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:

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!

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.

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.

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.

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.

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.

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.

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.

Why it’s a Good Idea to Hire a CPA

CPAs, or Certified Public Accountants, can help you in your individual or business accounting and tax preparation in many ways. With the laws surrounding accountancy such as generally accepted accounting practices for businesses, and tax laws that change every year for individuals, hiring a CPA to perform your accounting services needs is the best way to ensure that your accounting is error free in case of IRS or other audit.

Having a CPA prepare your business or individual income tax return is a great way to avoid errors, not to mention the prying eyes of the IRS and an audit. A CPA must undergo continuing education as accounting and tax laws change from year to year. Therefore, only a CPA can ensure that your tax return is completely accurate. Not only is accuracy important to the IRS and in case of an audit, but it is important to your immediate financial future as well. Because a CPA has intimate knowledge of tax laws and available exemptions, a CPA can make sure you get the largest refund possible.

In the case that you are chosen for audit by the IRS, your best bet to come through the audit cleanly is to have a CPA by your side. A CPA is as familiar with tax law as the IRS representative performing the audit. Because of this, the CPA can negotiate a lower penalty, help you avoid penalties, and help you claim the deductions you deserve. You should contact a CPA as soon as you have received an audit notice from the IRS, because the CPA can help you prepare for your audit and gather the necessary information. Then, the CPA can walk into the audit interview by your side, completely in charge and confident of the outcome of your audit.

If you own a small business, a CPA can also help you determine what business taxes are required by your local, state, and federal government. In addition, the CPA can help you set up a double entry accounting system that includes a journal and ledger. The CPA can also help you to set up a standard chart of accounts for use with your ledger. All of these tools will help you stay organized and ready for tax time and any possible audits. The CPA can also use the information from these tools to create financial statements for your business, which will then help you to make business decisions, make comparisons with competitors, discover industry and company financial trends, and prepare financial reports and business plans for purposes of investors and bank loans.

Whatever the financial service required, a CPA is your best bet. With a CPA, you have the security of a licensed, monitored professional along with the peace of mind that all of your accounting is accurate and ready for any possible

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Accounting
posted by Mark Battalini
March 15, 2020

Bookkeeping Basics

Most people probably think of bookkeeping and accounting as the same thing, but bookkeeping is really one function of accounting, while accounting encompasses many functions involved in managing the financial affairs of a business. Accountants prepare reports based, in part, on the work of bookkeepers.

Bookkeepers perform all manner of record-keeping tasks. Some of them include the following:

They prepare what are referred to as source documents for all the operations of a business – the buying, selling, transferring, paying and collecting. The documents include papers such as purchase orders, invoices, credit card slips, time cards, time sheets and expense reports. Bookkeepers also determine and enter in the source documents what are called the financial effects of the transactions and other business events. Those include paying the employees, making sales, borrowing money or buying products or raw materials for production.

Bookkeepers also make entries of the financial effects into journals and accounts. These are two different things. A journal is the record of transactions in chronological order. An accounts is a separate record, or page for each asset and each liability. One transaction can affect several accounts.

Bookkeepers prepare reports at the end of specific period of time, such as daily, weekly, monthly, quarterly or annually. To do this, all the accounts need to be up to date. Inventory records must be updated and the reports checked and double-checked to ensure that they’re as error-free as possible.

The bookkeepers also compile complete listings of all accounts. This is called the adjusted trial balance. While a small business may have a hundred or so accounts, very large businesses can have more than 10,000 accounts.

The final step is for the bookkeeper to close the books, which means bringing all the bookkeeping for a fiscal year to a close and summarized.

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Tax Preparation
posted by Mark Battalini
February 9, 2020

Electronic Tax Preparation Options

Just in time for tax season you will find yourself presented with this years editions of popular tax preparation programs that promise to make tax filing a breeze for the average person. Which one is right for you and what are some of the most popular electronic tax filing solutions? Read on as we discuss your tax preparation options and explore the popularity of electronic tax filing.

What to look for in choosing a tax preparation solution? Newcomers should look for software that takes a step by step approach throughout the digital tax preparation interview and one that presents interview topics that are easy to understand and answer.

