Tax Loss Harvesting

Many taxpayers are not familiar with the term “tax loss harvesting,” but it’s an important term to know and understand.   

Tax loss harvesting is something that you can use to your advantage whenever you suffer an investment loss. Essentially, by making your losses evident to the IRS, you can avoid paying as much in taxes.

To take advantage of tax loss harvesting, you have to sell your assets for less than you paid for them and/or earned from them, i.e. at a loss. You then have to use the money to take on other, similar investments.

By doing this, you can lower your income tax costs by subtracting any losses from your capital gains. Just keep in mind that taxation does vary based on how long you’ve held an investment, so you have to factor that information in. If you’ve held an investment for over a year, it will be taxed at the long-term capital gains rate. Investments held for under a year, however, are subject to the normal tax rate.

Can YOU Benefit from Tax Loss Harvesting?

Basically, if you have any capital gains and losses, you can use tax loss harvesting to your advantage. However, this opportunity tends to most benefit long-term investors.

And, the best way to enjoy these benefits is to hold onto your investments for as long as possible. The longer you do, the more your savings will compound

Your best bet is to take advantage of this opportunity at the end of each year, just for simplicity’s sake, but there is no rule that says you have to wait until then.

However, to ensure you are taking advantage of this opportunity to the fullest extent possible and that you are doing everything right, just make sure that you work with a tax professional every step of the way, something all investors should be doing anyway.

The Savers Tax Credit

Everyone knows that saving for retirement is important. However, that certainly doesn’t make it easy. Fortunately, there are many credits and programs that exist to make it, at the very least, a little bit easier.   

One such credit is the Saver’s Credit, which was designed specifically to help average people save for retirement. If you qualify for this credit, you could enjoy a tax credit for as much as half of your retirement contributions.

Are You Eligible?

Whether you are eligible for this credit or not and how much of a credit you are eligible for depends on your filing status, as well as how much you make each year. Some people can earn a 10% credit, while others earn a 20% credit or even the aforementioned 50% credit.

For people who are single, married filing separately, or widowed, here are the eligibility factors:

l  If you have an adjusted gross income between $19,751 and $30,500, you are eligible for the 10% credit.

l  If you have an adjusted gross income between $18,251 and $19,750, you are eligible for a 20% credit.

l  If you have an adjusted gross income below $18,250, you are eligible for a 50% credit.

Of course, if your status changes, your eligibility will change as well. For head of household taxpayers, the limits are:

l  If you have an adjusted gross income between $29,626 and $45,750, you are eligible for a 10% credit.

l  If you have an adjusted gross income between $27,376 and $29,625, you are eligible for a 20% credit.

l  If you have an adjusted gross income below $27,375, you are eligible for a 50% credit.

For people who are married filing jointly, the limits are as follows:

l  If you have an adjusted gross income between $39,501 and $61,000, you are eligible for a 10% credit.

l  If you have an adjusted gross income between $36.501 and $39,500, you are eligible for a 20% credit.

l  If you have an adjusted gross income below $36,500, you are eligible for a 50% credit.

What You Should Understand About Tax Shelters

Most people have heard the term “tax shelter.” Unfortunately, most people don’t really understand the true definition of this term.   

A “tax shelter” is simply a place where you can put your money so that it won’t be taxed. And, while that might sound illegal, there are plenty of tax shelter options that are fully legal and legitimate. These legitimate tax shelters are the exact type that you should be taking advantage of.

Deductions

One type of legal tax shelter is what is known as a deduction. Deductions are legally allowed tax breaks.

You can get deductions for things like making a donation to a charity, deducting business expenses, or deducting student loan interest. There are all kinds of deductions available, and you can find the ones that will apply to and benefit you by working with a qualified tax professional.

Home Equity

Home equity is another valuable tax shelter, at least for those who sell their homes at some point in the future.

When you choose to sell your home, you won’t have to pay taxes on the profit up to a certain amount. For single people, this amount is $250,000. For married couples filing jointly, the amount is $500,000. That’s a lot of money to make without paying taxes, and it’s perfectly legal. Just make sure you work with a tax professional to ensure you cross all your “i’s” and dot your “t’s.”

