Skip to main content Skip to search

Archives for Tax Deductions

How Retirement Contributions Affect your Taxes

The COVID-19 pandemic underscored the need to save for retirement and highlighted how many individuals are living paycheck to paycheck. Many individuals were unable to continue their contributions, while others were forced to withdraw funds due to pandemic-related situations. The following are some of the ways in which retirement contributions will affect your taxes.

Filing Status

Navigating tax-deductible amounts can be highly complicated and depends on your filing status, age, and the type of retirement plan you have. The best option to ensure accuracy on your income tax return is to seek the services of a professional accountant or tax preparer that will be knowledgeable in the tax laws governing multiple types of retirement accounts.

Roth IRA

Contributions to a Roth IRA are not deductible. You’ll pay the full amount of taxes on any money placed in the account. The trade-off is that you won’t pay taxes on contributions or investment returns after you retire and begin drawing money from the account.

Traditional IRA

Contributions to a traditional IRA reduces taxable income in direct proportion to the amount contributed. There’s a limit of $6,000 that can be contributed to the retirement plan. However, if you’re aged 50 or over, you can contribute up to $7,000.

Retirement & the CARES Act

The CARES Act in response to the COVID-19 pandemic added some changes to retirement funds and how they’ll affect your tax liability. The Act removed the 10 percent penalty on withdrawals if you’re under 59.5 years old. The tax liability can be spread over three years and an amended tax return can help regain money paid on the distribution if you’re paying back the account.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

Read more

Tax Credits for Single Parents

Tax time can be extremely stressful, particularly for single parents that need every tax credit they can take. There are a number of ways that single parents can take advantage of credits on their federal income taxes to reduce the tax burden of which they may not be aware.

Head of Household

Claim head of household to receive a higher standard deduction. Individuals will also pay fewer taxes overall. Generally, the filer can claim this if they were single on the last day of the year, the child(ren) lived with them the majority of the year, and they provided more than 50 percent of the child’s financial support.

Earned Income Credit

This is one of the most often claimed credits by single parents and couples. It’s designed for working families of low- and moderate-income, even if they don’t owe taxes. However, the IRS is required to hold the entire amount of any refund until mid-February if they claim this.

Child Care Credit

A single parent is eligible for this credit if they paid someone to care for their child so they could work. The child and the one caring for them must meet certain requirements. The credit is available when children are cared for by a licensed childcare center. Parents that pay someone to care for a child in their own home may be subject to the “Nanny Tax” as an employer.

Child Tax Credit

The child tax credit shouldn’t be confused with the child care credit. Up to $2,000 can be deducted from tax liabilities for each child under the age of 17 on Dec. 31, provided the parent has earned at least $2,500. The amount that can be refunded begins to diminish once individuals reach the $200,000 mark for income.

Medical Expenses

Extensive medical expenses that exceed 7.5 percent of an individual’s adjusted gross income can be deducted. It will require an itemized return and itemized returns are more likely to be audited.

Adoptions

The federal government gives individuals a tax credit when they adopt a child. Adopting a spouse’s child doesn’t count for the credit.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

Read more

Ways to Cut your Tax Bill

Everyone wants to cut their tax bill and reduce their taxes. There are ways to accomplish those goals of which you may not be aware. The following are just some of the ways that you can cut your tax bill.

401k

The IRS doesn’t tax contributions to an IRA, making them an ideal way to reduce taxable income. Up to $19, 500 can be placed in an IRA and people 50 and over can add an extra $6,500 to that amount.

Education

You can establish an educational savings fund and deduct your contributions on your federal tax return. Contributing to the state’s 529 prepaid tuition or educational savings plan may also be deductible on state taxes. Be aware that the gift tax may apply if it exceeds $15,000 to a single beneficiary.