One of the most useful features of tax preparation software is that it lets you play around with your figures and try out hypothetical situations. Many of the top programs also come with importing features that allow the user to import data from other programs directly into the tax preparation software.

Because of their ability to do extensive calculations and other automated checks, electronic tax preparation and filing is reported to have only a small error rate of less than 1 percent. In fact, using tax preparation software will almost always result in a more complete and more accurate tax return.

With the growing popularity of high-speed Internet connections and advances in Internet security, more and more tax preparation is being done online. Using online income tax preparation services has proven to be secure, easy and accurate. With an explosion in online resources at your fingertips, the taxpayer can do a job equal to that of a professional.

Either way, it’s clear that electronic tax preparation has really taken off and become quite popular. Its because of these benefits that once again this year, taxpayers will be turning to tax software to help them prepare and file their taxes. Did you know that you can even prepare and e-file your taxes wherever and whenever you access the Internet? The IRS Free File program, which is designed to help taxpayers file their taxes electronically, is best for those taxpayers who prepare their own taxes and still file paper returns. It is also important to note that if you are filing taxes for prior years, you are not eligible to file electronically.

By doing taxes online, you are empowered to prepare and e-file your own income tax return. And, like doing banking online, doing your taxes online is easy, fast, accurate, as well as very secure. If you’re considering doing your taxes online, why not give it a try this year? While it still isn’t a blast, doing your own taxes will give you a feeling of accomplishment.

Like most people, your likely dreading the task of doing your taxes that and maybe you would like to make it easier this year. With some prior planning, you can make doing your taxes a lot less dreadful and can help avoid any unpleasant surprises.

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Tax Preparation
posted by Mark Battalini
February 8, 2020

Self-Employed Tax Strategies

The good news is being self-employed is one of the best tax strategies out there. Unlike a salaried employee, the full scope of tax credits and deductions available in the tax code are now available to you. The key, of course, is understanding the available deductions and organizing your business in a manner that allows you to maximize the write-offs.

The number one tax strategy for self-employed individuals is to keep receipts for every business expense and write them off. Practically anything can be deducted, so do it. Acceptable expenses include cell phone usage, business mileage, office supplies, home office deductions including part of mortgage or rent and so on. If you’ve filed a tax return while self-employed, you are probably already aware of this so lets move on to more specific tax strategies for self-employed individuals.

Maximizing your non-capital losses can result in major tax savings. If your expenses exceed your income for a year, you obviously will not have to pay taxes for that year. What most people don’t realize, however, is that such losses can be carried forward for seven years and deducted against future income. Alternatively, the same losses can be carried backward three years to recover past taxes paid. The end result of this situation is you can turn a bad business year into an income generator by applying the losses to taxes in other years which effectively wipes out your tax bill for those years.

Another tax strategy is to look at your side businesses. If you have one business, you’ll often have a second one that is tailored to making some money off a personal interest. While you are in it mostly because you like it, you may not realize it qualifies as a business and can help you reduce your taxes. Let’s assume you are primarily a self-employed consultant, but also write travel articles on the side. You may view the travel articles as a hobby, but it is in fact a business. If you’ve sold or even tried to sell any of your articles to a publication, all of your expenses related to travel writing can be deducted from your taxable income. This includes trips and so on. These, deductions can significantly reduce your taxable income from the consulting business. Make sure to get a grasp of your overall business efforts, even if you don’t really consider them to be a business.

Consider employing your children to save on taxes. A child under 18 that works for you does not have to pay FICA and so on. If the total wages for the year are under $4,250, they will pay no taxes and you can write off this amount as a legitimate business expense. Of course, the child needs to actually be doing a legitimate business task, but filing and similar manual tasks certainly will qualify.

Tax strategies for the self-employed are plentiful. If you are self-employed, consider getting professional help. A good professional will save you thousands upon thousands of dollars in taxes, more than making up for their fees. Oh, you can also deduct their fees!