College Savings

If you have children, you undoubtedly hope that they will one day attend college. If you’re saving up money for that very purpose via a 529 College Savings Plan, you could also save on taxes.

Any earnings from this plan are not subject to taxes, providing you do eventually use them for your child’s college education.

As you can see, legal tax shelter opportunities abound. These are actually just a few of many. The key is simply to take advantage of the tax shelter options you have. Learn how to do just that and about other possible tax shelter options by working closely with a tax professional.

The Truth About Tax Loopholes

Many people are under the misguided impression that the tax law in the United States is perfect. However, that’s definitely not the case. There are some glaring loopholes within the tax law.   

When we say “loophole,” we are talking about provisions that exist in the tax code for reducing tax liability. Most of these provisions were designed for real and legitimate reasons, but that does not stop others from taking advantage of them or using them in unintended ways. Others, however, were designed solely with the intention of helping taxpayers, which is nice to know.

Some of these loopholes deserve being explored.

The Carried Interest Loophole

This glaring loophole most often benefits hedge fund managers, private equity partners, and venture capitalists. Through it, you can enjoy having any compensation you earn taxed at a lower rate than the regular income tax rate. This happens because of the “long-term capital gains rate.”

The Home-Sale Exclusion Loophole

Another loophole applies to those who sell their home and end up making a profit. These people won’t owe capital-gains taxes on the first $250,000 (if single) or $500,000 (if married filing jointly) they earn in profit. Most people aren’t earning this much for their home anyway, so it’s safe to say that the vast majority of people who sell their homes can benefit from this loophole.

The Earned Income Tax Credit Loophole

Some people who fall below a certain income can take advantage of the “Earned Income Tax Credit” loophole, which allows them to reduce their tax bill. This credit is refundable, meaning people can even end up earning money from the IRS if the math plays our right.

As you can see, lots of tax loopholes do exist, and some are definitely worth taking advantage of. To learn more about these or other loopholes and how to use them to your benefit, speak with a tax professional.

About a Tax Extension

Whenever possible, you should always attempt to file your taxes on or before the April filing deadline. This will keep you safe from penalties, fees, and other potential consequences of not getting your taxes in on time.   

If, however, you just can’t make that April deadline for some reason, you do have the option of requesting an extension. If granted, you have six more months to get your tax return in. However, make sure you fully understand this October deadline and how it works in order to avoid making a grave mistake.

An Extension Doesn’t Fully Protect You from Penalties and Fees

Many people wrongly assume that if they’re granted a filing extension, they are safe from penalties and interest. However, that’s not necessarily the case. Just because you were granted a filing extension doesn’t mean you were granted a paying extension.

Thus, you’ll still likely have to deal with the failure to pay penalty. On top of that, if you miss your October deadline- the extended deadline- you could also find yourself facing a failure to file penalty.

Special Circumstances May Apply

As you can tell, it is typically in your best interest to file and pay your taxes by the April deadline or, if you absolutely can’t, by the extended October deadline. However, there are some special circumstances in which you could end up having until December to file and pay.

These special rules typically apply to people living outside the United States or military professionals in combat zones. If you think you may have a special circumstance such as this talk to a tax professional to learn more about your options.

The bottom line is that you should do what you can to file and pay your taxes on time. And, if you can’t, make sure you understand and adhere to the full regulations surrounding tax filing extensions.

When You Don't File Your Taxes

Taxes are something that most people are required to file each year. Of course, it’s also something most of us dread, especially if you know you’re going to be hit with a big tax bill.

Don’t make the mistake, though, of thinking that you can simply “skip out” on filing your taxes. In fact, doing so comes with some serious potential consequences.  

Penalties and Interest, Oh My!

When you don’t file your taxes by the April deadline, penalties immediately start piling up. This includes the ‘failure to file” penalty, which is 5% of the amount of tax you owe for each month you don’t file your return. Eventually, you could end up owing 25% of any taxes due plus the taxes themselves.

