2.5% of their nightclub building’s $1 million basis (25,000) equals $100,000.

 

Since (1) is greater, their pass-through deduction for tax year 2018 is limited to $150,000–not $160,000 that was initially calculated above prior to the limitations being applied.

 

Many owners of pass-through businesses, especially landlords, have no employees, thus the 25% plus 2.5% deduction is of most benefit to them.

 

Conclusion:

 

We will conclude this discussion by defining what a pass through entity is and then reiterate how you can make the QBI deduction work better for you and your family.

 

Definitions:

Pass-through entity:

 

A pass-through entity is a business entity that passes through its income to the owners of the business. The owners then report the business income on their personal returns.

 

Generally, pass-through entities include partnerships and S corporations, but the qualified business income deduction also applies to other unincorporated entities such as sole proprietorships and single-member LLCs.

 

Partnership

S-Corporation

Sole Proprietorship

Single-Member LLC

 

Common Questions:

 

How can I make the Qualified Business Income Deduction work for me?

By becoming a business owner or continuing as a business owner with the right form of ownership (discussed above) you can deduct up to 20% of your qualified business income or, if lower, 20% of your taxable income net of any capital gain.

 

This deduction would be claimed on your individual tax return.

 

Generally, qualified business income refers to the business’s profits (income minus expenses).

 

Qualified business income does not include salary or wages paid to you–either as W-2 wages from an S corporation or guaranteed payments from a partnership.

 

This basic formula applies if the taxable income that business owners report on their individual returns does not exceed certain thresholds that were mentioned earlier–and will be presented again to further your understanding.

 

The thresholds for taxable income are:

 

$157,500 for single filers and $315,000 for people filing joint returns.

 

The numbers will be adjusted for inflation after 2018.

 

If taxable income does exceed these thresholds, the deduction factors in limitations relating to the wages the business pays to its employees and depreciable assets the business owns–also discussed above.

 

A key point to keep in mind – the latest pass-through business tax reform reduces “federal income tax” but does not reduce self-employment taxes for income from partnerships and sole proprietorships, or income for purposes of the alternative minimum tax.

 

How can I benefit throughout the year?

If you have the right form of business ownership and your income passes through on your federal 1040 return you can adjust your estimated taxes to account for this reduction in taxable income.

 

But, be sure to use caution because if you “underestimate” how much income you’ll earn in a year, the penalty for underpayment of estimated taxes can hurt you during filing time as you will be penalized.

 

In the examples presented above in this discussion “estimated taxes” were not taken into consideration and in both examples “a penalty” would more than likely apply for underpayment of estimated taxes!

 

If the new tax reform for pass-through entities sounds complex—you can increase your understanding by comprehending this article and site, gaining a real handle on your personal finances and hiring competent professionals if you now have a pass through entity or you anticipate having one in your future.

 

What is QBI?

The new qualified business income deduction provision in the Tax Cuts and Jobs Act (TCJA) gives a 20% deduction for qualified business income.

QBI is also called the section 199A deduction.

The goal of the legislation is to improve the benefits for flow-through entities and sole proprietors, who did not receive the major tax cuts that were given to C corporations (regular corporations) where their tax rate was reduced to 21%.

Whether the rule meets the goal remains to be seen. Any strategies you consider should be approached with  caution as the new law has some grey areas.

However, you can review the basic rules and strategies and see how they may apply to you, and what questions you may want to explore further as you expand and grow your business.

 

What exactly is a qualified business?

A qualified business is any business except those “specified service businesses” and the income earned by an employee, from guaranteed payments or personal interest, dividends or capital gains.

The specified service businesses can be in health, law, accounting, consulting, brokerage services, financial services, and others, but exclude architects and engineers.

 

What forms of ownership qualify?

QBI is available to sole proprietors and owners of pass-through entities such as S-Corps, LLCs, and partnerships.

 

Are there any limitations?

QBI is subject to limitations based on the taxpayer’s income and the type of business they operate.