Making a Profit

Accountants are responsible for preparing three primary types of financial statements for a business. The income statement reports the profit-making activities of the business and the bottom-line profit or loss for a specified period. The balance sheets reports the financial position of the business at a specific point in time, ofteh the last day of the period. and the statement of cash flows reports how much cash was generated from profit what the business did with this money.

Everyone knows profit is a good thing. It’s what our economy is founded on. It doesn’t sound like such a big deal. Make more money than you spend to sell or manufacture products. But of course nothing’s ever really simple, is it? A profit report, or net income statement first identifies the business and the time period that is being summarized in the report.

You read an income statement from the top line to the bottom line. Every step of the income statement reports the deduction of an expense. The income statement also reports changes in assets and liabilities as well, so that if there’s a revenue increase, it’s either because there’s been an increase in assets or a decrease in a company’s liabilities. If there’s been an increase in the expense line, it’s because there’s been either a decrease in assets or an increase in liabilities.

Net worth is also referred to as owners’ equity in the business. They’re not exactly interchangeable. Net worth expresses the total of assets less the liabilities. Owners’ equity refers to who owns the assets after the liabilities are satisfied.

These shifts in assets and liabilities are important to owners and executives of a business because it’s their responsibility to manage and control such changes. Making a profit in a business involves several variables, not just increasing the amount of cash that flows through a company, but management of other assets as well.

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Accounting
posted by Mark Battalini
February 6, 2020

Building Cash Reserves

Building a financial cushion for your business is never easy. Experts say that businesses should have anywhere from six to nine months worth of income safely stored away in the bank. If you’re a business grossing $250,000 per month, the mere thought of saving over $1.5 million dollars in a savings account will either have you collapsing from fits of laughter or from the paralyzing panic that has just set in. What may be a nice well-advised idea in theory can easily be tossed right out the window when you’re just barely making payroll each month. So how is a small business owner to even begin a prudent savings program for long-term success?

Realizing that your business needs a savings plan is the first step toward better management. The reasons for growing a financial nest egg are strong. Building savings allows you to plan for future growth in your business and have ready the investment capital necessary to launch those plans. Having a source of back-up income can often carry a business through a rough time.

When market fluctuations, such as the dramatic increase in gasoline and oil prices, start to affect your business, you may need to dip into your savings to keep operations running smoothly until the difficulties pass. Savings can also support seasonal businesses with the ability to purchase inventory and cover payroll until the flush of new cash arrives. Try to remember that you didn’t build your business overnight and you cannot build a savings account instantly either.

Review your books monthly and see where you can trim expenses and reroute the savings to a separate account. This will also help to keep you on track with cash flow and other financial issues. While it can be quite alarming to see your cash flowing outward with seemingly no end in sight, it’s better to see it happening and put corrective measures into place, rather than discovering your losses five or six months too late.

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Tax Preparation
posted by Mark Battalini
January 13, 2020

Are You Overpaying Taxes If You Use Tax Preparation Software?

For many business owners, the answer to this quandary is tax preparation software. Fill out a fairly simple interview, click “print” and out comes a completed return that will pass muster with the IRS. The answer to all your problems…or is it?

Can One Software Program Cover All Businesses?

Take a moment to consider the wide range of businesses that exist in the United States. Now cut that number down to those that can be categorized as “Internet businesses”. If you were asked to write a business plan to provide web design services to each of these services, how long would it be? It would be huge and completely useless because each business would have different needs. An Internet business selling flowers would have completely different needs from an online bank which would have different needs from a hosting company and so on. The only way you could create a practical plan for all Internet businesses would be to offer a collection of general services they could all use on their sites. Tax preparation software designers have the same problem.

There are over 15,000 pages in the tax code and over 100,000 pages of regulations interpreting those pages. Changes are made to the tax code every year, and new regulations are issued constantly. If one were to create a list of questions for every tax deduction and credit detailed in those pages, the list of questions would be the size of a phone book! Yet, tax software programmers have somehow boiled it all down to a simple 30-minute interview process? Common sense should tell you that it doesn’t make sense.

