How to Reduce Your Taxes

People can lower their federal and state tax obligation through credits and deductions. Credits typically produce a more favorable result, as they lower the taxes owed. However, in combination with deductions, they provide a way to reduce your taxable income and reduce your total tax bill.

Tax Credits

There are a number of tax credits available to individuals that reduce overall income and can put you in a different tax bracket, meaning your income is taxed at a lower rate They include the earned income credit, child tax credit, child and dependent care credit, and American Opportunity tax credit. These and others reduce the amount you owe the federal government and work to lower your income.

Retirement Savings

Income set aside for retirement purposes and company-sponsored 401(k) accounts can lower your taxable income. They include traditional IRAs, Roth IRAs, and 401(k) plans.

Health Savings Account

People contributing to an HSA for health care expenses can use those funds to lower their taxable income, as they’re made with pre-tax income.

529 Plans

As an educational savings plan, earnings and distributions aren’t subject to taxes – providing the funds are used for qualified educational costs. They’re not deductible on federal taxes, but can lower the state tax burden. Be aware that rules vary by state. Pre-paid tuition plans are another option for qualified institutions.

Charitable Contributions

Those who volunteer at a qualified non-profit organization can deduct travel expenses associated with volunteering. Cash and non-cash contributions can also be deducted – be sure to keep a receipt. Claiming a charitable contribution will lower income and tax burden, but itemization of deductions is required and there are limits on how much can be deducted.

Depreciation and Business Expenses

For those that operate a home business or farm, for example, a portion of equipment or machinery can be deducted as depreciation. A percentage of a home used exclusively for conducting business can also be deducted.

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Tax Deductions
posted by Mark Battalini
November 6, 2022

Tax Benefits of Charitable Donations

In 2021, each individual was allowed to deduct a maximum of $300 in charitable donations without itemizing deductions, provided they had receipts, and the contribution was made to a recognized charity. It’s important for individuals to know they can maximize their charitable giving through standard deduction amounts and itemized deductions.

Taxpayers can contribute money, time and a wide range of items to charitable organizations. Individuals should be aware that claiming non-cash contributions will raise red flags at the IRS and can trigger an audit. The IRS scrutinizes charitable contributions extremely closely.

Those that itemize deductions can usually deduct up to 50 percent of their adjusted gross income to lower their tax liability. Individuals can’t claim the time they spent volunteering, but they can deduct out-of-pocket expenses incurred while they volunteer.

Assets and Capital Gains

Every investor should perform portfolio rebalancing to ensure their strategies are working as they wish. As part of that process, individuals can make a charitable gift that will offset capital gains. When donating property or stocks, only 20 to 30 percent may be deducted.

Individuals will need to have held the assets for more than a year. They’re typically deducted at their fair market value, which can be up to 30 percent of adjusted gross income (AGI).

Stocks, bonds, mutual funds, and property are often overlooked opportunities for charitable giving that reduces taxes owed. Capital gains taxes are eliminated on those types of donations when they contributed directly to an organization. It can account for up to a 23 percent reduction in taxes.

Donor Advised Fund

A donor-advised fund is another way in which individuals can reduce their tax burden. It’s an account established for the sole purpose of making charitable contributions. It’s easy to create, highly flexible, and an effective strategy to reduce the tax liability.

IRA to Roth IRA

Converting from a traditional IRA to a Roth IRA comes with significant taxes. A charitable contribution can help in offsetting that cost.

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Tax Deductions
posted by Mark Battalini
November 6, 2022

Cryptocurrency Losses and Your Taxes

If you’re one of the many cryptocurrency investors, you may have losses to report. The factors that affect traditional paper money also affects digital currency and has led to significant losses for many.

If you own cryptocurrency, you should definitely report it on your federal tax return. The IRS requires it and views cryptocurrency as property rather than currency, per se. The good news is that you can claim your losses on your taxes – within limits.

Deduction

You can use your crypto losses as an income tax deduction up to $3,000. However, you won’t be able to do so if you had total capital gains across all your assets.

