Learn how you can enhance your business revenue by using business expenses more effectively…

More on Taxes…

If you are currently a business owner, or desire to be one—it is important that you earn income and you know “the deductions that you can claim” now and in your future.

In this discussion TheWealthIncreaser.com will discuss a number of deductions or business expenses that you can take to help lessen your tax burden.

With this being the creation of the last page of this decade for the creator of TheWealthIncreaser.com and the 100^th blog page on this site TheWealthIncreaser.com thought that an appropriate topic of discussion for those who desire to build wealth in the next decade and beyond was to show in clear terms how to use “business expenses” to build your business more efficiently–and effectively.

Although this discussion is longer than most, it is important that you “lock-in” on this discussion and utilize your mind at a high level so that you can see clearly where you can use business expenses to achieve more in the coming years.

Record Keeping

It is important that you realize the importance of record keeping whether it be for travel, meals, entertainment, office in the home, building, warehouse, office out of the home, automobile usage for business, advertising and any other expense related to your business.

It is important that you realize that most expenses—and in some cases all expenses that are directly related to your business—can or have the potential to be deductible on your individual or business tax return—and it is you who must keep records in an acceptable way to meet the scrutiny of the IRS.

All of the business expenses that follow have one thing in common—they all require that you keep effective records so that you can protect your interest if you face IRS scrutiny.

In the following paragraphs we will detail a number of critical expenses and show you ways that they can help you lower your taxable income.

Whether you now have (or are contemplating) forming a business as a sole proprietor, partnership, LLC or corporation–the discussion that follows can help you strategically plan your business and achieve more throughout your lifetime.

Automobile Expenses

You can use actual expenses or mileage to deduct automobile expenses and that topic will be discussed in greater detail later in this discussion.

For now, be aware that the standard mileage rate increased to 58 cents per mile for the 2019 tax year—up from 54.5 cents per mile in 2018.

Always remember that “depreciation” which will be discussed later, is already factored into the 58 cent mileage rate mentioned above.

For 2019, the first-year limit on depreciation, special depreciation allowance, and section 179 deduction for vehicles acquired before September 28, 2017, and placed in service during 2019 is $14,900.

The first-year limit on depreciation, special depreciation allowance, and section 179 deduction for vehicles acquired after September 27, 2017, and placed in service during 2019 is $18,100.

If you elect not to claim a special depreciation allowance for a vehicle placed in service in 2019, the amount is $10,100.

Meals & Entertainment

In general, entertainment expenses are no longer deductible.

The cost of business meals generally remains deductible, subject to the 50% limitation.

The maximum amount you can elect to deduct for most section 179 property (including cars, trucks, and vans) you placed in service in tax years beginning in 2018 and forward is $1,000,000.

This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,500,000.

For 2018 and 2019, the special (“bonus”) depreciation allowance on qualified property (including cars, trucks, and vans) is 100% for qualified property acquired and placed in service after September 27, 2017 and placed in service before January 2023, and is reduced 20% each year after for property placed in service before January 2027.

For tax purposes, travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job.

An ordinary expense is one that is common and accepted in your trade or business.

A necessary expense is one that is helpful and appropriate for your business.

An expense does not have to be required to be considered necessary!

If you are in the military and you are transferred from one permanent duty station to another, you may have deductible moving expenses—for most, moving expenses are no longer deductible.

Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home.

It includes the entire city or general area in which your business or work is located.

If you have more than one regular place of business, your tax home is your main place of business.

If you move around a lot you are considered an itinerant (a transient) and your tax home is wherever you work.

As an itinerant, you cannot claim a travel expense deduction because you are never considered to be traveling away from home.

If you have more than one place of work, consider the following when determining which one is your main place of business or work:

• The total time you ordinarily spend in each place.

• The level of your business activity in each place.

• Whether your income from each place is significant or insignificant.

If you (and your family) do not live at your tax home (defined earlier), you cannot deduct the cost of traveling between your tax home and your family home.

You also cannot deduct the cost of meals and lodging while at your tax home.

If you are on a temporary assignments or job there are nuances to your tax treatment that may require additional analysis by your tax professional.

Note: there are exceptions for federal crime investigators or prosecutors

When you travel away from home on business, you should keep records of all the expenses you have and any advances that you receive from your employer.

You can use a log, diary, notebook, or any other written record to keep track of your expenses.

The types of expenses you need to record, along with supporting documentation include meals:

There is a 50% limit on meals.

You can figure your meals expense using either of the following two methods:

1) Actual cost

2) The standard meal allowance

Both of these methods are explained below.

But, regardless of the method you use, you generally can deduct only 50% of the unreimbursed cost of your meals.

The actual cost method is quite simple and it only requires that you keep records of your meal costs and divide the cost by 50 percent.  You now have your meal deduction using the actual cost method.

If you use the standard meal allowance, you still must keep records to prove the time, place, and business purpose of your travel.  You deduct a per-diem amount based on IRS guidelines.

For travel between October 1, 2018 and September 30, 2019, the rate for most localities in the United States is $60 a day.

Note: The rates for the remainder of 2019 had not been published as of the date of this article

You can find this information (organized by state) at gsa.gov/perdiem.

Enter a zip code or select a city and state for the per diem rates for the current fiscal year.

Per diem rates for prior fiscal years are available by using the drop-down menu.

Incidental-expenses-only method

You can use an optional method (instead of actual cost) for deducting incidental expenses only.

The amount of the deduction is $5 a day.

You can use this method only if you did not pay or incur any meal expenses.

You cannot use this method on any day that you use the standard meal allowance.

This method is subject to the proration rules for partial days.

Building Mortgage or Lease Payments

If you are purchasing or renting a building for business use you can deduct the mortgage or lease payments.

Insurance, taxes and other fees related to the use and upkeep of the property such as maintenance, lawn care, grounds and other fees are also deductible.

Business Gifts

Always realize that there is a $25 limit on gifts as far as deductibility is concerned.

You can deduct no more than $25 for business gifts that you give directly or indirectly to any one person during your tax year.

Transportation Expenses

These expenses include the cost of transportation by air, rail, bus, taxi, etc., and the cost of driving and maintaining your car.

Also, daily transportation expenses can be deducted if:

(1) you have one or more regular work locations away from your residence, or

(2) your residence is your principal place of business and you incur expenses going between the residence and another work location in the same trade or business, regardless of whether the work is temporary or permanent and regardless of the distance.

If you want to use the “standard mileage rate” for a car you own, you must choose to use it in the first year the car is available for use in your business.

“Then in later years, you can choose to use either the standard mileage rate or actual expenses.”

If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period.

If you purchase a car and change to the actual expenses method in a later year, but before your car is fully depreciated, you have to estimate the remaining useful life of the car and use straight line depreciation.