On top of this, there’s a “failure to pay” penalty related to the taxes that you owe, as well as interest on all of your tax debt. When you consider all of these penalties and their costs, it’s easy to see that you should file on time no matter what.

You’ll Miss Out on Potential Returns

If you don’t owe any taxes, the IRS won’t hit you with a bunch of penalties for not filing. However, it will hold on to your refund.

This means that you could miss out on money that is owed to you, all because you forgot to file or put it off.

If it’s too late and you’ve already missed a filing deadline, don’t panic. Instead, see a tax professional, file your taxes, and do everything you can to get back on track. Payment plans and other options exist to make this easier than you might think, but it’s definitely nice to have a professional to help you wade through it all. And, when you’re done, you can take steps so that you never miss a tax filing deadline again.

Retirement Savings Can be the Key to Tax Savings

Getting a hefty tax bill at the end of the year does not feel good. Fortunately, though, there are some legal and very smart ways to go about reducing that tax bill.

For example, if you make a concentrated effort to save for retirement and you do so in the right way, you could end up owing less in taxes come tax time.  

The 401K Hack

To begin with, consider opening a 401K if you haven’t already. Once you have this plan established, then go ahead and max it out each year, meaning contribute the maximum amount allowed.

Your payments to your 401K will reduce your taxable income, and you’ll be saving for retirement in the process. In some cases, you could even reduce your taxable income so much via this method that you end up bumping into a lower tax bracket.

Try Opening a SEP IRA

Another option you may want to try, if you qualify, is to open a SEP IRA. These accounts are open to those who are self-employed and/or who own their own small businesses. And, when you contribute money to this type of account, you can lower your tax liability up to a certain amount.

If you do go this route, just make sure you are aware of the contribution limits that apply and that you stay within them.

These are just two of many ways that you can save for retirement and, at the same time, reduce your taxes. To learn about more options that might be available to you, speak with a tax professional. Not only can you get great tips on reducing taxes, but you can also ensure your retirement savings plan is up to par and on track to help you in the future.

What is Negative Income Tax?

Many people have not heard of the “negative income tax,” and, if you haven’t, don’t worry. It’s not a real thing- just an idea that some people believe in.   

The idea behind the idea, so to speak, is to provide those who are poor with money. People who support the negative income tax believe this is a better solution than the government programs that currently exist, such as subsidized housing and tax credits.

Proponents of this idea think that those with little or no income should file tax returns and then, if they meet certain requirements, be supplied with a pre-determined payment amount based on factors such as household size.

While the negative income tax obviously doesn’t exist yet- and some say it never will- it’s an idea that many people stand strongly behind. And, those who do believe in this idea also tend to support the Basic Income Guarantee, a theoretical policy that would provide a “floor” income for every American, basically ensuring that everyone could maintain a certain sustainable quality of life.

Obviously, these ideas are pretty radical, so it makes sense that people tend to feel very strongly about them one way or the other. People who are “for” ideas like these think that it would help the economy and better the lives of all Americans. Others, however, think it would discourage people from working harder and create even more of an “entitlement” generation.

Right now, though, it’s all just a matter of conjecture and talk. However, no one knows what the future holds, so it’s not a bad idea to think about ideas such as these and to decide where you stand. Who knows? One day, you may have to vote on a matter like this.

Own Your Own Business? Let's Talk Taxes

Owning your own business is a wonderful thing. However, like most wonderful things, it also comes with some level of responsibility. One of those responsibilities is paying business taxes.  

How much you’ll need to pay, when, and various other factors will all depend on the type of business you have. People with a sole proprietorship, for example, will have different obligations and rules than people with corporations.

If you’re not sure how best to classify your new business, or if you’re considering changing the classification of your current business, it’s a good idea to speak with an accountant to figure out, tax-wise, which would make the most sense for you.

Take Advantage of Deductions

While figuring out business taxes can be a bit annoying, owning your own business isn’t all bad.