FSA

A flexible spending account for medical and dental expenses can aid in lowering your tax bill. There’s a limit of $2,750 in contributions. If you have a dependent care FSA account for child care expenses, the IRS will exclude contributions of up to $5,000. It may also cover eldercare expenses. Check with a tax professional to be sure.

HSA

Contributing to a health savings account can be beneficial if you have a high-deductible insurance plan. The plan parameters change each year and not everyone may qualify for the deduction, but they also have investment potential. It’s not a good option for everyone, so check with a tax professional first.

IRAs

There are standard/traditional IRAs and Roth IRAs. You might be limited on how much you can contribute or unable to deduct contributions under certain circumstances, depending upon which type you have. It’s best to discuss the situation with a tax professional or accountant.

Tax Calculators

There are numerous types of tax calculators that can help you save. There are calculators to estimate your taxes and refund to more complex calculators for determining capital gain taxes. Knowing where you stand financially is an effective tool for managing your finances and reducing tax liability.

W4s

Your W4s tells your employer how much to deduct from your check each week. If you had to pay in a sizable amount last year, increase your withholdings. The opposite is true if you got a large refund the previous year. You can change the withholdings on your W4 any time you want.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

Read more

Tax Saving Tips for Millennials

Many Millennials are struggling when it comes to their taxes. They don’t have access to the wide variety of tax deductions that their parents have been claiming for years. They’re at a unique point in their life where they’ve just graduated, started a new job, or are just struggling with day-to-day expenses. The following are some tax tips specifically for Millennials.

Filing Fees

Anyone that makes less than $64,000 per year is eligible to file for free. The IRS website can lead filers to companies and organizations that provide the online software to complete their federal and/or state taxes and for e-filing.

Education

Students and graduates should write off every possible educational deduction, including a tuition and fees deduction. It could result in a deduction of up to $4,000. To do so, Millennials will need to save every receipt that may apply. Young taxpayers can also claim their student loan interest up to $2,500.

Another deduction is Lifetime Learning Credits. The deduction can be taken for continuing education even after graduation and has the benefit of making individuals more attractive to employers.

Healthcare

A Health Savings Account (HSA) is a fund to which a taxpayer can contribute on behalf of their medical expenses. Up to $6,150 can be deposited each year and it’s all tax-free money that can be used toward any medical expense.

Retirement

Millennials should start saving for retirement as soon as possible. A Roth IRA, for example, allows individuals to take money from the original principal without penalties if needed while continuing to yield monetary results.

Working

Expenses associated with moving to start a new job may be deductible as a work-related expense if the relocation is at least 50 miles. For Millennials that may be working from home, a portion of their living space may qualify as a home office and be eligible for the home office deduction.

Amazon, eBay, and Etsy are all great ways to make extra cash and those avenues may qualify as a home business. Some individuals that are working in positions in which they can offer consulting services can change their filer status from employee to entrepreneur, which opens up new savings possibilities when filing.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

Read more

Automobile Tax Expenses

The powers that be have historically written sections into the tax code promoting business activities. One of the traditional write-offs has always been the expenses associated with using a vehicle for business purposes.

 

The simplest automobile tax expense situation is one in which a vehicle is used entirely for business. For example, if you have a van used for a delivery service and nothing personal, all expenses associated with the van can be written off. This is known as the exclusive use situation. For many small businesses, however, a vehicle will be used for both personal and business reasons.

 

Where you use a vehicle for both personal and business reasons, you can only deduct the automobile expenses associated with the business use. Keep in mind that driving to and from work is not considered business mileage while driving from an office to meet a client is considered business mileage.

 

There are two methods for determining deductible automobile tax expenses. The first is a simple calculation known as the standard mileage deduction. The second is the actual expenses method. You can choose whichever deduction provides you with the biggest deduction unless you lease the car. With a lease, you must use the standard mileage deduction.

 

The standard mileage rate deduction is a calculation wherein you multiply your total business mileage for the year by a figure provided by the IRS. For the first eight months of 2005, the figure provided by the IRS is 40.5 cents per mile. For the last four months of 2005, the figure has been bumped up to 48.5 cents to reflect high gas prices.