Standard mileage rate not allowed

You cannot use the standard mileage rate if you:

1) use five or more cars at the same time (such as in fleet operations)

2)  claimed a depreciation deduction for the car using any method other than straight line, for example, MACRS (as discussed later under Methods of depreciation under Depreciation Deduction)

3) claimed a section 179 deduction (discussed later) on the car

4) claimed the special depreciation allowance on the car, or

5) claimed actual car expenses after 1997 for a car you leased.

If you are self-employed and use your car in your business, you can deduct the business part of state and local personal property taxes on motor vehicles on Schedule C, Schedule C-EZ, or Schedule F (Form 1040).

If you itemize your deductions, you can include the remainder of your state and local personal property taxes on the car on Schedule A (Form 1040).

In addition to using the standard mileage rate, you can deduct any business related parking fees and tolls.

Parking fees that you pay to park your car at your place of work are nondeductible commuting expenses!

NOTE: If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction.

Actual car expenses include:

Depreciation

Tolls/Parking fees

Licenses

Lease payments

Registration fees

Gas

Insurance

Repairs

Oil

Garage rent

Tires

If you have “fully depreciated” a car that you still use in your business, you can continue to claim your other actual car expenses.

Be sure you continue to keep records!

If you use your car for both business and personal purposes, you must divide your expenses between business and personal use.

You can divide your expense based on the miles driven for each purpose—that is why effective record keeping is so important.

If you use a vehicle provided by your employer for business purposes, you can deduct your actual unreimbursed car expenses.

Casualty and theft losses

If your car is damaged, destroyed, or stolen—you may be able to deduct part of the loss that is not covered by insurance.

Note: For tax years 2018 through 2025, if you are an individual, casualty and theft losses of personal-use property are deductible only if the losses are attributable to a federally declared disaster,  however business casualty and theft losses are still deductible.

You can elect to recover all or part of the cost of a car that is qualifying section 179 property, up to a limit, by deducting it in the year you place the property in service.

What is the section 179 deduction?

A section 179 write off allows you to write off part or the entire purchase price of an asset in one year as opposed to depreciating and writing it off over a number of years based on its asset class and depreciation schedule.

Therefore if your goal is to reduce your taxable income you may want to write it off in one year.  Likewise if you desire to spread out the deduction over a number of years you have that option as well.

You must normally make the 179 election in a timely manner in order for it to be allowed by the IRS.

If you elect the section 179 deduction, you must reduce your depreciable basis in the car by the amount of the section 179 deduction.

“You can claim the section 179 deduction only in the year you place the car in service.”

For this purpose, a car is placed in service when it is ready and available for a specifically assigned use in a trade or business.

Even if you are not using the property, it is in service when it is ready and available for its specifically assigned use.

A car first used for personal purposes cannot qualify for the 179 deduction in a later year when its use changes to business.

Let’s say in 2018 you bought a new porsche and placed it in service for personal purposes.

In 2019, you began to use it for business.

Changing its use to business use does not qualify the cost of your car for a section 179 deduction in 2019.

“However, you can claim a depreciation deduction for the business use of the car starting in 2019.”

Requirements for 179 deduction

More than 50% business use is a requirement.

You must use the property more than 50% for business to claim any section 179 deduction.

If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use.

The result is the cost of the property that can qualify for the section 179 deduction.

If the cost of your qualifying section 179 property placed in service in 2019 is over $2,500,000, you must reduce the $1,000,000 dollar limit (but not below zero) by the amount of cost over $2,500,000.

Let’s say the cost of your section 179 property placed in service during 2019 is $3,500,000 or more, you cannot take a section 179 deduction.

The total amount you can deduct under section 179 each year after you apply the limits listed above cannot be more than the taxable income from the active conduct of any trade or business during the year.

If you are married and file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service.

If you or your spouse file separate returns, you are treated as one taxpayer for the dollar limit. You must allocate the dollar limit (after any reduction) between you and your spouse.

Employees use Form 2106 to make the election and report the section 179 deduction.

All others use Form 4562 to make an election.

You must keep records that show the specific identification of each piece of qualifying section 179 property.

These records must show how you acquired the property, the person or business you acquired the property from, and when you placed the property in service.

Note: Daycare centers, travel by air, cruise ships and rental income have a special set of rules as it relates to deductions.

You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement.

You must generally prepare a written record for it to be considered adequate.

This is because written evidence is more reliable than oral evidence alone!

However, if you prepare a record on a computer, it is considered an adequate record.

Be sure to record the Cost—Date—and Purpose—especially on Gifts, Travel and Transportation.

If you do so in written form that is acceptable.  Also, if done on your computer that is usually ok as well!

You should keep the proof you need in an account book, diary, log, statement of expense, trip sheets, or similar record.

You should also keep documentary evidence that, together with your record, will support each element of an expense.

Documentary evidence

You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses.

Exception:

Documentary evidence is not needed if any of the following conditions apply:

• You have meals or lodging expenses while traveling away from home for which you account to your employer under an accountable plan, and you use a per diem allowance method that includes meals and/or lodging.

• Your expense, other than lodging, is less than $75.

• You have a transportation expense for which a receipt is not readily available.

Adequate evidence

Documentary evidence ordinarily will be considered adequate if it shows the:

-amount,

-date,

-place, and

-essential character of the expense

For example, a stay at an Air BnB where you get a receipt is enough to support expenses for business travel if it has all of the following information.

• The name and location of the Air BnB.
• The dates you stayed there.
• Separate amounts for charges such as lodging, meals, and telephone calls.

A restaurant receipt is enough to prove an expense for a business meal if it has all of the following information.

• The name and location of the restaurant.
• The number of people served.
• The date and amount of the expense.

If a charge is made for items other than food and beverages, the receipt must show that this is the case.

Canceled check

A canceled check, together with a bill from the payee, ordinarily establishes the cost.

However, a canceled check by itself does not prove a business expense without other evidence to show that it was for a business purpose.

Timely-kept records

You should record the elements of an expense or of a business use at or near the time of the expense or use and support it with sufficient documentary evidence.

A timely-kept record has more value than a statement prepared later when generally there is a lack of accurate recall.

You do not need to write down the elements of every expense on the day of the expense.

“If you maintain a log on a weekly basis that accounts for use during the week, the log is considered a timely kept record.”

If you give your employer, client, or customer an expense account statement, it can also be considered a timely kept record.

This is true if you copy it from your account book, diary, log, statement of expense, trip sheets, or similar record.

Proving business purpose

You must generally provide a written statement of the business purpose of an expense.

However, the degree of proof varies according to the circumstances in each case.

If the business purpose of an expense is clear from the surrounding circumstances, then you do not need to give a written explanation.

What if you have incomplete records?

If you do not have complete records to prove an element of an expense, then you must prove the element with:

• Your own written or oral statement containing specific information about the element, and

• Other supporting evidence that is sufficient to establish the element.

