Tuesday, March 26, 2024

How To Lower Your Taxes Big Time

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Tax Deductions And Credits You Can Use To Reduce Business Taxes

Lower Your Taxes Big Time Sandy Botkins

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The Internal Revenue Code is set up to provide numerous tax breaks to individuals and businesses alike. Even the IRS acknowledges that you must keep some money to live on and with which to run your small business.

Some small business tax savings strategies, like timing income and expenses, must be accomplished before the end of the tax year. But others, such as funding a retirement plan, can be done at any time before you file your tax return.

If you’re looking for ways to save money on your small business taxes, keep reading.

Maximise Your Personal Savings Allowance

In 2022-23, you can earn £1,000 of interest on savings tax-free if you’re a basic-rate taxpayer. If you’re a higher-rate taxpayer, your tax-free allowance is £500.

You’ll only pay tax on savings income that exceeds this threshold.

This will no longer be deducted automatically by the savings provider. If tax is due, you’ll need to pay it via self-assessment or have it deducted via PAYE.

Keep in mind that you won’t have a savings allowance as an additional-rate taxpayer.

Offset Alternative Minimum Taxes Possibly For This Year And Next

If you are subject to the alternative minimum tax , making additional charitable gifts claimed as itemized deductions could reduce the difference between regular income tax and AMT . This is particularly useful because many commonly itemized deductions are added back to income under the AMT, including state and local income taxes, real estate taxes, home mortgage interest .*

For those who are charitably inclined, and are likely to be subject to the AMT year after year, it may make sense to make a charitable contribution in the current year. However, even though a taxpayer may receive a tax benefit for a charitable gift when they are subject to the AMT, they might consider deferring the contribution to a year when they are out of the AMT to take advantage of a potentially larger tax benefit. Talk with your tax advisor about your personal situation.

*The availability of certain federal income tax deductions may depend on whether you itemize deductions. Charitable contributions of capital gains property held for more than one year are usually deductible at fair market value. Deductions for capital gains property held for one year or less are usually limited to cost basis.

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American Opportunity Tax Credit

The American opportunity tax credit, or AOTC, is exclusively for first-time college students for their first four years of college or other higher education, which makes it different from the LLC . If you’re pursuing a degree and haven’t had a felony drug conviction, you could qualify if you meet income thresholds.

For your 2020 tax return, your modified adjusted gross income could not exceed $80,000 a year in order to claim the full credit and had to be between $80,000 and $90,000 for the partial credit. For joint filers, your MAGI could not exceed $160,000 for the full credit or must have fallen between $160,000 and $180,000 for the partial credit. The exact thresholds for 2021 tax returns were released in January 2022.

The AOTC is worth up to $2,500 . This credit is partially refundable — if deducting this credit brings your tax balance to zero, 40% of the remaining amount of this credit may be given back to you as a tax refund.

Use The Starter Rate For Savings

Freelancers: Lower Your Taxes Big Time!

If your income from a job or pension is below £12,570 in 2022-23, but you earn income through interest on savings, you may also qualify for the starter savings allowance.

Any interest you earn up to £5,000 is tax-free. This will be in addition to your personal savings allowance, meaning you could earn as much as £18,570 before paying tax.

Read Also: When Is The Earliest You Can File Taxes 2021

Paying Taxes Is Never Fun But There Are Steps You Can Take To Reduce Your Business’s Tax Liability

  • A tax liability is the tax debt you owe the federal, state or local government.
  • Understanding what deductions you can make, what equipment to purchase and how to invest in operations can help reduce your tax liability.
  • Tax credits can reduce your tax
  • This article is for small business owners looking to better manage their taxes.

For most people, taxes are due April 15, but businesses must prepare taxes year-round. The decisions you make throughout the year impact your businesss tax liability. If this is your first year filing a business tax return, you might be nervous about how much you owe the government.

Deduction #1: Empowerment Zone Credits

Empowerment zones were created by the Empowerment Zones and Enterprise Communities Act of 1993. These zones are designated in rural and urban areas as places in need of economic investment to combat unemployment and lack of opportunities. Businesses that are located within these zones are eligible for tax incentives.

Economic empowerment zone credits can be advantageous for businesses that qualify. A business located within an empowerment zone that hires employees living within that same zone is able to claim the credit, as well as 20% of what that employee is paid capped at $3,000 per year per employee. There are no limits to how many qualified zone employees you can claim, and they can be full or part-time employees.

To see if youre located in an empowerment zone, check out this .

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Fund A Retirement Plan

Setting up and funding a retirement plan for yourself and/or your employees can save you money on taxes. Make sure it’s a qualified plan so you can take advantage of those tax savings. It must be one that’s recognized by the IRS to allow deferment of taxes on earnings until the earnings are withdrawn. These types of retirement accounts include IRAs and defined contribution plans such as 401s or 403s.