Service businesses face additional limitations, however non-service businesses face limitations based on:

 

(1) 50% of the W2 wages they paid their employees or,

(2) 25% of W2 wages plus 2.5% of their capital expenditures

 

W- 2 and depreciation limits apply to non-service businesses but they are always allowed a deduction of some amount if they qualify (contrast that with a service business where elimination of the deduction will occur at some income level).

 

Exactly how does a Qualified Business Deduction work?

The QBI deduction reduces your taxable income, but not your adjusted gross income and can be taken regardless of whether you itemize deductions on your tax return.

To get the full benefit of the deduction, and not be subject to further wage and capital limitations, taxable income must be no greater than:

$315,000 for married filing jointly (phases-out through $415,000);

and $157,500 for single or married filing separately (phases out through $207,500).

 

  • If the pass-through entity owner is over the dollar threshold and a specified service business, it does not get the deduction; but if it’s a qualified trade or business it does, although it is subject to wage and capital limitation.

 

What is the amount of the deduction?

The deduction is the lesser of: 20% of the taxpayer’s qualified income, and a wage and capital limitation.

The wage and capital limitation is the greater of: 50% of the W-2 wages; or 25% of the W-2 wages plus 2.5% of the unadjusted basis of all qualified property–whichever is greater.

In addition, there is 20% deduction of REIT dividends and distributions from publicly traded partnerships.

 

What is the W-2 wage limit all about?

The W-2 wage limit minimizes the deduction if the business does not employ a substantial number of people relative to its size, or invest in a substantial amount of property under the “wage-and-property limit.”

Specified service businesses that rely primarily on the efforts of their owners or those with limited employee or capital investments will be affected the most and they may not be able to fully utilize the new qualified business income deduction.

In addition, there is an overall limitation on the deduction!

The limitation is the lesser of: the combined qualified business income, and 20% of any excess taxable income minus the sum of any net capital gain plus any qualified cooperative dividends.

The total amount cannot exceed the taxpayer’s taxable income (minus the taxpayer’s net capital gain) for the tax year.

 

How can I better qualify for the deduction?

If some portion of your qualifying business income comes from a “specified service business” you could:

  • Redefine your business if done so legally

 

  • You could consider spinning off portions of your business (separating the specified service business portion from the other qualified trade or business portion)

 

  • You could consider operating as a real estate investment trust (REIT), which do especially well. There is only one level of tax, and shareholders are entitled to a 20% qualified business income deduction for ordinary distributions with no W-2 basis limitation. On the flip side, REIT compliance and maintenance rules are complicated.

 

  • You could consider operating as a publicly traded partnership (PTP), which are not subject to the W-2 wage limit and qualified property cap.

 

  • If you are participating in an S corporation, it may be beneficial to take advantage of reasonable compensation so that you could meet the 50% of wages limitation by paying out more in compensation.

 

  • You could possibly rearrange your employer-employee relationship to one in which there is a partnership under an agreement in which the individual’s income from the partnership would be higher and their salary would be lower, thus making them (or you) eligible for the deduction.

 

  • You could use a gifting strategy (give up a percentage of business ownership) to bring in more people that qualify under the  “$157,500 per person threshold.”

 

  • If you are in a partnership, consider switching from guaranteed payments, which don’t qualify, to preferred returns, which do.

 

  • You could possibly increase the W-2 limit by switching from 1099 independent contractors to W-2 employees–think this process through carefully as there may be other negative effects as well.

 

  • You could manage your total income and taxable income so it is below the phase-out thresholds in order to qualify for the deduction.

 

  • You could manage your pension contributions to reduce taxable income as no part of the pension contributions would be included in income, so the QBI deduction could apply.

 

  • You could make tax-deductible qualified retirement plan contributions to reduce  your or your employee’s  taxable income in order to qualify for the deduction.

 

  • You can use your imagination to come up with other scenarios that might allow you to legally qualify for the QBI deduction–be sure to run it by your tax professional to ensure that it falls under the QBI guidelines.