If the element is the description of a gift, or the cost, time, place, or date of an expense, the supporting evidence must be either direct evidence or documentary evidence.

Direct evidence can be written statements, or the oral testimony of your guests or other witnesses setting forth detailed information about the element.

Documentary evidence can be receipts, paid bills, or similar evidence.

If the element is either the business relationship of your guests or the business purpose of the amount spent, the supporting evidence can be circumstantial, rather than direct.

For example, the nature of your work, such as making deliveries, provides circumstantial evidence of the use of your car for business purposes.

Invoices of deliveries establish when you used the car for business.

Sampling

Another record keeping strategy that many are unaware of but could prove helpful is the use of sampling.

You can keep an adequate record for parts of a tax year and use that record to prove the amount of business or investment use for the entire year.

You must demonstrate by other evidence that the periods for which an adequate record is kept are representative of the use throughout the tax year.

Separating expenses

Each separate payment is generally considered a separate expense.

For example, if you entertain a customer or client at dinner and then go to a show on broadway, the dinner expense and the cost of the broadway tickets are two separate expenses.

You must record them separately in your records.

Combining items

You can make one daily entry in your record for reasonable categories of expenses.

Examples are taxi fares, telephone calls, or other incidental travel costs.

Meals should be in a separate category.

You can include tips for meal-related services with the costs of the meals.

Expenses of a similar nature occurring during the course of a single event are considered a single expense.

Car expenses

You can account for several uses of your car that can be considered part of a single use, such as a round trip or uninterrupted business use, with a single record.

Minimal personal use, such as a stop for lunch on the way between two business stops, is not an interruption of business use.

Allocating total cost of travel or entertainment

If you can prove the total cost of travel or entertainment but you cannot prove how much it cost for each person who participated in the event, you may have to allocate the total cost among you and your guests on a pro-rata basis.

To do so, you must establish the number of persons who participated in the event.

If your return is examined, you may have to provide additional information to the IRS.

This information could be needed to clarify or to establish the accuracy or reliability of information contained in your records, statements, testimony, or documentary evidence before a deduction is allowed.

How long should you keep records and receipts?

You must keep records as long as they may be needed for the administration of any provision of the Internal Revenue Code.

Generally, this means you must keep records that support your deduction (or an item of income) for 3 years from the date you file your income tax return on which the deduction is claimed.

A return filed early is considered filed on the due date.

There are certain nuances and rules for independent contractors and clients, fee-basis officials, certain performing artists, Armed Forces reservists, and certain disabled employees–so if you fall in one or more of those categories be sure to consult your tax professional for more up to date information.

You report your gift expenses and transportation expenses, other than car expenses, on line 27a, and you report your car expenses on line 9 of schedule C if you file as a sole proprietor.

You would also complete Part IV of the form unless you have to file Form 4562 for depreciation or amortization.

Employee Business Expenses no longer deductible

If you are an employee and your employer included reimbursements in box 1 of your Form W-2 and you meet all three rules for accountable plans, ask your employer for a corrected Form W-2.

The three simple guidelines an Accountable Plan must follow to be considered valid are:

1) all expenses to be reimbursed through the plan must have a business connection,

2) expenses must be “timely substantiated,” and

3) any excess advances provided to the employee must be “timely repaid.”

“Employee” expenses for business use of the home are no longer allowed.

If you are an employee, you can no longer claim any miscellaneous itemized deductions on Schedule A, including expenses for using your home as an employee.

Miscellaneous itemized deductions are those deductions that would have been subject to the 2% of adjusted gross income limitation had they not been eliminated for most with the 2017 Tax and Jobs Act.

You cannot claim a deduction for mortgage insurance premiums for expenses paid or accrued after 2017 if you have a home office.

Home Office Deduction

You can use two methods to claim the home office deduction:

When figuring the amount you can deduct for the business use of your home, you will use either your actual expenses or a simplified method.

• Square Foot Approach, or

• Simplified method for business use of home deduction.

Actual Expenses (Square Foot Approach)

You simply divide your business usage area by the square foot area of your house to come up with the business percentage.

All expenses associated with your home office and home would be multiplied by the percentage in order to come up with your business deduction.

To qualify to deduct expenses for business use of your home, you must use part of your home:

• Exclusively and regularly as your principal place of business (defined later),
• Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,
• In the case of a separate structure which is not attached to your home, in connection with your trade or business,
• On a regular basis for certain storage use (see Storage of inventory or product samples, later),
• For rental use, or
• As a daycare facility (see Daycare Facility, later).

“You can deduct expenses for a separate free-standing structure, such as a studio, workshop, garage, or barn, if you use it exclusively and regularly for your business.

The structure does not have to be your principal place of business or a place where you meet patients, clients, or customers.”

After you determine that you meet the tests under Qualifying for a Deduction, you can begin to figure how much you can deduct.

Simplified Method

The IRS provides a simplified method to figure your expenses for business use of your home.

Electing to use the simplified method.

The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses.

“You choose whether or not to figure your deduction using the simplified method each tax year.”

With the simplified method you receive a standard deduction of $5 per square foot, up to 300 square feet (the deduction can’t exceed $1,500).

$5 multiplied by 300 square feet equals $1,500 is your maximum deduction!

Qualified Business Income

Although not a direct expense QBI or qualified business income—may help you lower your taxes and can be quite helpful to those who qualify.

QBI: If your business is a specified service, trade or business and operates as a sole proprietor, partnership, LLC member or S corporation stockholder—you could possibly qualify for the QBI deduction or pass-through deduction (if otherwise eligible) provided you have taxable income below certain amounts.

Conclusion

By landing on this page you have learned about business expenses in great detail.

For those individuals or companies that are new to business or existing companies or individuals who want to maximize their deductions—you can now do so by planning effectively.

The most common fully deductible business expenses in alphabetical order include the following:

• Accounting fees

• Advertising

• Bank charges

• Commissions and sales expenses

• Consultation expenses

• Continuing professional education expenses

• Contract labor costs

• Credit and collection fees

• Delivery charges

• Dues and subscriptions

• Employee benefit programs

• Equipment rentals

• Factory expenses

• Insurance

• Interest paid

• Internet subscriptions, domain names, and hosting

• Laundry

• Legal fees

• Licenses

• Maintenance and repairs

• Office expenses and supplies

• Pension and profit-sharing plans

• Postage

• Printing and copying expenses

• Professional development and training fees

• Professional fees

• Promotion

• Rent/Lease payments

• Salaries, wages, and other compensation

• Security

• Small tools and equipment

• Software

• Supplies

• Telephone

• Trade discounts

• Travel

• Utilities

• Web Services

By utilizing the above expenses to offset against your income for the year you can use the above expenses to strategically increase or decrease your tax position as it relates to your payment of business taxes.  Keep in mind most of the expenses covered in this discussion apply to sole proprietors, LLC’s, LLP’s, partnerships, S corporations and C corporations.