What Is Tax Planning

How Big Earners Reduce their Taxes to Zero

Tax planning is about dedicating time and expertise to planning the best tax strategy for you. Theres no one-size-fits-all approach to tax planning. The goal is to reduce your taxable income so you pay less tax. And by doing so, youll maximise the money you keep hold of to spend on whatever you choose.

Tax planning gets great results for executives, professionals, sole traders, business owners and even athletes.

Theres no escaping tax. It touches every aspect of your personal finances from income to investments, superannuation, home loans, assets and the wealth you leave for future generations.

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Invest With An Enterprise Investment Scheme

To encourage investments in early-stage businesses, the government offers extra tax relief on some investments.

If you buy shares in a qualifying company, typically through crowdfunding investment sites like CrowdCube or Seedrs, you’ll be able to deduct 30% of your investment from your income tax bill for the year. The amount you can invest in any given year is £1 million – potentially saving up to £300,000 in income tax.

You can find out more in our guide to equity crowdfunding.

Child And Dependent Care Expenses

If you pay someone to care for a child or another dependent while you work, you may be able to claim the Child and Dependent Care Credit. To qualify, the person receiving the card must be a child or a spouse or other dependent who is physically or mentally incapable of self-care.

The credit is worth between 20% and 35% of your allowable expenses, depending on your income. Allowable expenses are limited to $4,000 for the care of one dependent and $8,000 if you paid for the care of two or more dependents. IRS Publication 503 provides more information on the Child and Dependent Care Credit. Youâll need to attach Form 2441 to your Form 1040 to claim the credit.

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Sell Loser Investments To Offset Gains

A key year-end strategy is called loss harvestingselling investments such as stocks and mutual funds to realize losses. You can then use those losses to offset any taxable gains you have realized during the year. Losses offset gains dollar for dollar.

And if your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income.

If you have more than $3,000 in excess loss, it can be carried over to the next year. You can use it then to offset any 2022 gains, plus up to $3,000 of other income. You can carry over losses year after year for as long as you live.

Talk To A Tax Attorney

Secrets to Lowering Your Tax Bill

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    The Top 17 Small Business Tax Deductions

    Each of these expenses are tax deductible. Consider this a checklist of small business tax write-offs.

    And remember, some of the deductions in this list may not be available to your small business. Consult with your tax advisor or CPA before claiming a deduction on your tax return.

    The cost of advertising and promotion is 100 percent deductible. This can include things like:

    • Hiring someone to design a business logo
    • The cost of printing business cards or brochures
    • Purchasing ad space in print or online media
    • Sending cards to clients
    • Running a social media marketing campaign
    • Sponsoring an event

    However, you cannot deduct amounts paid to influence legislation or sponsor political campaigns or events.

    Make The Most Of Venture Capital Trusts

    Similarly, Venture Capital Trusts also offer 30% tax relief, but only on investments up to £200,000. VCTs are a specialist type of investment trust, meaning the investments are managed by a fund manager, rather than chosen yourself.

    To qualify for the relief, you’ll need to buy the shares at launch, and hold them for at least five years.

    Read Also: How To Qualify For First Time Home Buyer Tax Credit

    Capital Gains Tax Allowance

    Capital gains is the profit you make from selling certain investments, including second homes, art, antiques and shares.

    Capital gains of up to £12,300 are tax-free in 2022-23. Married couples and civil partners who own assets jointly can claim a double allowance of £24,600.

    Remember, if you don’t use the allowance within the tax year, it’s lost forever. You can’t add your tax-free allowances together for different years.

    This chart explains the rate of capital gains tax you will pay as a basic-rate and higher-rate taxpayer. For more details, see our guide on capital gains tax allowances and rates.

    Contribute The Maximum To Retirement Accounts

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    There may be no better investment than tax-deferred retirement accounts. They can grow to a substantial sum because they compound over time free of taxes.

    Company-sponsored 401 plans may be the best deal because employers often match contributions.

    Try to increase your 401 contribution so that you are putting in the maximum amount of money allowed . If you cant afford that much, try to contribute at least the amount that will be matched by employer contributions.

    Also consider contributing to an IRA.

    • You usually have until the April 18, 2023 filing deadline to make IRA contributions, but the sooner you get your money into the account, the sooner it has the potential to start to grow tax-deferred.
    • Making deductible contributions also reduces your taxable income for the year.
    • You can contribute a maximum of $6,000 to an IRA for 2022, plus an extra $1,000 if you are 50 or older. Use our IRA Calculator to see how much you can contribute.

    If you are self-employed, a good retirement plan might be a Keogh plan. These plans must be established by December 31 but contributions may still be made until the tax filing deadline for your 2022 return. The amount you can contribute depends on the type of Keogh plan you choose.