 

The actual cost expense option is exactly what it sounds like. It is the actual cost associated with using the vehicle for tax purposes for a particular tax year. Automobile tax expenses will include gas, tires, repairs, oil changes, registration costs, licensing, insurance and so on. In many cases, the actual expense deduction will end up being larger than the standard mileage deduction.

 

Regardless of the method you choose, you must document the automobile tax expenses. This means keeping a mileage book and receipts of anything you intend to deduct.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

Read more

Should I Itimize my Deductions?

When you finally decide it is time to prepare your taxes, the first question is whether you should itemize your deductions or take the standard deduction provided by the IRS.

Tax deductions are a very simple part of a theoretically simple tax reporting system. If you’ve ever prepared your own taxes, you know this simply isn’t true. Complicated tax forms can be a nightmare to fill out. Ever helpful, the IRS gives you an option of just taking a standard deduction instead of itemizing your deductions. So, what should you do?

The standard deduction is the easiest method because it requires no calculations or supporting documentation of any sort. You figure out your adjusted gross income and simply submit the amount for your classification. The amount differs based on whether you are filing as single, married, older than 65 or have kids.

Many people scoff at the mere idea of taking the standard deduction. As with all tax issues, deciding whether to take the standard deduction isn’t so easy. If you have a fairly simple financial life and don’t have many deductions, the standard deduction is almost always the best choice. For instance, if you make $45,000 as an employee of a company, rent a residence and don’t have any major medical bills or losses, the standard deduction is probably going to save you more money than itemizing. Unfortunately, you can never be sure until you take a stab at itemizing your deductions in a rough draft of a tax return.

Itemizing your deductions is exactly what it sounds like. You literally go through your records and categorize every possible deduction. These deductions are then subtracted from your adjusted gross income to get a final figure from which tax is determined using the tax tables. Itemizing is the way to go if you have significant tax deductions or tax credits in your financial life. For instance, you almost always want to itemize if you own a home as mortgage interest can be deducted. Generally, you want to itemize if you own a home, have significant medical bills, can claim a tax credit or suffered some type of major loss. Obviously, there are other situations where itemizing makes sense, but this gives you an idea of the situation.

If you have a simple financial situation, claiming the standard deduction may be the answer. If life is a bit more complicated, itemizing is probably going to save you more on your tax bill.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

Read more

Tax Tips for Mortgage Holders

It’s that time of year again when numbers such as 1040, W-2 and INT-1099 become all too familiar to millions of people.  One of the benefits of holding a mortgage on your house is the ability to claim certain deductions that can assist you in offsetting some of your tax burden.  As you prepare to file your yearly taxes let’s look at a few areas where you can take advantage of tax deductions and keep a little more green in your pocket this tax season.

The most obvious deduction that many tax filers take advantage of is the interest paid on the mortgage for their primary residence.  For those of us with a mortgage balance of less than $1 million dollars (and hopefully that is the majority of us!) you can fill out Schedule A, also known as “itemized deductions”, and claim all the interest paid in the previous year on your mortgage.  Keep in mind this is for your primary residence (where you live) only and does not include other properties and houses you may own for rental purposes, etc.  If you paid off your mortgage this year and were slapped with a pre-payment penalty you can also use Schedule A to take a deduction on those fees as well.

Taxes paid to local governments, known as real estate or property taxes, are also tax deductible.  If your mortgage company pays your taxes for you through an escrow account you can find the deductible amount listed there – else check your assessment notice sent to you by your local taxing authority.

If you decided to spruce up your home and took out a home equity loan you may also be eligible to take a deduction for the interest of the home equity loan.  One thing to keep in mind though is if the home equity loan plus your mortgage amount puts you over the real value of your home in total amount owed there are limits to what you may deduct.