 

In summary, The Tax Cuts and Jobs Act (HR 1, “TCJA”) established a brand new tax deduction for owners of pass-through businesses that can provide a tangible advantage for those who put themselves in position to qualify.

 

Pass-through owners who qualify can deduct up to 20% of their net business income from their income taxes, reducing their effective income tax rate by 20%.

 

This deduction begins for 2018 and is scheduled to last through 2025—that is, it will end on January 1, 2026 unless extended by Congress–as it was not made permanent in the manner that the 21% tax rate for corporations were.

 

If you are a small business owner–or desire to be one–you need to understand this somewhat complex, but highly beneficial deduction.

 

Always remember that:

 

You Must Have a Pass-Through Business

 

  • a sole proprietorship
 (a one-owner business in which the owner personally owns all the business assets)
  • a partnership
  • an S corporation
  • a limited liability company (LLC), or
  • a limited liability partnership (LLP).

 

As an owner you would pay tax on the money on your individual tax return (as opposed to corporate tax return) at your individual tax rates.

 

The majority of small businesses are pass-through entities.

 

Regular “C” corporations do not qualify for this deduction; however, starting in 2018 they do qualify for a low 21% corporate tax rate–that was made permanent and could be more beneficial–depending on your type of business, revenue generation and your intended goals for the business.

 

Therefore, if you are structuring a new business or have an existing business you must determine the best form of ownership from both a tax and liability position among other considerations that you may have to determine the best type based on your future goals and the direction that you desire to take your future.

 

Other Key Points:

QBI is determined separately for each separate business you own.

If one or more of your businesses lose money, you deduct the loss from the QBI from your profitable businesses.

If you have a qualified business loss—that is, your net QBI is zero or less–you get no pass-through deduction for the year.

Any loss is carried forward to the next year and is deducted against your QBI for that year.

This serves as a penalty for having a money-losing business.

 

Example: During 2018, you earned $20,000 in QBI from a lawn care business and had a $40,000 loss from your office store business.

You have a $20,000 qualified business loss, so you get no pass-through deduction for 2018. The $20,000 loss must be carried forward and deducted from your QBI for 2019.

 

You Must Have Taxable Income!

To determine your pass-through deduction, you must first figure your total taxable income for the year (not counting the pass-through deduction). This is your total taxable income from all sources (business, investment, and job income) minus deductions, including the standard deduction ($12,000 for singles, $18,000 for head of household and $24,000 for married filing jointly in 2018).

 

You must have positive taxable income to take the pass-through deduction!

Moreover, the deduction can never exceed 20% of your taxable income.

Example: You are a single taxpayer who run a consulting business which earned $80,000 in profit this year.  You had no other income and you take the standard deduction ($12,000).

Your taxable income is $68,000 ($80,000 income – $12,000 standard deduction = $68,000).

Your pass-through deduction cannot exceed $13,600 (20% x $68,000 = $13,600).  Even though  you had $80,000 in QBI, your deduction is limited to $13,600, not 20% of $80,000 = $16,000 because you had no other income such as w-2 income.

If you have other income that allows you to take advantage of the full 20% deduction you can do so as long as your taxable income is below $315,000 ($157,500 for Singles).

 

If you exceed the above limits that is a good problem to have–just realize your QBI deduction may be limited or eliminated if you are a “service business owner” and you exceed the threshold limits.

 

Deduction for “Service Business Owners” (Income Over $315,000/$157,500)

 

If your business involves providing personal services, and your taxable income is over the $315,000/$157,500 thresholds, your pass-through deduction is gradually phased out up to $415,000/$207,500 of QBI.

 

And remember that if you fall at the top of the income range you get no deduction at all.

 

That is, if your total income is $415,000 if you’re married, or $207,500 if you’re single, you get no deduction. This was intended to prevent highly compensated employees who provide personal services—lawyers, for example–from having their employers reclassify them as independent contractors so they could benefit from the pass-through deduction.

 

There is no such phase-out of the entire deduction for non-service providers.