    Also Check: What Is The Difference Between Estate Tax And Inheritance Tax

    Medical And Dental Expenses

    Even with insurance, you might have to pay for medical expenses out of pocket. You can deduct these expenses for yourself, your spouse or any of your dependents, as long as the total amount exceeds 7.5% of your AGI. Possible expenses include:

    • Fees to doctors, dentists, specialists, mental health professionals and even nontraditional medical practitioners.
    • Hospital care, residential nursing home care and acupuncture treatments.
    • Treatment for alcohol, drug addiction, smoking-cessation programs and prescription drugs for nicotine withdrawal and related addiction needs.
    • Payments for insulin, eyeglasses, contact lenses, hearing aids, crutches, wheelchairs, guide dogs and other service animals.

    Funeral expenses, over-the-counter medications and most cosmetic surgery can’t be deducted.

    The Right Tax Software Can Help You Find Eligible Tax Breaks

    Selecting the best tax software for your situation can help greatly with finding all the deductions and credits that apply to you. Our top choices this year — TurboTax and H& R Block — use helpful questionnaires to identify all your possible savings, but you’ll need to pay for their expertise. Alternative software option TaxAct costs less and uses a Deduction Maximizer to make sure you don’t miss anything important, but it’s less polished and lacks the support features of the big two.

    You can also file your taxes for free, particularly with Cash App Taxes — our pick for best free tax software — but you’ll probably need to do some of your own tax research on important credits and deductions to make sure you get the biggest possible refund.

    Recommended Reading: How Much Taxes Get Taken Out Of Your Paycheck

    Child And Dependent Care Credit

    If you care for a child or another dependent in your household, you may be able to get up to 50% back as a tax break or refund for your child care-related expenses in 2021. The amount you can claim maxes out at $8,000 for one dependent and $16,000 for two or more. To qualify, you’ll need to provide proof of your expenses come tax time.

    What Is The Tax Treatment Of Charitable Contributions

    3 Tactics to Maximize Tax Refund

    Individuals who make qualified charitable contributions may deduct those contributions up to 60% of their adjusted gross income, as long as they itemize the deductions on their income taxes. Taxpayers who take the standard deduction may not deduct charitable contributions.

    Corporations can deduct certain charitable contributions, though they may not deduct more than 10% of their pretax income in any given year. Excess contributions may be carried forward for up to five years. How your contributions are treated may also depend on the type of contribution you made, such as cash, property or shares of stock.

    Certain charitable contributions also count as business expenses. If your business received any benefit in exchange for the donation, such as ad space or event sponsorship, the donation can be considered a business expense.

    Key takeaway: Charitable contributions can be deducted, although corporations cannot deduct more than 10% of their pretax income in the same year. Some charitable contributions are also business expenses.

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    Legal And Professional Fees

    Legal and professional fees that are necessary and directly related to running your business are deductible. These include fees charged by lawyers, accountants, bookkeepers, tax preparers, and online bookkeeping services such as Bench.

    If the fees include payments for work of a personal nature , you can only deduct the part of the fee thatâs related to the business.

    Income Deferral Or Acceleration

    Deferring or accelerating taxable compensation isnt the right approach for every situation, but it may reduce your exposure to income and capital gains taxes and the 3.8% Medicare surtax on investment income.

    Income deferral isnt just about deferring income in the current year. Tax savvy individuals know that creating a long-term income deferral strategy can help you compound your savings and investments at a faster rate.

    One thing to keep in mind as you consider tax reduction strategies for high-income earners is that the current tax rates are temporary and slated to expire in 2025 income you defer in 2022 may actually be taxed at a higher rate later on.

    Key income strategies to consider:

    Consider non-qualified deferred compensation contributions. If your employer offers a deferred compensation plan you can reduce your taxable income this year and build your post-retirement savings.

    Ask your employer to defer income until 2023. Are you having a big year for commission income? If so, your taxable income may be higher this year than next year.. If you plan on receiving commissions or other types of earned income late in 2022, consider asking your employer to defer paying your income until 2023. If your taxable income is going to be lower next year, deferring your income until next year could reduce your tax burden by transferring the income to a lower tax bracket.

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    What Makes A Business Tax

    Tax-exempt organizations do not have to pay federal income taxes, though may still be required to pay state and local income tax. To be eligible for tax-exempt status, the owners and founders of a business must not receive profits from it.

    A variety of organizations can be tax-exempt, but they generally fall into one of nine categories:

  • Arts or culture
  • Public social benefit
  • International or foreign affairs
  • Membership organizations
  • To receive tax-exempt status, your business must register with the IRS. The most common form of tax-exempt organization has 501 status. To be eligible for this, your organization must

  • Not give net income to an owner, founder, or any other individual.
  • Have a religious, scientific, educational or other charitable purpose.
  • Not be involved in political campaigns or attempt to influence government legislation.
  • Not violate public policy or be involved in illegal activity.
  • If you are a 501, in addition to being tax-exempt yourself, donations that individuals make to your organization are tax-deductible. There are a variety of other tax-exempt entities, such as a 501 status for social welfare organizations. The IRS provides information on who can claim tax-exempt status and which forms you will need to use to file the return.

    Key takeaway: Tax exempt businesses are identified by law and registered with the IRS. Tax exempt businesses are generally non-profit 501 organizations.

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