Whether you are a sole proprietor, LLC, partnership or corporation—you can manage your tax position so that you can achieve the goals that you desire as far as your business and personal growth are concerned.

If your goal is to get in position to use credit in your future—you may want to maximize your income and minimize your expenses to get the loan that you need at an appropriate rate and terms.

By doing so you can possibly put yourself in stronger position in the eyes of financial institutions when you apply for credit or a particular type of loan that will look at your “businesses financials” and/or “personal financials” to determine if you or your company meet the lending criteria that they require.

If you anticipate no need to use credit in the short or intermediate time period you may want to maximize your expenses and lower your tax payments.

If your goals fall in the middle you can plan accordingly as well.

All the best toward minimizing or maximizing your expenses and improving your circumstances as we enter 2020 and beyond.

Success lives in you—now is the time that you make your dreams come true…

Return to Top

Return from Business Expenses & Wealth Building to Taxes & Wealth Building

Return from Business Expenses & Wealth Building to Taxes & Personal Finance

Return from Business Expenses & Wealth Building to Tax Projections & Wealth Building

Return from Business Expenses & Wealth Building to Mastering Your Credit

Return from Business Expenses & Wealth Building to The “3 Step Structured Approach” to Managing Your Finances

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Learn how you can build wealth and use the tax code to assist in your efforts…

The proper preparation and filing of your tax return is an important step in the upward movement of your net worth and is a key aspect of your wealth building efforts.  Now is the time that you rise up and achieve more in your life and knowing a few tax tips can possibly lead to you flying higher.

With another successful tax season in the books TheWealthIncreaser.com thought that helping prepare you and others who desire more success in the coming tax seasons was in order.  In this discussion TheWealthIncreaser.com will discuss how “preparing in advance” is a key step in filing your taxes and building wealth.

It is important that you realize that record keeping is an important responsibility whether you decide to file your own tax return or you hire a professional to do them for you.

If your taxes are not complex and you are computer savvy you may be able to file your taxes yourself.

If you make under $66,000 the IRS offers free filing if you qualify.

Other online services also offer free tax preparation as well.  If you choose a free provider be sure to read the fine print and know all of your obligations going in—not after the return is prepared and filed.

You also have the option of purchasing tax software and doing your return yourself.  Live chats and explanations are normally included in the software purchase.

The average cost to file a tax return is over $200 in most areas of the United States.  In many cases it can be money well spent.

If you dread doing your taxes yourself consider a professional who knows how to complete the type of return that you will file.  If you have schedule A entries, capital gains or losses, investment properties, business income and the like you may want to choose a highly competent tax professional as there are nuances and certain understanding that is possessed by those who do taxes on a regular basis and take the profession seriously.

Whether you decide to complete and file yourself or you decide to hire a pro, the following paragraphs will provide you with basic insight on how you can build wealth more efficiently by effectively using the tax code.

Maintain Good Financial Records Relating to Deductions

• Document non-cash contributions and donations
• Assign a value to each item you donate
• Document all of your medical expenses and mileage to and from your medical provider(s)
• Save all mail and correspondence that is marked “Important Tax Information”
• Organize all of your financial data
• Start an “IRA” if you or your loved one qualifies at the earliest time possible and keep a record of your annual contributions

It is important that you avoid common mistakes that many make whether they prepare their return themselves or use tax professionals.

You want to definitely maintain good mileage records as the mileage rate for 2018 is 54.5 cents per mile.

Don’t overlook any of your itemized deductions or potential itemized deductions as with the new law many have been eliminated–however you may still need to run the numbers to see if your federal and state refund amount or amount owed will be more or less beneficial to you–depending on the approach (itemized or standard deduction) that you take.

Be sure you know all entries that you can legally enter on schedule 1   and schedule A now–and in future tax years.

If you are a business owner and travel don’t overlook travel expenses and keep good records.  You also want to be aware of a potential home office deduction that you may be entitled to take.  Also document and keep records of all business related purchases whether they be office supplies or major assets such as machinery, computers, automobiles and the like.

Also, if you are not doing so contribute to your 401k or other retirement account as well as HSA, FSA and other tax advantaged accounts.

If you qualify consider a ROTH or Traditional IRA (income qualification and contribution limits apply).  Of course, whether and how much you contribute will depend on your current financial condition, therefore it is imperative that you know how to manage your finances at an optimal level.

Student Loan Interest

You can deduct up to $2,500 in student loan interest annually on your tax return if you qualify.  However if you are single and earn over $80,000, you would not be eligible for the deduction–which seems quite unfair–you borrow to pay your way through college and when you start earning decent money to pay the loan back you are penalized and not allowed a deduction on your tax return.

Outside of earning less (usually a bad option) or getting married (your income limit increases some) your options to qualify may be limited!  Are those real options for you–probably not and a change in the tax code would be more appropriate–however by knowing the income limitation at this time–you can at least plan proactively or plan to avoid student loans altogether if you find yourself in a precarious position at this time.

If you are currently seeking higher education or you have dependents who are now seeking higher education you may be eligible for credits and deductions that could help lower your taxes.

You can also save for higher education in a tax efficient manner by utilizing a 529 plan, a prepaid tuition plan or other tax advantaged educational savings plans–including IRAs.

Itemized Deductions

Medical deduction limit in 2018 is 7.5% of your AGI and 10% of your AGI in the 2019 tax year.

You can no longer deduct moving expenses unless you are in the military.

Casualty losses are non-deductible unless in a federally declared area.

Unreimbursed employee expenses, tax preparation fees and other 2% miscellaneous deductions are no longer allowed on schedule A.

If you need to make changes on your tax return remember the 3 year rule (three years from the filing deadline–including extensions) form 1040X allows you to amend your return.

If you have not filed your return in the past three years and you are due a refund–file now as after three years you will no longer be eligible for the refund.

Always consider your overall “effective” tax rate–that means looking at your taxes from a federal tax point of view as well as state and city (local)—where applicable.

 Investments

If you have investments be aware of the type you choose and the present and future tax consequences.  If you have children or grandchildren consider setting up a 529 plan, an IRA or other tax favored savings plan for their educational and/or retirement future.

It is important that you are aware of how your “investment choices” affect your future and your taxes–and it is you who must gain the “right knowledge” that you need–to succeed.

You can set up an IRA for your child or your grandchild if they have income and by saving consistently and gaining an average rate of return you can set your heirs up for a prosperous future in a relatively painless way.  However, it is important that you plan now and set up systems that allow you to do that and more.

In addition, you must insure that you are on track to meet or exceed the goals that you desire and you must also operate in a sound manner in all of the financial affairs in your life.

Conclusion

With many changes in the new tax law of 2017 many may feel uncomfortable tackling their own taxes.

However, in many cases your taxes may not be complicated and tax software can lead you toward an accurate and cost saving preparation of your taxes.