 

All the best toward your effective use of QBI and your future  success…

 

 

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Hot Tax Topics & Wealth Building

As we enter the latter part of January many consumers in the U.S. and other parts of the world are gearing up for the filing of their 2018 income tax returns…

Learn about the latest tax news so that you can avoid the financial blues…

 

In this discussion TheWealthIncreaser.com will look at and discuss a number of critical areas of taxes that could help you maximize your tax position in 2019 and beyond.

 

In order to achieve more and maximize your personal income tax return it is important that you have knowledge of—and a practical understanding of how you can do the following more effectively:

 

Use the New Tax Rates to Your Advantage

 

If you are an individual and do not have majority ownership in a C corporation or S Corporation–your maximum tax rate is 35% versus the maximum for a corporation of 21% due to the job and tax act of 2017.

 

That means if you have high income that puts you in the upper income tax brackets you could possibly reduce the taxation of your income by establishing a corporation or keeping your income in the corporation as opposed to receiving a salary if you now have a corporation.

 

There are a number of ways that you can strategize to lower your taxes by using the new tax rates to your advantage and it is up to you and your professional team to find ways to do just that.

 

If You are a Business Owner or Desire to be One You Must Understand the Forms of Ownership

 

Sole Proprietorship

Limited Liability Company (LLC)

Limited Liability Partnership (LLP)

S Corporation

C Corporation

 

You must know and understand fully that certain types of ownership allows you to shield your personal assets against the liabilities of your business.

 

If you are operating as a sole proprietor where you are using your social security number as your Federal ID you are putting yourself and your family in position to be personally liable for actions that may arise out of liabilities of your business.

 

Whether a pass through entity or a corporation will be of greatest benefit to you will depend on your unique tax and financial position, the type of business you operate, the state that you are in, your liability (risk) exposure and the path that you desire to take to reach your goals once you lay out all of your intentions–whether you decide yourself or you decide to use financial professionals.

 

IRA’s

 

IRA’s and other tax favored retirement plans retain those tax advantages in spite of the tax cut and jobs act of 2017.  That means the “saver’s credit” and deductibility for a traditional IRA are still available.

 

In addition ROTH conversions can be done regardless of your income level and ROTH IRA’s still enjoy the tax free benefit upon withdrawal if done so according to IRS guidelines.  Contributions remain tax free upon withdrawal.

 

With both IRA’s the first time homebuyer withdrawal provision remains as well as several other “exceptions” that can help you avoid the tax bite.

 

HSA’s

 

A Health Savings Account may allow you to save more and meet your health care expenses in a tax efficient manner by allowing you to deduct the amount you contribute,  allow your contributions to grow tax free and allow you to withdraw your earnings tax free when used for medical related expenses.

 

Be sure to give the “triple tax benefit” of HSA’s real consideration.  In addition, be aware of the expenses that you will pay as that can eat away at your earnings.  Be sure to shop for the best plan available based on your financial position and health saving goals.

 

Know at the earliest time possible if you are going to utilize the standard deduction or itemize your deductions

 

Standard Deduction

 

The standard deduction has been increased for the 2018 tax year and many of those who once itemized will find that it is no longer to their advantage to do so.

 

Single is now at $12,000

Head of Household is now at $18,000

Married Filing Jointly is now at $24,000

 

Personal exemption eliminated for most—some dependents on your tax return may allow you to claim a $500 personal exemption.

 

Be sure to consider the effect on your state tax refund in determining whether to itemize or claim the standard deduction–as you may be surprised to find that a reduced itemized deduction at the federal level could still be to your benefit if you would get a higher overall refund or pay less in taxes when the federal and state amounts have been combined!

 

Itemized Deductions

 

Medical

Long-Term Care (LTC) insurance that you pay, Medical Insurance that you pay, Health Care Insurance Premiums that you pay, Eye Care that you received during the year, Out of Pocket medical expenses that you pay for the year, Dental Expenses that you pay for the year, Prescription drugs that you purchase for the year, Mileage to and from your medical care destination and many other medical related expenses may all be deductible in 2018 if they exceed 7.5% of your AGI (Adjusted Gross Income–line 7 on page 2 of form 1040) and you itemize your deductions. 

