We all do it – we arrive at a deadline and wish we hadn’t procrastinated until the last minute – and your taxes are no different. Here are some year-round tips for minimizing your taxes. Learn Which Life Events Affect Taxes – and How While you probably aren’t thinking of it at the time, most major life events also come with tax changes. If you get married, divorced, have a child or adopt one, or experience other big changes this year, your taxes will be affected. Take the time to do some research beforehand. Knowing how your big life events will affect your taxes can help you start planning for those changes earlier, which only makes it easier for you and your family in the long run. Use the IRS Tax Withholding Estimator If you want to get way ahead of the curve, you can use the IRS’s free Tax Withholding Estimator tool. Having an accurate estimate of your withholding can do a few things. It can help you catch paycheck withholding errors quickly, and it can also ensure that you are not withholding too little tax, and thus creating a large tax bill for yourself next year. Reduce Gross Income Subject to Taxes Investopedia recently shared three moves to help reduce your taxable income and cut your taxes: Increase retirement contributions: one of the easiest ways to reduce taxable income is to increase your contributions to an employer-sponsored retirement plan or an individually held traditional IRA. Recently, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 states that for 2020 and beyond, the age restriction of 70 ½ years has been lifted, allowing seniors to contribute to IRA accounts indefinitely. Increase your contribution (or start contributing to Roth 401(k) or Roth 403(b): These employer-sponsored plan contributions are made through your paycheck, and while they don’t provide up-front tax benefits, they do allow for tax-free withdrawals later. Profit from your losses: On the individual level, losses on …
Tax Breaks for Tax Year 2021
2020 made us all look long and hard at the current state of our business industries and our personal finances. And with that came new laws and tax breaks that you may be eligible for. Charitable Contribution Tax Breaks The Taxpayer Certainty and Disaster Relief Act of 2020 allows you to take up to $300 in charitable contributions as a tax deduction for the tax years 2020 and 2021, without itemizing. This change was made to help charities that were struggling during the pandemic, which means your charitable giving benefits you while also helping spur more momentum for philanthropy in these difficult times. It’s also worth noting that if you are able to itemize your charitable giving, the CARES Act allows you to deduct 100% of your adjusted Gross Income (AGI) in 2021, rather than the standard 60% deduction rate. Credit for Health Insurance Costs If your medical expenses exceed 7.5% of your AGI, and you itemize your deductions, you can deduct them. This percentage was set to go up in 2021 to 10%, but the passing of the latest act made this lower rate permanent. Medical expenses could include things like medical office fees, dental expenses, copays, health insurance payments, eyeglasses and eye exams, and more. You can also get a refundable credit (known as the HCTC or health coverage tax credit) that equals 72.5% of premiums paid by certain taxpayers for coverage of the individual and any qualifying family members under qualified health insurance. Temporary – Full Deduction of Business Meals For 2021 and 2022, the Taxpayer Certainty and Disaster Relief Act has provided a 100% deduction for business meal food and beverage expenses, which is a big jump from previous years where the standard deduction was 50%. Keep in mind, this provision is still considered temporary. Saver’s Tax Credit If you are 18 or older and you make eligible contributions to your IRA or employer-sponsored retirement plan in tax year 2021, you can claim 10%, 20%, or 50% of your …
8 Common Tax Myths
Taxes are complicated and confusing for non-professionals. We wanted to take some time to dispel the most common tax myths for you. Myth: Tax Filing is Voluntary When it comes to tax filing, the word “voluntary” doesn’t mean you only have to file if you want to. It simply means you are responsible for calculating (or hiring someone to calculate) the correct amount of taxes you and/or your business owe. The only people not required by law to file their taxes are those individuals who make too little income to file. Myth: Cash Transactions Don’t Have to Be Included in Your Taxes There is a reason many cash transactions are dubbed “under the table.” No matter whether there is little to no paper trail for a transaction, income is income and should be reported on your taxes for the applicable year. Myth: You Can Claim Home Office Deductions As a Result of the Pandemic Many people found out the hard way when filing their 2020 taxes that just because you have a home office does not necessarily qualify you for home office deductions. From tax years 2018 to 2025, whether your employee requires it or you request it, employees who work from home (not independent contractors, freelancers, or small business owners) can no longer claim the home office deduction. While many government and tax programs were amended to make exceptions for pandemic-induced hardships, the home office deduction was not among those amendments. Myth: Filing for an Extension Will Put You at Higher Risk for an Audit Many people are told that if you file an extension on your taxes, you are more likely to be audited. Studies have shown, however, that there is no correlation between extension filing and audits conducted. You can rest easy knowing that your extension is just that – an extension. Myth: Your Fur Babies Can Be Claimed as Dependents Even if they eat at the kitchen table and have their own bedroom, you can’t claim your pets as dependents. But here are some great tax deductions …
Tax Pro Tips for the Self-Employed