Under the Tax Cuts & Jobs Act the standard deduction has basically doubled for most taxpayers and personal exemptions are gone except in limited cases (now called a tax credit).

The tax rates were reduced for most taxpayers, the child tax credit doubled from $1,000 to $2,000 for children under 17.

If you own a business and had income you may qualify for the Qualified Business Income deduction.

In addition, you want to form the right type of business (sole proprietor, corporation, LLC, partnership etc.), pay your estimated taxes (January 15th–April 15th–June 15th–September 15th) in a timely and accurate manner, record your revenue and expenses accurately and stay in good standing with the IRS in a proactive way.

Be sure to keep a separate bank account for your business, separate credit card(s) for your business and avoid commingling your business and personal records including bank deposits and withdrawals.

Also, allocate your income and expenses in the appropriate categories so that you can see where your income is coming from—and how much you are paying out in expenses–and where!

Keep a mileage log in your car (vehicle) or use an automated system and log all business related miles as well as repair and maintenance expenses such  as gas, oil changes, parking/tolls and other expenses in case you decide to use actual expenses instead of mileage.

A monthly profit and loss statement will help your tax professional at tax time (or yourself if you plan on doing your own taxes) and also help in planning your business now and in the future as you can use the data for employee staffing, inventory, maintenance and other areas of concern that are particular to your type of business.

In short, by previewing your tax position now–you can plan better for your future.  It is the desire of TheWealthincreaser.com that this page has given you some added insight on how you can achieve more in your future and lighten your tax burden as well.

Now is the time that you use T P T & W B to achieve results that you can see!

All the best toward your tax saving and wealth building success…

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Learn what you can do to lessen your tax bite and achieve more in your future…

As December rolls in and 2018 comes to an end it is important that you review your tax situation at this time and determine if there are some year end and year beginning moves that you can make to put yourself in a better position for short and long term success.

In this discussion TheWealthIncreaser.com will look at a number of moves that you can make to improve your tax position so that you can reach your short, intermediate and long-term goals so that you can enjoy life more and lessen your tax bite.

It is important that you are aware of new tax law changes that occurred in 2017 under the jobs and tax cut act and more particularly the ones that might affect you and your family.

You want to know your 2018 tax projections for your taxes that you will do in 2019 for the 2018 tax year.

However if you have not done so by now—you can at least prepare properly and put yourself in position to make other tax moves and possibly adjust your w-4 withholding in 2019 and not have any tax surprises on your 2019 and future year taxes.

Amend Your 2017 Return if You are Eligible Based on Tax Law Extensions Passed Earlier this Year

It is important that you are aware of tax law changes that occurred in February of 2018 that extended more than 30 tax breaks, including those for businesses and even a few for individuals and families.

The MIP (mortgage insurance premiums), deduction for tuition and fees of up to $4,000 and energy efficient home improvements went back on the books for 2017 returns and 2018 returns are still up in the air–as far as extensions are concerned.

To claim the deductions for 2017 if you are eligible you would have to file an amended return (form 1040X).

If after amending your return your AGI is reduced—that reduction could affect your state return and you could possibly amend that return as well and get additional income.

Project Your 2018 or Future Year(s) Tax Bill

You may be due a larger refund or you may owe more in taxes.  However, you won’t know if you don’t get out in front and project your 2018 tax bill as best you (or your accountant) can.

You can then determine if you need to adjust your w-4 in 2018 and better direct your refund or balance due—depending on your goals.

With new withholding tables now on the books you can now go to irs.gov and utilize the w–4 calculator to better plan your taxes after you have projected your income.

You can then go to your employer and adjust your withholding if you see a benefit.

Determine Now the Likelihood that You will Itemize or Take the Standard Deduction

With the standard deduction being nearly doubled for some taxpayers, it is expected that the number of those who itemize will decline.

Will you be in that number that utilize the standard deduction or will you itemize–or do you even care?

If you itemize you have the ability to deduct more items—but will the cash total be higher than the amount of the adjusted standard deduction based on your filing status that were put into effect with the job and tax act of 2017?

Be aware of the tax ramifications and don’t forget to consider the implications of your state taxes depending on the choice that you will make (itemize or standard deduction) as a lower itemized total at the federal level could still be of benefit–if it will help you more at the state level (your overall tax refund would be more or your overall tax payment would be less).

Find Ways to Earn Additional Income

Whether you get a second job, invest in the market both inside and outside of your retirement accounts, form a company of your own (Sole Proprietorship, C-corp., S-corp., Partnership, LLC or any other legal form) that you create based on “your” desire, ambition and passion—it is important that you use your imagination to find new ways of generating income.

Be aware of the tax ramifications and again don’t forget to consider the implications of your state taxes depending on the choice that you will make (investment choice(s) and ownership structure) and also look at non-tax issues in detail and do a thorough analysis as that analysis may sway your decision in the opposite direction of where you planned to go.

Questions You Need to Ask Yourself if You Are Considering Opening a Business of Your Own Include the Following–Among Others…

Can I really make money and pay all of my monthly expenses—including my taxes?

Can I sell my product or service for more than it costs to bring to market?

Can I serve my intended audience and/or customers or will I be overwhelmed and unable to meet the needs of my customers or potential customers in a timely manner?

Will I create a business plan and put together a team that can handle my legal, tax, banking, regulatory, technological and accounting concerns?

Do I believe in the product or service that I will be promoting and selling?

These are some of the questions that you must ask and answer upfront as the tax code generally favors those who take risks.

Even so, you want to take a calculated risk where you know the probability of success is in your favor when endeavoring in a new venture.

Create an HSA Account

A Health Savings Account provides you the opportunity to save for your future health care costs in a tax efficient manner (you can deduct your annual contributions on your tax return to reduce your taxes and your earnings grow tax free–and withdrawals are tax free if used for medical related purposes).

The good news is that there are “no income limits” and you can “invest in a variety of financial products” such as mutual funds, stocks, bonds etcetera to help guard against rising health care costs that you may incur in your future.

There are also “deductible qualifiers” if your employer offers health insurance.  However, you can also open and set up an HSA account at many financial institutions yourself if your employer does not offer a plan or you are self employed or you don’t otherwise qualify for medical coverage.

It is also important that you know what to consider if you decide to set up an HSA account and a recent bankrate.com article spells out what you need to consider in clear terms.

If your employer offers an HSA and you elect to participate you would not be taxed on the contributed amount or pay FICA on the contributed amount.  Even though you received the tax benefit through your employer you would still have to file form 8889 on your  personal tax return.

If you qualify for a HSA, you can deduct the contributions on your tax return even if you don’t itemize by using form 8889.  Keep in mind you will face serious penalties (20% in the 2018 tax year) if you withdraw funds for non-medical related expenses.

Once you reach age 70 ½ there are no mandatory withdrawals–therefore you could potentially continue to let your account grow in a tax-free manner if you had no need for the funds! 