 

The AGI limit increases to 10% in 2019 and beyond unless Congress acts.

 

Taxes

 

State income taxes and sales taxes, ad valorem taxes, property taxes and possibly other taxes may be deductible by you if you itemize and otherwise qualify.

 

Keep in mind that there are limitations on taxes in some instances—so keep that in mind—particularly if you are in a high tax state such as California, New York, New Jersey, Connecticut and several others.

 

Mortgage Interest

 

Mortgage interest deduction is now limited to $750,000 down from 1 million.

Mortgage Insurance Premiums (MIP) and Private Mortgage Insurance (PMI) are not deductible for the 2018 tax year and beyond unless congress acts.

 

Charitable Contributions

 

New rules apply to deducting charitable contributions that are non-cash as you must provide additional documentation for donations valued over $250.

 

As for church donations and others that are in the form of cash the maximum percentage that you can deduct has changed,  however the required documentation is basically the same.

 

2% AGI Deductions Eliminated

 

Tax related fees, investment fees, unreimbursed employee expenses (including automobile expenses) and other 2% of AGI deductions have been eliminated for the 2018 through 2025 tax years.

 

Social Security Income Threshold Increases

 

In tax year 2018 the maximum social security wage base is $128,500—however for the 2019 tax year that wage base will increase to $132,900 which means if you earned over $128,500 in 2018 you may see a tax increase in the amount of social security tax that you will pay (6.2% of the amount that is between $128,500 and $132,900 will now be taxed) when you file your 2019 taxes.

 

The Medicare portion limit did not change as a result of the tax cut and jobs act of 2017.

 

Conclusion

 

It is important that you realize that many changes have occurred over the past few years as it relates to your taxes and the filing of your tax return. 

 

The form 1040 has a new look and now includes “Schedules” that allow you to include in income or deduct many of the items that were on page 1 of the 1040. 

 

You will now sign on page one as opposed to page two.  1040EZ and 1040A no longer exist and you must use form 1040 to file your 2018 through 2026 tax returns. 

 

In most instances you won’t claim exemptions, however the child tax credit has gone up to $2,000 per child with up to $1,400 of the credit refundable.  Student loan interest deduction and other educational credits remain.

 

Whether it is the “Affordable Health Care Act” (penalty will be eliminated after the 2018 tax filing year) the “Tax Cut and Jobs Act of 2017” or any other incidental changes in the tax code—it is important that you put yourself and your family in position to take advantage of the changes and not let the changes take advantage of you.

 

Be sure to choose highly competent professionals and be sure to gain the knowledge that you need so that you can succeed. 

 

Be sure to engage with professionals who have a track record of success, someone who encourages you to ask questions and are willing to spend the time that is necessary so that you can fully understand the questions you ask–and someone who adds value to your financial and overall life from this day forward!

 

You want to put yourself in an informed position where you know what is going on “tax wise” so that you can position yourself in a way where you can’t easily be taken advantage of.

 

By landing on this page alone—you are showing a real commitment toward success in you future and you are on a path to maximizing your tax knowledge in a way that will put you and your family in position to achieve more throughout your lifetime.

 

By landing on this page and navigating this site you will put yourself in position to not be taken advantage of like many were during the financial crisis from 2007 to 2009.

 

You will put yourself in position to know how the recent tax changes over the past few years will affect you and your family—thus giving you the opportunity to plan proactively and improve the likelihood that you will achieve your goals.

 

You no longer have to let your ignorance of the tax laws, immaturity in approaching your finances, insecurity in approaching your finances or the inability to approach your finances due to fear–lead to idleness and not moving forward in the financial realm of your life!

 

Today is the day that the Five “I’s” die—and you more than just try!

 

Today is the day that you pursue a new road to success that has fewer turns and less stress—and allows you to give it your best!

 

Today is the day that you become aware, mature, believe in yourself, operate daily with character and move to action in a manner where the success that you see has already been achieved.

 

All the best to your new tax knowledge and new road to success…

 

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