Worried you aren’t taking advantage of all the tax benefits for self-employed individuals? Here are some tax pro tips for you! Home Office & Business-Related Deductions Home office deductions are some of the most talked-about and least understood pro tips for the self-employed. The quick description of the home office deduction is this: the cost of any workspace you use exclusively for your business – even if it’s a closet in your home or a bedroom-turned-craft-or-recording-studio – can be deducted as a home office expense. And this applies to more than just the desk or computer you use. Let’s say, for example, the space you are using occupies 12% of your home. That means you can deduct 12% of the following expenses: Business percentage of deductible mortgage interest Home depreciation Utilities Homeowners insurance Annual Repairs You can also deduct the following business expenses: phone, fax, and internet. Essentially, if you can show that an expense was incurred while you were doing business (charge for a long-distance phone call, the monthly or yearly costs of owning and operating your website), it is, more often than not, deductible. Bonus: did you know you can also deduct the cost of specialized magazines, journals, and books that are directly related to your business? Here’s some more information on that. Retirement Planning Several retirement plan contributions are also tax-deductible. Contributions to SEP-IRAs, SIMPLE IRAs, and solo 401(k)s are included in this. For the 2020 and 2021 tax years, you can contribute up to $19,500 (or $26,000, with the catch-up contribution, if you're 50 or older) in deferred salary. Mileage & Business Trip Expenses When you use your car for business, your mileage for those trips is tax-deductible. For 2021, the standard mileage rate is 56 cents per mile. Using the standard mileage rate is easiest. However, after the first year of you using that vehicle for business, you can use the …
7 Strategies for Financial Organization & Bookkeeping
Whether you are an established business owner or just starting on your entrepreneurial path, bookkeeping is a necessary part of your professional journey. Here are some strategies to help you with financial organization and bookkeeping. Set Up Automatic Billing and Payments Where You Can The money that comes in and out of your business needs help getting to its destination, but that doesn’t mean you have to do everything yourself. Take advantage of – or even set up systems for – automatic billing and payments. The crux here is making sure you still monitor these systems on a less frequent, but still consistent, basis. So long as you know which expenses are coming out of which business accounts and you know you have enough funds to cover them, automatic transactions relieve some of your stress and give you peace of mind knowing your essentials are taken care of. Break Up the Work Procrastination is the spice of life. It’s easy to tell yourself “I’ll do a little bit every day” when you are planning out your next week or month, but the execution doesn’t always work out that way. Set up a time in your day (preferably) or week to go through your transactions, enter the necessary data, and gather or organize documents. We all know how it feels to put something off for just a little too long and then be staring down the barrel of a mountain made of paperwork. Keep Your Files Organized While having one perfect system for keeping all finances and other business-related records would be ideal, the reality is much more nuanced. Your business may have a storefront that accepts a variety of payments like cash, checks, credit, and debit. And perhaps your online store runs through Paypal or Square. That’s a lot to keep track of. It’s important to develop a strategy early in the year to ensure that your records – whether paper, pdf, or something in between – are organized and easily referenced. Issues will arise, and it’s better to have things in order before …
Continue Reading about 7 Strategies for Financial Organization & Bookkeeping →
FAQs for Filing Taxes
No matter who you are or what you do, you’re going to have tax questions. Let’s take some time to go through the most frequently asked questions for filing taxes. Are Unemployment Benefits Taxable? In 2020, the unemployment rate reached 14.8%, which is the highest rate observed since data collection began in 1948. And many people had to include unemployment benefits in their 2020 (and possibly their 2021) tax returns. Typically, unemployment income is taxable. If you collected unemployment payments, you will receive Form 1099-G which will show your total payments. It is also worth noting that under the 2021 American Rescue Plan, the first $10,200 (or $20,400 if married filing jointly) of unemployment income was tax-free on your 2020 taxes. No word yet if those provisions will carry forward to the tax year 2021 returns. What Is Self-Employment Tax? Self-Employment tax is a separate tax from your typical personal returns. It is a self-employed person’s version of the FICA tax, in which the independent contractor is responsible for paying for Social Security and Medicare. This is important to remember because those who are self-employed are responsible for both the employer and employee portion of the tax. Do I Need a FEIN for my Home Business? If you run a business out of your home as a sole proprietor, you don’t need a Federal Employer Tax ID Number. You can use your personal Social Security number. Any other business setup, however, will require you to set up a FEIN. What Are the Tax Ramifications of Withdrawing Money from a Retirement Account? Before the age of 59 1/2, withdrawing money early from a retirement account comes with a 10% tax penalty. The money may also bump you up into a higher tax bracket. I Started My Own Business. Can I Take Advantage of Home Office Deductions? Home office deductions are a little tricky. If you started a business and are looking into home office deductions, you’ll want to make sure everything you purchased …