Be sure to seriously consider the option now–and not look back in regret years down the road when the costs have skyrocketed and your financial options to cover your health care expenses are limited or non-existent.  If you remain healthy late into your 80’s or 90’s you will have tremendous growth in the account that you can use outside of medical related expenses after you turn age 65 (taxes would be due on withdrawals but there would be no penalty).

If used for medical related expenses after age 65 there would be no taxes due at all!

HSA’s have annual contribution limits (currently $6,900 for 2018 and $7,000 for 2019 for families–with a $1,000 catch-up provision for those age 55 and over).  Withdrawals are “penalty free” for all purposes after you reach age 65!  However, if you use the funds for other non-medical purposes taxes would be due at your ordinary income tax rate in effect at the time of  your withdrawal.

If your employer offers an HSA your contributions can allow you to avoid payment of FICA taxes, thus providing you an additional 7.65% additional savings on top of the amount that you contribute annually–all while helping you reduce your taxable income.

If you earn $100,000 a year and contribute $7,000 you would pay taxes (federal, state and FICA) on $93,000–the $7,000 contribution would be excluded from federal, state and FICA (social security) taxes!  In addition, your income minus your contribution (up to the limit for your filing status) can be used for calculating whether you are eligible for a subsidy under the Affordable Care Act.

Open an IRA Account

Did you know that an IRA (Individual Retirement Account) provides you another tax-efficient way to manage your retirement income?

It is important that you realize that there are basically two types of IRA’s:

1)    Traditional

2)    ROTH

A Traditional IRA allows you the ability to contribute up to an annual maximum and then you can deduct those contributions on your future year tax return—even contributions up to the filing deadline if the amount does not exceed the annual maximum (currently $5,500 or $6,500 if age 50 or older).

The result of deducting your contribution would normally be owing less tax or getting a larger refund.  Once you retired you would pay taxes at your current tax rate on the withdrawals.

Mandatory withdrawals are also required once you reach age 70 1/2!

A ROTH IRA allows you to make non-deductible contributions that have already been taxed—therefore your withdrawals would be tax free at retirement.

Roth IRAs do not require withdrawals until after the death of the owner.

With the Traditional IRA and the ROTH IRA there are income limits and other qualifier’s, however both are worth real consideration if you currently have the discretionary income at this time—or you want to learn more so that you can plan your future in a more tax efficient way.

Conclusion

Your tax moves at this time or at other times during the year can prove to be beneficial for you and your family.

All tax situations are unique, however there are moves that you can make to put yourself and your family in a better position tax-wise.  In this discussion TheWealthIncreaser.com has only scratched the surface in the coverage of tax moves that you can possibly make.

Even so, those that apply to you or that you may be considering can get you moving forward in a real way!

By taking several hours out of your busy life and organizing your tax and other financial data–and reviewing and seeing clearly where you now are at you can better position yourself and your family for future success.

Now is the time to outwork and outthink what is working against you and now is the time to turn the tide so that you can make your dreams come true.

By taking the time to think about your taxes and do something about them in a sincere way–today–you are on a path toward real success–if you give it your best!

And always remember the tax code normally favor those who take risks!

The tax code may not be as favorable for some due to their current family size, marital status, whether they were negatively affected by the tax law changes (i.e. claimed unreimbursed employee expenses—including mileage on their automobile etc.), their income level, the number, types and amount of deductions and credits available, whether they have a mortgage or rent and other factors.

All the best toward your tax moves and future success…

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Learn what you need to know as you approach your retirement years and the taxation of your income that can prevent you from making the wrong moves…

Did you know that there are a number of concerns that you should have as you approach retirement age?

Hopefully you have managed your credit and finances effectively prior to your retirement years and you are in position now (if you are currently retired) to take advantage in ways that will better serve your retirement years.

Whether you are or are not retired be sure to focus in on what can help you achieve more at this time and throughout your lifetime.  By doing so you will put yourself far ahead of those who enter retirement without doing the preparation that is necessary that could guide them toward a more enjoyable retirement journey.

In this discussion TheWealthIncreaser.com will show you ways that you can make your retirement years more enjoyable and put you on path to making the retirement that you desire have less roadblocks for you and your loved ones.

First and foremost you must realize that you want to address your retirement related financial activity in a manner where you will have no surprises as it relates to your taxes as many who retire often have no clue how their tax position will impact their retirement years.

You must be aware of how the taxation of your IRA’s and 401k’s etcetera, social security benefits, w-2 income (if you work part-time during your retirement years), investment income, self-employed income or other pass through income and earned pension income–will all affect your tax position.

If you don’t withhold enough income or pay estimated taxes at the right amount with your IRA’s and 401k’s etcetera, social security benefits, w-2 income (if you work part-time during your retirement years), investment income, self-employed income or other pass through income and earned pension income when you receive those income streams you could be in for an unpleasant tax surprise if you have not planned ahead and gotten at least a cursory overview of how taxes will affect your income streams during your retirement years.

• IRA’s, 401k’s and other retirement plans

IRA’s, 401k’s and other retirement plans may require that you begin taking distributions at age 70 1/2 even if you have no need for the funds.  You must plan for the tax consequences of these withdrawals at the federal and state level (if applicable) and know where you will fall based on your unique tax position.

• Social Security benefits

Your social security benefits may or may not be taxable depending on your unique tax position.  However, there is the potential that your taxes could be 85% on your social security income.  You can elect to receive your social security at various times after you turn age 62 and you must determine if taking early payments or waiting is the best move for you and your family from a tax point of view based on your overall finances and future plans.

• W-2 income

If you work part-time during your retirement years you may find that it will affect the taxation of your IRA’s and other retirement accounts, social security income, investment income and your pension income.

• Investment Income

Your investment income will also be taxed during your retirement years and you must know the rate that you will pay during your (and your spouse if married) retirement years based on your annual income and filing status.  There are various thresholds and depending where you fall in those thresholds you could pay 0% up to 20% depending on the type of investment, your income and your filing status.

• Self-employed income and/or other pass through income

If you decide to work for yourself or you receive pass through income from a partnership or S corporation there will be tax consequences and they will vary based on your income from self-employment, other pass through income and all of your other sources of income and your filing status.

• Earned Pension Income

If you have worked for an employer and they had a pension plan you would receive a 1099R and you would be taxed on that pension income at the Federal level in almost all cases.  The question then becomes did you have enough withholding or did you pay enough in estimated taxes to offset the taxes that you would owe.

At the state level you would also be taxed but the rate varies from state to state and many states offer you the opportunity to exclude certain retirement and other income from your taxes if you meet the states requirement.  In a few states there are no state income taxes at all, and if you live in one of those states that is even better.

Conclusion

It is imperative that you look at the tax consequences of the various income that you will receive during your retirement years.  It might be helpful to get professional projections of the taxes that you may owe under various situations from your CPA or other financial professional(s) so that you can know what to expect during your retirement years.