Points of all types are usually tax deductible as well.  If you refinanced in the past year any points you paid to buy down the mortgage rate can be written off proportionately over the life of the loan.  This means that if you have a 20 year mortgage, you get to deduct 1/20th of the points each year.  An added bonus comes if you refinanced in a prior year and then refinanced against in the past year and ended up paying off the first refinance.  Any points you had not deducted from that first loan now become eligible for write off in their entirety.

If you took out your mortgage in the past year, any points that you paid on the purchase are fully deductible if the mortgage was for your primary residence and you paid an amount down at least equal to the points you were charged.  This one can be tricky, so be sure to consult your tax prepared for more information.

This tax season make sure you are taking advantage of every deduction you can; part of owning a home and having a mortgage means that you get to reap some of the benefits of that ownership through the tax system.  Don’t let the IRS keep the money that you can use to help pay off that mortgage faster!

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

Read more

7 Ways to Minimize Your Income Taxes

Are you paying too much in income taxes?  Are you getting all the credits and deductions you are entitled to?  Here are 7 tips to help you minimize taxes and keep more in your pocket:

 

  1. Participate in company retirement plans. Every dollar you contribute will reduce your taxable income and thus your income taxes.  Similarly, enroll in your company’s flexible spending account.  You can set aside money for medical expenses and day care expenses.  This money is “use it or lose it” so make sure you estimate well!

 

  1. Make sure you pay in enough taxes to avoid penalties. Uncle Sam charges interest and penalties if you don’t pay in at least 90% of your current year taxes or 100% of last year’s tax liability.

 

  1. Buy a house. The mortgage interest and real estate taxes are deductible, and may allow you to itemize other deductions such as property taxes and charitable donations.

 

  1. Keep your house for at least two years. One of the best tax breaks available today is the home sale exclusion, which allows you to exclude up to $250,000 ($500,000 for joint filers) of profit on the sale of your home from your income.  However, you must have owned and lived in your home for at least two years to qualify for the exclusion.

 

  1. Time your investment sales. If your income is higher than expected, sell some of your losers to reduce taxable income.  If you will be selling a mutual fund, sell before the year-end distributions to avoid taxes on the upcoming dividend or capital gain.   Also, you should allocate tax efficient investments to your taxable accounts and non-efficient investments to your retirement accounts, to reduce the tax you pay on interest, dividends and capital gains.

 

  1. If you’re retired, plan your retirement plan distributions carefully. If a retirement plan distribution will push you into a higher tax bracket, consider taking money out of taxable investments to keep you in the lower tax bracket.  Also, pay attention to the 59-½ age limit.  Withdrawals taken before this age can result in penalties in addition to income taxes.

 

  1. Bunch your expenses. Certain expenses must exceed a minimum before you can deduct them (medical expenses must exceed 7.5% of your adjusted gross income and miscellaneous expenses such as tax preparation fees must exceed 2% of your AGI).  In order to deduct these expenses, you may need to bunch these types of expenses into a single year to get above the minimum.  To achieve this, you might prepay medical and miscellaneous expenses on December 31 to get above the minimum amount.

 

The most important thing is to be aware of the tax deductions and credits that apply to you and to plan for taxable events.  And don’t be afraid to ask for help.  The benefits from consulting an experienced tax professional far outweigh the cost to hire that professional.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

Read more

Determining Your Tax Status

There are five classifications from which you choose to file: single, married filing jointly, married filing separately, head of household or qualifying widower with dependent child. If for some reason, more than one status applies to you, you should choose the status that gives you the greatest tax benefit.

 

Determining your status as a single filer seems simple enough, but there are different situations that exist that can qualify the taxpayer as single. For example, if you are legally separated even in the last month of the year, you are considered single for the entire year. With no dependents and you are unmarried, you are considered single. Divorce and annulment within the year also qualifies you to file as single.