Capital Gains

It’s possible to lower or offset your capital gains, and future capital gains if carried forward, by claiming a loss on your crypto. A strategic selling off of assets at a loss is known as crypto tax loss harvesting and can offset your gains. You can also carry forward those losses to future tax returns.

You’ll use the same method to report crypto losses as you would crypto gains. Crypto isn’t considered a security, so selling it and buying it back within 10 days isn’t technically considered a crypto wash sale. However, you should consider safer ways to reduce capital gains.

Special Forms

The IRS requires special forms to report gains and losses from cryptocurrency. It can be difficult to quantify short-term and long-term losses and gains. The best solution is to seek the services of an accountant who is knowledgeable in tax laws concerning crypto and understands the exact forms to use.

Stolen Crypto

If you’ve been the victim of a crypto hack, you’re understandably upset and have little hope of recovering the lost currency. Unfortunately, the IRS views stolen crypto in the same way it does traditional dollars that have been stolen. Even though you can’t take a deduction for stolen crypto, its important to record it in your records so it’s not mistaken for a sale.

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Tax Deductions
posted by Mark Battalini
November 6, 2022

Are Grants Tax-Free?

A wide variety of grants are available for education, research, business, municipal, and even home projects. Whether the funds are taxable or not will depend on the type of grant received and the purpose for which its intended.

The funds may be distributed under the auspices of a grant, emergency relief funds, a stipend or a variety of other names. It can be a one-time payment or made through recurring payments. A grant can be in the form of cash, supplies or equipment.

Education

Grants and scholarships are not taxable, providing the money is used for study or research for a degree. The funds must be spent at an eligible educational institution.

Business

Grants for business purposes are taxed by the IRS as income, regardless of its source. Depending upon the state in which the business is located, owners may also be required to report grant funds as income on their state income tax returns. Some grants are only allowed to be used for very specific purposes.

Home

Programs are available for projects ranging from home repairs for low-income families to those for installing eco-friendly solutions that protect and preserve natural resources.

Reporting

A schedule C should be completed for grant money. The benefit of claiming it as income is that it will usually be taxed at no more than 30 to 40 percent on federal or state income tax returns. Even if a state says the grant is tax-free, it will still be subject to federal taxes, Social Security and Medicare taxes.

In some instances, recipients must prove what the grant was spent on or what was purchased. No matter how it’s distributed, the source, its intended purpose, or if it’s in the form of cash, equipment or supplies, recipients are better off financially if they report it as income. It will be considered revenue by the IRS.

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Tax Deductions
posted by Mark Battalini
September 25, 2022

If I’m Self-Employed, What Tax Deductions do I Qualify For?

An increasing number of people are launching their own businesses. Government figures indicate that ¼ of the self-employed have an incorporated business operation. However, a full ¾ of all self-employed people have an unincorporated enterprise.

Nearly 11 percent of people in the U.S. are self-employed, representing 15 million individuals. It includes home-based businesses, those in the gig economy, entrepreneurs, startups, and small business endeavors.

Tax time is especially painful financially for the self-employed. They have to pay state and federal taxes, and may need to pay city taxes. Individuals need to pay FICA taxes and are forced to pay a self-employment tax. The good news is that there are a variety of deductions that can help ease the pain at tax time.

Home Office

Those that work out of their home can deduct a portion of the total area of their home’s square footage if they’re self-employed, but not if they work for someone else. The space will have to be used regularly, be the principal place of business, and only be used for business purposes. Individuals can deduct the cost of rent for business space.

Credit Card Interest

Qualified business purchases placed on a credit card may be deductible. It can include phone bills, business travel, meals rent, internet service, office equipment, membership dues for professional organizations, and other expenses/utilities necessary for operating the business.

Training and Education

Taking a course to maintain or improve current skills relating to the business may be tax deductible. Expenses includes the cost of the course, tuition, books and supplies, and transportation.

Insurance Premiums

Premiums for business insurance are deductible for those who are self-employed.

Self-Employment Tax

The IRS allows people that are self-employed to deduct 50 percent of their total self-employment tax, subject to certain income limits.