Did you seriously consider the tax ramifications of receiving income from IRA’s and 401k’s etcetera, social security benefits, w-2 income (if you work part-time during your retirement years), investment income, self-employed income or other pass through income and earned pension income?

It is important to look at this information in isolation and in combination as you plan out your retirement year’s income streams. 

Did you analyze and determine that you will have the income that you need to live at the level that you desire after your retirement years after the payment of taxes from your various sources of income?

These—and more are the types of questions that you must answer prior to retirement so that you don’t enter your retirement years with an unrealistic expectation of how you can enjoy life.

You must fervently pursue your retirement goals, effectively utilize this page and site, make yourself available to learn more about retirement and taxes from other sources and make the right financial moves in a proactive manner throughout your life.

By doing so you will put yourself in position where you won’t have to FEAR your financial or retirement future—whether it be the tax implication or any other concern.

All the best as you work toward your retirement success…

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Understanding the New Tax Law & Wealth Building

Learn how you can use the recent United States tax cuts and job act law changes to maximize your 2018 and future tax filings…

With the new tax bill out and anxiety in the air among many taxpayers the creator of TheWealthIncreaser.com had no choice but to review the new tax bill to help alleviate the fears of many and help those who desire greater success build wealth more efficiently in the coming years.

Even the creator of TheWealthIncreaser.com found navigating the bill of several hundred pages to be boring and cumbersome—however key aspects that could possibly benefit you and others were focused on and analyzed.

In the following paragraphs highlights of the bill will be analyzed and presented in a manner that could possibly help you build wealth in 2018 and beyond in a more efficient manner.

Even though the new tax law will reduce the taxes for millions, that does not mean that you will be included among the millions as personal taxes are unique and vary from person to person and family to family.

The good and bad news is that tax rates were lowered across the board but are scheduled to expire in 2025 unless congress decides to make them permanent.

To keep this discussion logical and concise the order of presentation will try to keep the format of the 1040 long format as the blueprint or guideline for discussion.

Personal Exemptions Are Now Gone

You can no longer claim your children or other dependents and get a personal exemption for them—or yourself and your spouse if married.

Those exemptions that you have become accustomed to getting have been replaced with higher standard deductions, lower tax rates, increased child tax credits, and a dependency credit for other dependents of $500.

Whether the new tax changes will be of more benefit to you depends on the age of your dependents, your income level, your family size, your above the line (page 1 of form 1040) and below the line deductions (page 2 of form 1040) ,  your tax withholdings and many other factors that may be unique to you and your family.

Standard Deductions Are Increased Substantially

Standard Deductions are now $12,000 for single up from $6,350, $18,000 for head of household up from $9,350 and $24,000 for  married filing jointly up from $12,700.

Be aware that claiming the higher federal standard deduction may not be a wise move in some cases.   It depends on a number of factors, including the amount of your itemized deductions and your state income tax filing standard deduction (if applicable)–among other factors.

Child Tax Credit Increases

The child tax credit increased from $1,000 to $2,000 so if you have a child under age 17 you would more than likely be eligible for the credit.  The income limits for phaseouts also increased as you can now earn up to $400,000 (AGI–line 37 of form 1040) and still take the credit (up from $110,000 in 2017).  In addition, $1,400 of the credit is refundable meaning even if you owe no taxes you are entitled to the refund.

To claim the credit your child dependent must live with you at least half a year and you must provide over half the cost of support for the child in order for you to claim the child tax credit—similar to when exemptions were claimed in past years.

The EIC or Earned Income Credit remains as well—meaning those with modest income and a family of 4 with kids under 17 could see a possible increase in the amount of the refund they will receive on their 2018 tax filing.

Those over age 17 whom you provide support such as college students, parents and others will provide you the opportunity to claim a $500 tax credit in the filing of your taxes if they meet the guidelines for dependents under the tax law.

The Marriage Penalty is Finally Eliminated or at Least Made Less Relevant for Most

Under the new law the tax bracket for married couples are almost double that of a single person in most instances.  If you have been avoiding matrimony due to the tax code or financial concerns—you can now breathe easier.

If you make $500,000 or more (which is a good problem to have) the marriage penalty again starts to rear its ugly head—If you make over $500,000 and plan on getting married soon—consult your tax professional before making the hitch as there may be ways that you can reduce the tax bite.

Alimony is also affected by the new tax law as you can no longer deduct alimony if you pay alimony and you don’t have to include alimony as income if you receive alimony (must be after December 31, 2018 otherwise old rules apply).

Education Deductions Remain in Place

Although TheWealthIncreaser.com did not initially take the news of eliminating the student loan interest deduction seriously—due in large part to the number of student loans outstanding and the hardship that the payments continue to cause for many—there were serious efforts to eliminate this helpful above the line deduction.

Fortunately, those in congress used their better judgment and the deduction for up to $2,500 worth of interest on student loans remain!

Tuition waivers and discounts by graduate students also remain tax-free.

The AOTC or American Opportunity Tax Credit worth up to $2,500 per undergraduate student (MAGI of $80,000 single and $160,000 married) survived the new tax bill.

The Lifelong Learning Credit also survived the new tax bill and it is worth up to $2,000, or 20 percent of the first $10,000 spent in a year (MAGI of $56,000 single and $112,000 married).

The $2,000 limit is per household with the Lifelong Learning Credit but the American Opportunity Tax Credit applies per student and could be more valuable to you if you have several kids in college.  Your overall credit would be higher, thus your tax bill would be lower or your tax refund would be higher!

529 college savings plans are now eligible to be used for k through 12 grades at private or parochial schools—in addition to colleges and universities.

Coverdell accounts remain although it appears they will be phased out and the cap remains at $2,000 annually, however you can now roll them over into a 529 plan tax free.

Always keep in mind the fact that many states also sweeten the pot—as you can deduct 529 contributions in many states.  And with the limits on property taxes (discussed later) that could be significant for those affected by the limitations.

ABLE accounts now are available for setup for a disabled beneficiary and can be legally rolled over from a 529 plan.  The benefit of doing so includes the tax-free use of funds for a variety of purposes—not just college, private or parochial school.

Assets up to $100,000 don’t count toward the $2,000 limit for SSI benefits.  Contribution limits are capped at $15,000 in 2018 and your rollover from the 529 plan would count toward that cap if you were to roll over a 529 plan into an ABLE account.

Educator expenses continue to be deductible (up to $250) by teachers who come “out of pocket” to purchase classroom material and supplies.

Most Retirement Plans Are Not Affected by the New Law

With the new tax law a change in your withhholdings may occur.  If you are in a strong financial position consider using the additional amount that you may see on your check to save more for retirement to help lower your taxable income and build wealth more efficiently.