In addition to the perks of being your own boss, you can also enjoy several deductions that the average person doesn’t. These include deductions for things like legitimate business expenses (think equipment and required travel), premiums paid for health insurance, and more. There are also tax credits for which you may be eligible.

To ensure that you’re getting all of the deductions and credits for which you are eligible, however, it’s a good idea to sit down with a tax professional. That way, you won’t miss out on an opportunity to save money or end up paying more than you truly have to.

Also, keep in mind that having a tax professional available at all times is a wise idea when you own a business, whether you have tax filing questions or not. All businesses have financial needs, and it’s best to let a professional address and handle those needs to avoid costly mistakes and other problems.

Estate Tax Basics

Many people hear the term “estate tax” and assume that estate taxes only apply to the very wealthy. However, that’s not always the case.

Estate taxes are taxes applied to transferring property to heirs. When a person dies and leaves behind a property to others, that estate will be taxed if it’s worth a certain amount, hence the name “estate tax.” Unfortunately, many people also call this tax by a much darker name- the “death tax.”  

Whatever you want to call it, right now the federal estate tax rate is 40%.

When You Plan an Estate

Obviously, you don’t have to worry about estate taxes unless you are leaving property to others. However, when you do make these plans, it’s necessary to determine the value of your estate and what taxes, if any, will be applied.

A qualified financial planner can help you with these planning needs.

When You Inherit an Estate

Estate taxes typically don’t affect the people who are lucky enough to inherit an estate or to receive other gifts of value from their deceased loved ones.

However, such people do often have to pay taxes on the money they receive. If you have recently received a gift of some kind, whether it be an estate or something else, from someone deceased, it’s a good idea to check in with a tax professional to determine what you owe and how best to file and pay it.

Pretty much everything can be taxed and is taxed- including items and assets left behind by people when they pass on. To ensure you’re paying everything you’re supposed to, don’t underestimate the value of working with a qualified, knowledgeable tax professional.

What are Payroll Taxes?

Most of us have heard the term “payroll taxes” before. What you might not know, however, is what, exactly, payroll taxes are.   

To put it simply, payroll taxes are funds that are required to deducted from your pay. These taxes apply to the first $127,000 of your income as of 2017.

The good news is that you’re not all on your own when it comes to payroll taxes, at least not if you work for someone else. When this is the case, your employer will take care of some of these taxes for you. If you are self-employed, though, all of the burden does ultimately fall on you.

For those who work for others, payroll taxes that are withheld are made up of things like state income taxes, federal income taxes, Social Security taxes, and Medicare taxes, also known as FICA taxes.

Whether you fall into the self-employed or traditionally employed category, it can be helpful to talk with a tax professional if you’re having trouble understanding payroll taxes. These professionals can better explain them to you and help to ensure that you’re paying everything you owe to avoid trouble later on down the line.

The Good News

While payroll taxes and having to pay them isn’t very fun, it’s really not as bad as it seems.

Without payroll taxes being deducted from your checks on a regular basis, you’d find yourself making a huge payment come tax time each year.

Plus, if you end up paying too much in payroll taxes or in any taxes for that matter, you’ll get a nice refund from the IRS come tax time.

At the end of the day, payroll taxes are just a part of how our tax system works, so, while they may not be your favorite thing, they are a necessary and inescapable part of life for Americans who work.

Are You at Risk of a Tax Levy?

Filing taxes, knowing how much you owe, and then figuring out how to pay it all can be difficult. In fact, many people report being confused during tax season. Unfortunately, though, if you don’t take care of your tax liabilities like you’re supposed to, you could find yourself facing a tax levy.

A tax levy happens when the IRS takes some of your assets, like money in your bank account, or when it chooses to garnish your wages. Fortunately, you’ll be notified before this type of thing happens.  

You’ve Been Warned

As mentioned, the IRS doesn’t just take your money out of the blue. Instead, it will notify you when you owe back taxes. It will also give you deadlines for when the money has to be paid. If you ignore these notices for too long, they won’t just go away.

Instead, it is likely that you will eventually receive a CP77 notice, which will inform you that the IRS plans to levy assets and collect on unpaid taxes. Once you receive this notice, it is imperative that you act fast.