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Tax Deductions
posted by Mark Battalini
July 26, 2022

When Can You Deduct Mileage

One of the many deductions possible on your federal income taxes is mileage driven for work-related endeavors if you use your own vehicle. Those deductions can be taken if you’re self-employed. It’s also possible to deduct mileage if your employer requires you to travel using your own vehicle – providing the employer doesn’t reimburse you for mileage.

There are two ways to calculate the mileage. The first is based on the business-related percentage of the total miles driven. The second method is by multiplying the miles you drive for work by the IRS’s standard mileage rate. The rate changes each year. In 2022, the IRS increased the mileage rate to 62.5 cents per mile due to soaring gas prices.

There are a great number of jobs in which an employer expects the employee to use their own vehicle as part of the job. They include delivery drivers, salespeople, couriers, service techs, reporters, on-demand shoppers, and ride-shares. You can also claim mileage for medical-related reasons and charitable driving.

A key component for claiming mileage is keeping a detailed record of the date, miles driven with the beginning and ending mileage stated, and the reason. There are apps that will do this. The IRS may demand to see a logbook of the miles traveled to determine if you’re eligible for the deduction. While it’s unusual for the IRS to do so, they have the option of doing so.

If an employer requires you to use your personal vehicle for work, but doesn’t reimburse you for mileage, you can claim the mileage by the actual number of miles or the IRS’s standard mileage rate. It’s a lot more complicated if you have an employer that reimburses you for mileage. You’ll first have to know if the company’s reimbursement policy is an accountable plan.

Are You Eligible to Claim Child Tax Credits?

If you have children, you’re probably familiar with the Child Tax Credit. It can put some much-needed cash in your pocket, but there are criteria for qualifying for the credit.

Age and Qualifying Child

A qualifying child is one that didn’t turn 18 before Jan. 1, 2022. A qualifying child is defined as the taxpayer’s son or daughter, stepchild, eligible foster child, brother, sister, stepbrother or stepsister, or half-brother or half-sister. Descendants of those qualifying children may also qualify, such as a grandchild, niece or nephew. The child must have a Social Security number that’s valid for employment.

Financial Support

The child can’t have provided more than one-half of their own support during 2021.

Living Arrangements

The child must have lived with the taxpayer for more than one-half of the tax year. The home must have been in one of the 50 U.S. states or District of Columbia for more than half the year. A permanent home can be a house, apartment, mobile home, or temporary lodging and doesn’t have to be in the same location throughout the taxable year.

You may still be eligible for a lesser amount of money if your home wasn’t in the U.S. for more than half the year. Bonafide residents of Puerto Rico may also be eligible to claim a Child Tax Credit even if they received no income and paid no U.S. Social Security taxes.

Taxpayer Dependent

You can’t claim a child as a dependent if you or your spouse are claimed as a dependent on someone else’s tax return or are residents of Canada or Mexico. The dependent must be a U.S. citizen, U.S. resident alien, or a U.S. national. Joint custody situations only allow one parent to claim a child on their income taxes. You can also claim that child if they died before Jan. 31, 2022.

Earned Income

You must have some type of earned income during the tax year as an employee or through self-employment. It includes wages, salaries, tips, bonuses and commissions.

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Tax Deductions
posted by Mark Battalini
April 17, 2022

Can You Write Off Pets on Your Taxes?

Pets are members of the family, but as much as you love them you can’t claim them on your annual tax return – unless they’re a certified service animal. You can’t claim them as a deduction, but you can claim the cost of their medical care, training and maintenance.

The IRS doesn’t recognize therapy animals as certified service animals. If you’re visually impaired, have audio deficits, or have a physical disability, then you can claim certain expenses for your service animal. Be very careful when trying to claim expenses for an animal on your taxes. It’s best to hire a tax professional or you could find yourself running afoul of the IRS.

Some of the expenses you can claim for your certified service dog includes veterinary bills, grooming, training and pet food. Be aware that you’ll need a doctor’s prescription indicating the need for the animal and a receipt for every expense.