 

However, even if you are single, but you have a dependent, or were widowed during the tax year, and you have dependents, your filing status would change to head of household or widowed with qualifying dependent child, not single.

 

When it comes to determining your status as a married taxpayer, there are simple qualification assessments that establish your legal filing status and if you’re considered married. Obviously, if you are legally married and living together as husband and wife, even for a small part of the tax year, then you would be considered married. If you are living together as common law spouses, and it is legally recognized in the state in which you live, or you lived part of the tax year in the state where the common law marriage began, then your filing status is married. Your filing status is still married even if you are married but not living together, but are not legally separated or divorced.

 

If you have unique circumstances, it might not be so easy to determine your filing status. If, for example, you were widowed during the tax year and did not remarry, you can file as married with your deceased spouse, and then file as widowed with qualified dependents for the next two years, so long as you do not remarry. If you remarry within the tax year that your spouse passed away, you would file as married with your current spouse, and file with your deceased spouse as married filing separately.

 

If you are married and want to file a joint return, your tax status is married filing jointly. All income to the household must be included on the one return, and both spouses must sign and date prior to submitting the tax return. All exemptions, deductions, and credits are reported on the joint return, and you share equal responsibility and liability for the information reported on the tax return, as well as any tax money owed. There are ways to ask for release from joint responsibility, either through innocent spouse relief, separation of liability for spouses who have not lived together for the past year, or equitable relief.

 

There are sometimes reasons that a spouse cannot sign a joint tax return, such as a spouse stationed abroad for the military. In this type of situation, you may sign for your spouse as a proxy, and attach a written explanation.

 

Choosing your filing status, while lengthy and sometimes complicated, is an important in the process of completing your Federal Income Tax return.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

Read more

All About Tax Deductions

Income tax time can be a dreadful season if you are not aware of all of the income tax breaks you can get through income tax deductions.  It is important to understand what is tax-deductible so that you can get as large of a tax refund as possible.

Probably the most well-known income tax deduction is the Earned Income Credit.  The earned income tax credit is available to those who make a minimum amount of money and can file tax as single, married, or head of household.  The more money you made, the more your earned income tax credit is until you hit the peak, which is around $30,000. Once you hit that peak, the earned income tax credit goes down until you reach the maximum income allowed to receive the earned income tax credit.

The second well-known income tax deduction is the Child Tax Credit.  The child tax credit is available to you if you have two or more children in the home for more than six months out of the year for which you are filing tax, and if you have a tax liability.  Through the child tax credit, you receive around $1000 per child. This total amount is then applied to your tax liability, and any amount of child tax credit left over is made a part of your income tax refund.

Another income tax deduction is for child daycare when the child daycare is needed in order for one or both parents to work outside the home.  This daycare income tax credit is equal to a percentage, up to a maximum amount, of the actual daycare expenses paid for that tax year.  

Other expenses can also be tax-deductible.  Interest paid on a mortgage for the primary residence can be claimed as an income tax deduction.  Medical expenses can also be claimed as an income tax deduction, although this is not very helpful unless you have an excessive amount of medical expenses to deduct on your income tax return.  Tax paid to another state can be used as an income tax deduction in the state that you live in. Donations and contributions to charities, fundraisers, churches, etc. can also be tax-deductible.  

If you are self-employed, you can also claim business expenses as income tax deductions.  This includes any expenses directly related to running your business. You can take a mileage income tax deduction for any miles you put on your vehicle for business purposes.  You can also take an income tax deduction for your office space in your home if it is used only for business purposes in the form of a portion of your rent, utilities, and phone bills.  You can also take an income tax deduction for your personal computer, printer supplies, and other office supplies as long as you have the receipts for the tax-deductible expenses, and usage logs for the personal computer and other equipment to show that it is used primarily for business.

As you can see, there are many income tax deductions available to you.  If you have any questions about what is tax-deductible, you should contact a qualified, certified, licensed tax accountant today.

 

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

CONTACT US TODAY

Read more