You have several options for what to do when you get this notice. You can attend a hearing if you feel the IRS is not charging you a correct amount. To sign up for the hearing, you simply have to fill out Form 12153 by the required deadline.

You could also request an offer in compromise with the IRS, which would allow you to settle with the IRS and pay an amount less than what you actually owe. Alternatively, you may be able to set up a payment plan with the IRS to pay off the amount you owe in more manageable chunks.

Deciding what the best route is for your situation can be difficult, which is why it is advisable to speak to a tax professional, ideally before things ever get to this point.

No matter what, one thing is for sure- if you ignore the levy notice, the levy will happen.

The Importance of Professional Assistance

As mentioned, it is very important that you seek professional financial advice if you are facing a levy, having trouble paying your taxes, or have other concerns about getting “squared up” with the IRS.

Tax law is confusing, so don’t try to go it alone if you’re not familiar with how everything works.

Understanding Sales Tax

Most people pay sales tax, and most people, at the same time, don’t really know what sales tax is. To put it simply, sales tax is the tax that is collected by merchants. The merchants have to pay this money they collect to the IRS. Of course, this is not the case in every state, though it is in most.

Right now, 45 states collect state sales tax, and 38 states collect local sales tax. How much taxes different states collect and how much they charge in each category varies greatly from one state to the next.   

If you do live somewhere that requires you to pay one or both types of taxes on a regular basis, then you may find it smart to deduct sales tax payments when you file your federal income tax return. In order to do this, you’ll need to itemize your deductions, and then deduct your state income taxes or state sales taxes, not both. Since you can’t deduct both, it’s worth it to figure out which deduction will benefit you the most and then take that one.

For most people, the smartest option is to deduct state income taxes. However, that may not be the case if you’ve made big purchases in a place with higher sales tax or if you’ve paid more in sales taxes than income taxes. If you’re having trouble figuring out which situation applies to you and how best to file, remember that you can always seek help from a tax professional.

In fact, anytime you are trying to itemize deductions and/or deduct sales tax payments, it’s a good idea to speak with a professional. These tax situations can be tricky and difficult to handle on your own, which is why it’s always good to have input and help from someone who knows what they’re doing.

Amended Tax Returns and What You Need to Know

Tax time is stressful for everyone. And all that stress can sometimes lead to mistakes in filing. If you’ve sent off your return and then notice you’ve made an error, don’t panic.  You can correct your mistake by filing what is known as an “amended return.”   

When to Amend

One of the main reasons to amend your tax return is if you’ve underreported your income. Not reporting your full income is an offense and can get you in trouble with the IRS, so you will definitely want to report this

You should also file an amended return if you missed out on some tax credits or tax deductions that would have saved you money.

Form 1040X

Most of the time, when you need to file a tax return, it’s as simple as filling out Form 1040 X.  You can use this form if your original tax form (the one you’re correcting) was:

·        Form 1040

·        Form 1040A

·        Form 1040EZ

·        Form 1040EZ-T

·        Form 1040NR

·        Form 1040NR-EZ

Just remember that amended forms have to be filed the old-fashioned way, i.e. on paper, so make sure you don’t waste any time in getting these forms filled out and done. It’s also not a bad idea to have a tax professional check over your amended form to protect you against any further mistakes.

Time Limits

One final thing to keep in mind is that there are time limits related to how long you have to file your amended tax return.

You have up to three years after filing your original return to get your amended return in. If you’ve already paid the IRS your taxes, you have two years after paying.

That may sound like a lot of time, but it goes by quickly, so be sure to fix errors right away.

And, remember, it is always better to avoid errors in the first place by having a professional prepare your taxes.

The Truth about Tax Refunds

Most people are excited when they find out that they are getting a tax refund. Many people even plan for and count on their refund each year, coming up with big ideas about what they will do with their money. While these refunds get a good name, however, they are actually not a good thing.  

When you get a tax refund, you are getting it because you have paid more taxes than necessary during the regular tax year. This could be because you had too much money withheld by your employer or, if you’re self-employed, it could be because you overpaid your estimated taxes.