IRA to a ROTH  conversions also see limits.  In the past you could undo the conversion and avoid the tax bite by re-characterizing the conversion by October 15 of the following year.   Now once you convert, it is permanent as far as the tax bite is concerned.

However, if you feel that a conversion is more beneficial for you and your family and you have the funds to handle the tax bite that could still be an effective strategy.  In addition, you could convert yearly a certain amount to lessen the tax sting.

Real Estate Takes a Hit with the New Law

Many residents of high cost cities where housing costs are high are crying foul over a number of provisions in the new tax.  The new law limits how much mortgage interest you can deduct.  The limit is now $750,000 (primary and vacation homes) down from 1 million.

Home Equity debt (home equity loan and home equity line of credit) interest is no longer deductible unless the money from the loan is used to improve your home.

Property tax deductions on your schedule A are capped!  The new law limits the amount that you can deduct in state income and property taxes at $10,000.

Like Kind Exchanges under Section 1031 of the Internal Revenue Code are now limited.  Like-kind exchanges of Real Property survived the new tax bill, however like-kind exchanges no longer apply to any other property–including personal property associated with real property.

Capital Gain Tax Rates are Preserved

Capital gain rates remain the same but the calculation formula now differs from using the tax brackets as in the past to using income thresholds.

If your income is less than $38,600 single or $77,200 joint you are at the 0% rate based on your income threshold.

If your income is between $38,600 to $425,800 single or $77,200  to $479,000 joint you are at the 15% rate based on your income threshold.

If you are in the ideal position of having even higher income your capital gains rate would be 20%.

The above capital gain tax rates apply to long-term capital gains (assets held over a year) and if you were to sell capital assets held less than one year you would pay tax at your ordinary income rate.

The “so called” kiddie tax that you would normally pay also has a change in the way that it is calculated.

Charitable Giving May Take a Hit Due to the Higher Standard Deduction Amounts

Charitable organizations were not pleased by the changes in the new tax law.  Even though charitable deductions are still deductible on the 1040 long form the likelihood of many using the long form has decreased due to the elimination of personal exemptions and the increase in the standard deduction.

Although many give generously out of the goodness of their heart, they still enjoyed the knowledge and annual application of a tax break.    That tax break that many have been accustomed to utilizing for years will be eliminated for some taxpayers due to the increased standard deduction which effectively wipes away their ability to itemize and claim their charitable giving.

Self-Employed & Those Who Have Pass Through Income Will See a Benefit

If you are self-employed or make additional income from a side job you could possibly benefit significantly from the new tax bill.  Many self-employed businesses will be allowed to deduct 20% of “qualifying” income from their taxable income.  Even so, there may be limitations depending on your business type and income thresholds.

Qualifying income is what the new law states that it is and can be a gray area, so consult your tax professional.

Entertainment expenses will no longer be deductible,  however meals will continue to be deductible (50% limit).

Medical Deductions Ceiling Reduced From 10% to 7.5%

At least for 2017 and 2018 you can deduct medical expenses on schedule A and have a 7.5% floor as opposed to 10% under the old rules.  The lower the floor the better–as it allows you to deduct more medical expenses on your schedule A.

The ceiling returns to 10% in 2019 so don’t get too excited.  Hopefully congress will make the 7.5% floor permanent or at least extend the deadline as baby boomers will find a real benefit as they age and get out of the employment population and experience increased medical expenses.

2% Miscellaneous Deduction Including Unreimbursed Employee Expenses Take a Major Hit

Moving expenses have been eliminated unless you  are an “active” member of the U.S. armed forces.  Tax preparation, unreimbursed employee expenses (mileage, travel, home office expenses etc.), investment advisory fees and casualty losses other than those declared as a presidential disaster area have all been eliminated.

Look for shockwaves to run through certain industries where they have high “unreimbursed” expenses when they file their 2018 tax return as those who work in the affected industries will in some cases experience a substantial increase in their tax bill.

Corporations & Pass Through Entities Receive the Majority of Windfalls with New Tax Bill

With a major tax rate reduction to 21%–down from 35%–many corporations will receive a significant financial windfall due to the reduction in their tax rates as well as other perks offered in the new tax law.

Depreciation write offs and 179 deductions could possibly be of greater benefit to you if you purchase equipment that qualifies.  However, there are no guarantee that they will continue indefinitely.

However, for the time being many corporations will benefit–and you too may be able to benefit as well if you are proactive and not reactive in looking at ways that you can better utilize the new provisions that are now available to corporations and pass-through entities.

Self-employed businesses, partnerships, S-corporations and C-corporations will all see a reduction in their tax rates and it is up to you to look at ways that you can use this new rate change to your and your family’s advantage by now getting in the game or playing the game more successfully by taking beneficial steps toward your goals at this time.

 W-4 Table for Exemptions No Longer Apply

The withholding based on exemptions are a thing of the past and new tables for withholding are in the process of being created.  It is important that you have your tax professional provide you projections based on your current withhholdings and the new rates and filing status to help plan for your 2018 tax filing in a more intelligent manner.

AMT & Estate Tax Remain

The Alternative Minimum Tax remains.  However, the exemption has been increased to $500,000 for single taxpayers and $1 million for couples.  This change is expected to result in fewer taxpayers being hit by the AMT tax.

The new tax law doubles the estate tax exemption to $11.2 million for single filers and $22.4 million for joint filers. This change will only affect a small percentage of the American population  as effective estate planning and the increased exemption will leave a very small percentage of taxpayers paying this tax.

Affordable Care Act Individual Mandate Gone

In 2019 the tax (individual health mandate penalty tax) that was imposed for healthcare under the Affordable Care Act (often called, “Obamacare”) will be eliminated.

Conclusion

Be sure you understand the difference between a tax credit and a tax deduction as a credit is a dollar-for-dollar reduction and a deduction is based on your tax rate or a percentage of your taxable income.

Even though the new tax bill appears to overwhelmingly benefit corporations and those who are well established financially–you too can benefit!   Be aware that much of the new tax bill was unfunded and will pass the cost on to others in an “irresponsible” way.

However, you can benefit now and in the future if you take the right steps to make the law work better for you and your family.

The new law provides the opportunity for those who are astute and who are willing to pause and take effective steps to use the new law to their advantage by asking and answering the right questions the ability to achieve at a higher level in the coming years.

How can “I” more effectively benefit from the various changes in the law during the various phases in my life?

How can I manage my finances at this time so that I can put myself in position to take advantage of the various changes in the law?

What can I do to avoid changes in the law that will negatively affect me?

These (and more) are the types of questions that you must ask yourself—and answer appropriately if you are one who desire to take advantage of the new changes in the tax law as opposed to having the new changes in the tax law take advantage of you!

It is the desire of TheWealthIncreaser.com that this discussion has at least got you started on a path to doing what you need to do to make the new tax law work better for you.

All the best as you pursue tax success…

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