The IRS recognizes service dogs for tax purposes. No other animals are allowed and are typically considered farm animals. However, if you have a business, you’re self-employed, and can prove the dog provides a service for the business, you can write off his/her expenses.

An example would be a Doberman or mastiff as a guard dog, but not a Yorkie or Pomeranian. You may also be able to claim a cat as rodent control, provided they live at the business. If the animal produces income through social media, breeding, animal shows, or films, TV or advertisements, there are expenses you can claim. Very precise records will need to be provided.

If you nurture dogs for charitable organizations, you can claim the associated costs as a charitable donation. A portion of travel costs related to volunteer work at a shelter or rescue can be deducted. You can only claim 7.5 percent of the costs of your adjusted gross income (AGI), and the amount will need to total more than your standard deduction.

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Tax Deductions
posted by Mark Battalini
April 17, 2022

Tax Write-Offs for Alarm Systems

Any business owner that’s been considering the installation of an alarm system should know they can deduct the cost on their federal tax return. The IRS recognizes a variety of qualifying equipment ranging from fire alarms to security systems if they were purchased or financed during the tax year.

Businesses can deduct the entire purchase price up to a specified limit and fire protection systems can now be written off. Allowable expenses include heat and smoke detection units, sensing devices, audible alarms, sprinkler systems, motion detectors, and door and window locks. Monitoring services may be deductible.

Individuals that work from home can deduct the cost of a security system as a business expense, within limits. The line between home office and business can be a little blurry. It’s best to hire a tax professional that is well-versed in the intricacies of the law. Those that work from home due to the COVID-19 pandemic don’t qualify, as they’re employees not business owners.

To claim a security system installed at a home as a business expense, individuals will need to prove that the home is their principal place of business where they meet with patients or clients. The home must also be the exclusive space where inventory is stored. Daycare facilities and properties for rental use are included.

Individuals will need to establish the allowable area where business is conducted. The IRS allows people to deduct a portion of the security system in relation to the area actually used for business purposes. There are two ways that percentage can be determined, so be sure to calculate both ways for the maximum benefit.

As with all IRS rules, there are exceptions. The business expense can’t equal or exceed the individual’s income. However, business owners operating a business from their home can claim depreciation of the system for the portion that protects the business space.

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Tax Deductions
posted by Mark Battalini
March 20, 2022

What Charities are Tax Deductible

Charitable organizations rely on the generosity of sources ranging from grants and bequests to personal donations. However, when it comes to tax time, individuals and businesses will want to be able to deduct those contributions. Child, animal and veteran’s organizations are three of the most popular choices for charitable donations. They range from small, local organizations to those based in the U.S. with global reach.

There are thousands of deserving and qualified organizations to which donations can be made, provided it qualifies under IRS rules as a tax-exempt organization as defined by section 501(c)(3). However, it’s important to know that an organization can have non-profit status, without meeting the 501(c)(3) specifications. That distinction is the difference in whether a contribution can be claimed on income taxes.

A major consideration is if the funds will be used generally or specifically. For instance, people can make a donation to a cemetery and it will be tax deductible if the money will be used for general upkeep and maintenance for the entire cemetery rather than a specific gravesite or mausoleum. If the individual received something in return for their donation, such as tickets, merchandise, or a dinner, it won’t be fully deductible.

Contributions to organizations such as the Red Cross and Salvation Army are tax deductible, but not when designated for a specific individual or family. Donations are tax deductible for museums, non-profit educational agencies, and for some religious organizations. Donations to volunteer fire departments and organizations that maintain public parks are also tax deductible, as are private foundations. Many animal shelters and organizations hold 501(c)(3) status.

Use Caution

Holidays and natural disasters are always prime opportunities for scammers to seek donations. There are numerous legitimate organizations that accept monetary contributions. It’s up to each individual or business to ascertain if the organization meets 501(c)(3) qualifications if they want to claim their contribution on their taxes.

It’s also a good idea to ask how much of the contribution will actually go toward the organization for the maximum good. Many people are surprised to learn that a scant 10 percent actually goes toward the organization. The IRS has an exempt organizations tool to help individuals and businesses identify qualifying organizations.

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