Some people don’t really mind getting a big refund of their own money once a year. They view it as a “bonus” of sorts. If you’re not in that camp, though, and you’d like to see more of your own money throughout the regular working year, talk with your employer or work with a professional accountant to figure out what you can do to pay less in taxes throughout the year. You actually have many options for making this happen.

When Should You Receive Your Refund?

If you’re fine with getting a refund once a year or it’s too late for you to change things for the upcoming tax season, you may be wondering when you can expect your refund.

Obviously, the sooner you file your taxes, the sooner you can get your refund, so make sure you file on time. You can also receive your refund faster if you file online. Generally, people who file taxes online receive their refunds a little over three weeks later. People who file the old-fashioned way, i.e. on paper, generally have to wait a little over six weeks or as long as eight weeks.

Mistakes made in filing can cause delays on these estimates, so make sure to go over your tax forms very carefully before sending them off. Ideally, you should have a professional prepare or at least look over them for you in order to avoid errors.

Hopefully, you now understand the tax refund process a bit better. If you do run into any questions or problems, however, remember that asking a professional for assistance is always your best bet. While these refunds get a good name, however, they are actually not a good thing.

When you get a tax refund, you are getting it because you have paid more taxes than necessary during the regular tax year. This could be because you had too much money withheld by your employer or, if you’re self-employed, it could be because you overpaid your estimated taxes.

Some people don’t really mind getting a big refund of their own money once a year. They view it as a “bonus” of sorts. If you’re not in that camp, though, and you’d like to see more of your own money throughout the regular working year, talk with your employer or work with a professional accountant to figure out what you can do to pay less in taxes throughout the year. You actually have many options for making this happen.

When Should You Receive Your Refund?

If you’re fine with getting a refund once a year or it’s too late for you to change things for the upcoming tax season, you may be wondering when you can expect your refund.

Obviously, the sooner you file your taxes, the sooner you can get your refund, so make sure you file on time. You can also receive your refund faster if you file online. Generally, people who file taxes online receive their refunds a little over three weeks later. People who file the old-fashioned way, i.e. on paper, generally have to wait a little over six weeks or as long as eight weeks.

Mistakes made in filing can cause delays on these estimates, so make sure to go over your tax forms very carefully before sending them off. Ideally, you should have a professional prepare or at least look over them for you in order to avoid errors.

Hopefully, you now understand the tax refund process a bit better. If you do run into any questions or problems, however, remember that asking a professional for assistance is always your best bet.

Understanding Tax Liability

Tax liability is not something that most people truly understand. They may get that they want to avoid having “tax liability,” but the average person doesn’t really know why or how to do so.

In order to understand all of these things, you first have to understand what, exactly, tax liability is. Tax liability is simply a term for the money that you owe in taxes at the end of the tax year.

Some people, if their income and/or deductions are low enough won’t have any tax liability. If you don’t fall into that category, however, bear in mind that there are still many things you can do to reduce your tax liability.   

Simple but Effective Tips for Reducing Tax Liability

To start off with, one very easy way to reduce tax liability is to take advantage of as many deductions as possible. There are all kinds of deductions available, such as home office deductions or business expense deductions, that can save you money. However, if you’re not aware of these deductions, you can’t benefit from them. That’s why it’s important to have a qualified tax adviser who can find deductions for which you’re eligible and then ensure that you use them to your maximum benefit.

Another method you can try to reduce tax liability is to give to a legitimate charitable organization. Your donation or donations will be tax-deductible, which means your taxable income is reduced. That, in turn, can reduce your tax liability. So, in this way, the more you give, the more you can reduce your tax liability.

Believe it or not, something as smart as saving for retirement can also benefit you when it comes to reducing tax liability. When you put money in a 401(k), for example, you can reduce your taxable income and, thus, your tax liability. Not all methods of saving for retirement will help with reducing tax liability, but many will, so just follow the advice of a financial professional if reducing tax liability is your main goal.