As a practical matter, tax software programs are designed to make sure that you claim a general set of deductions that are applicable to businesses across all industries. Most programs try to mask this fact by asking you to identify your business before proceeding. For a lark, you might try selecting another industry and then running through the interview process. You will find that the interview process is modified a bit, but you are still being asked the same basic tax deduction questions.

If you are only claiming general business tax deductions, you are paying more than you should in taxes. Ask yourself if you have seen any of the following questions in a tax software program interview:

Q. Do you store business inventory in your house?

Hint: You may be able to claim hundreds or thousands of dollars in deductions.

Q. Did you start a pension plan for your employees?

Hint: You may be able to claim a tax credit for the next three years totaling $1,500.

Q. Do you have a home-based business and a second office?

Hint: You may be able to deduct your commuting expenses each day. Yes, commuting expenses.

Q. Do you have business meetings at your home?

Hint: Did you charge your business for the space?

Q. Should you claim the standard mileage rate for your auto or the actual costs?

Hint: The standard mileage rate may not the best option.

Q. Did you modify your business location to comply with the Americans with Disabilities Act?

Hint: You may be able to claim a tax credit AND tax deduction for tax savings of $20,000 or more.

Q. Did you refinance your home?

Hint: The points you paid on your original mortgage are fully deductible now, not over the length of the loan.

This represents only the tip of the iceberg of available credits and deductions available to you. Just one of these deductions could save you thousands of dollars in taxes. Yet, you are never going to see these questions raised in a tax software program interview. The tax code and regulations are simply too large to be incorporated into a usable software program.

Your business is unique. You face and overcome issues and problems that are unique to your size, financial situation and particular business needs. Don’t short change yourself by limiting your deductions by using tax software programs.

Are You Ready For Tax Day?

Because deadlines are strict, and penalties will be given to late tax payments, you should make sure that you do not put off your “tax day.” You should definitely start preparing your income tax return well before April 15. Whether you are doing your own income tax return or you are getting the help of a certified public accountant or firm to prepare your income tax return, you should get a few things together before you begin or meet with the CPA.

The main thing you will need for your income tax return is proof of the income you made and the taxes you paid in the previous year. That includes income made through employers, interest from accounts, dividends from investments, income made through self-employment, income made as a subcontractor, and any other income. Student loans and other types of loans may also be considered income for the purposes of income tax, as can winnings from a lottery, casino, or other contest. If you are unsure about what can be considered as income for tax purposes, you should contact a certified public accountant.

The other thing that is important is social security numbers for everyone you will claim on your income tax return. That includes social security numbers for your spouse and any children you will claim. Without social security numbers, proof of residence, and birth dates, you cannot claim deductions on your income tax return for these individuals.

The next thing that you should gather is what you will need for deductions. If you have a mortgage, your interest paid to the mortgage company may be tax-deductible. If you use a vehicle for business purposes, you can claim a tax deduction for mileage. If you have children in daycare so that you can work, you can claim a tax deduction for that expense. You can also claim tax deductions for excessive medical expenses and charitable contributions.

If you are self-employed, you will need to also gather your receipts for tax-deductible expenses. A tax-deductible business expense is any expense that is used solely or primarily for the business you are involved in. The tax-deductible expense must be documented in order to claim it, so any receipts you have, usage logs for computers and vehicles, etc. should be gathered so that you can take the highest deduction possible. If you have any doubts about what is tax-deductible for your business, you should contact a certified public accountant to assist you in your income tax preparation.

Once you have gathered all of the necessary tax documents, you must determine which tax forms you need to file. If you are an individual with a few tax-deductible items, you can file a simple tax return. However, if you are self-employed you must also file a tax form called Schedule C. If you have a lot of tax-deductible items, you will want to file a more complex tax return to itemize your tax deductions. If you are unsure what tax forms you need to file, you should contact a certified public accountant to assist you in your income tax return preparation.

Tax Day can be a stressful time, but it doesn’t have to be. Gather all of your required tax documents as early as possible, and don’t put off the inevitable. Contact a certified public accountant as soon as you can if you are unsure what tax forms you need to file, or what tax deductions you can take. And, most importantly, don’t panic on tax day!

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