As you can see, you have a great many options for reducing tax liability. These are just a few of many. To discover all of your options and to take advantage of them to the fullest, be sure to work closely with a tax professional.

Tax Mistakes that Can Force an Audit

No one wants to face a tax audit. Even if you’ve tried your best to be honest and to keep everything on the “up and up,” it is still a stressful experience that most of us just don’t have time for.

And, while there is no surefire way to protect yourself from an audit (some of them just happen randomly), there are things that you can do to greatly reduce your chances of being audited.

To begin with, make sure you don’t commit any of the “major mistakes” that can easily end in an audit.

Hiring An Unscrupulous Tax Preparer

Many people try to protect themselves from errors and auditing by hiring a professional to prepare their tax returns.

And, while this is usually a smart choice, you do have to be careful to hire someone who is honest, scrupulous, and who knows what they’re doing.

If you hire the wrong person, meaning someone inexperienced and prone to mistakes or, worse yet, someone who lies to get higher returns for his clients, you could find yourself in a bad situation.

If the IRS notices that a particular preparer is making a lot of mistakes or being dishonest, it may decide to audit every person who has had a return filed by that individual. Obviously, you do not want your name on that kind of list, so choose your preparer wisely.

Filing the Wrong Forms

One easy way to end up getting audited is if you file the wrong tax forms for your situation. When you make this mistake, the IRS may wonder what else you’ve done wrong and decide to investigate with an audit.

Of course, some forms, such as a Schedule C, which is required for businesses, just increase your chances of an audit no matter what. In these cases, it’s important to work with a knowledgeable tax professional to ensure you’re filing these forms correctly and that you have protection and an advisee you can turn to if an audit does occur.

Taking Excessive Deductions or Credits

Finally, deductions and credits are wonderful things that can end up saving you a lot of money on your taxes.

With that said, though, if you take a lot of them, this could trigger an audit, particularly if the deductions and credits look a little suspicious, like when you’ve been “entertaining” one too many clients.

By all means, take the deductions and credits you are eligible for, but do so honestly and make sure you keep careful, documented proof of the fact that you were allowed to take them.

If you can follow these tips, you can reduce your chances of being audited or at least survive if an audit does happen to you.

How do People Spend Their Tax Refunds?

Each year, a large amount of people enjoy tax refunds come tax time, some of them pretty sizeable. These refunds are often very looked forward to by filers, but why? What do they plan to do with the additional money?

 

While it’s different for everyone, a recent TaxSlayer survey took a look at what people had planned for their refunds.

Most people, a whopping 43%, said that they planned to put their money in savings. This is obviously a smart use for a tax refund, but let’s just hope that people make good on their plans! So many people have good intentions for their money...but then don’t quite follow through.

42% of people also planned to use their money wisely, saying that it would go to pay off debts. This is another smart use of a refund, especially if the money is used to pay down or off debts that are negatively affecting one’s credit score and/or growing larger due to interest.

Other uses for the money weren’t quite as noble as the two above.13% wanted to buy a luxury item that they’d been waiting for while another 13% wanted

to fund a fun experience, like skydiving or a vacation. While these uses are not necessarily bad, they aren’t the best choices if you have other expenses that need to be taken care of.

Sadly, only 9% of people surveyed said that they’d use their money to fund a retirement plan. That’s unfortunate since studies show that most Americans are vastly under-prepared for retirement.

As you can see, many people do have good plans for their tax refunds, while others plan to use them frivolously. Hopefully you are in that first group! Whether you are or not, it’s a good idea to visit a tax professional to talk about your refund and the best possible ways that you could spend or invest it.

Take Advantage of Tax Cuts

There’s a new tax law in town, one that should offer up small tax cuts to most American citizens. And, while these tax cuts may be small, they can be mighty and mighty helpful if they are used wisely.

In fact, by taking advantage of any tax cuts or savings that you can find, you could actually help yourself when it comes to retirement savings.    

And, really, at this point, any help is better than no help. So many Americans- it’s estimated at about half- are not prepared to retire comfortably. Some, if they keep going the way they are going, may even retire with nothing.

By taking the money that you’re saving from the tax cut and choosing to put it in a Roth IRA or some other type of retirement savings account, you can end up making a nice dent in the amount of savings that you will need for retirement.

Obviously, you will want to save more than just the tax cut amount if you can, but any little bit helps when it comes to saving for retirement.   

If you’re unsure about how the tax cut will affect you or if it will, you should speak with a tax professional. They can help you not only to calculate your cut and how much it could grow if you invest it in retirement savings but also to find other smart and simple ways to save for retirement.

Just remember, as you save, that anything you can do or sock away for retirement is worth it, so don’t give up on saving. Even if you have to start small, that savings will grow, and you will definitely be grateful for it when the time comes to retire.

What to do with Your Tax Refund

When you get a tax refund, especially when you get one for the first time, it’s easy to get excited and to go “spend crazy” buying whatever you want.

And, while it’s okay to splurge a little bit if your refund is large enough, there are actually much smarter things that you could do with your money.    

Here are some ideas.

Pay Down Your Debts

While it may not be fun, one of the smartest things that you can do with the influx of money come refund time is to pay down your debts.

If you have debts you can pay off completely, do it! Even if that’s not possible, just paying as much as you can, particularly on the debts that are affecting you the most negatively, can have a big and majorly positive impact.

A good idea is to comb through your credit report with a financial advisor to determine which debts need the most immediate attention.

Stash Some Emergency Cash

If you’re like most people, your first instinct when you get extra cash is to spend it, but that may not be so smart.

Instead of spending, consider stashing. Whether you save the money as cash or put it in an emergency savings account, it’s good to have some money on-hand for those unexpected situations.

A car that suddenly needs major repairs, for example, is going to set you back some cash, but you won’t feel the blow quite so much if you’ve got some emergency money on hand to cover the costs. Having that “safety net” of money can really keep you from reeling from financial blows when they come.

Invest

Something else you can do with your refund is to invest it. Whether you want to play the stock market, open up a retirement savings account, or try out a new business venture, investing, if you do it wisely, can grow your money.

Before you invest, though, it is always a good idea to speak with a financial professional about your current situation, your future needs and goals, and the best investment options for you and your needs.

As you can see, there are much better things to do with your refund than just blowing it, so try to put these tips into practice. You’ll be thankful you did later on down the road.

Tax Breaks for Pet Owners

If you’re like most pet owners, then you probably love your furry friend, whether it’s a dog, cat, or anything in between, just as much as you’d love a human child. And, fortunately, the IRS is starting to recognize that by offering a wide range of tax breaks just for pet and animal owners.   

Guard Dogs

Deducting an animal as a business expense might seem like a crazy idea, but it’s actually quite possible.

If you have an animal that protects your business from thieves and intruders, you can deduct it as a legitimate business expense. After all, in this case, the animal really is serving a legitimate business purpose.

Show Dogs

Some people really enjoy showing their dogs. In some cases, they can even make money, often referred to as a “hobby income” from doing so, particularly if they’re good at it.

If you are making money from showing your dog or dogs and you’re counting that money on your taxes, then you can deduct some of the related costs, such as the expenses incurred in training the dog, entering shows, and grooming the dog before a big show.

It is also worth mentioning that it’s not only dogs that can be shown. If you’re earning money showing your pet chicken (and yes, this does exist) or your pet guinea pig, you may still be able to deduct relevant expenses.

Service Dogs

Another way to deduct money for your animals is if you have a legitimate service or guide dog.

In this case, you can deduct expenses related to training the dog, taking it to the vet, and registering it with a national service dog organization. Just make sure you have documentation showing that you actually need the animal to provide a legitimate service.

These deductions and others like them can be super helpful for people who own animals. However, they are not always easy to get. Nor is it easy to make them look legitimate even when they are. So, for these reasons, it’s always a good idea to seek professional tax help when claiming such deductions.

Changes Resulting from the Tax Cuts and Jobs Act

Near the end of 2017, the Tax Cuts and Jobs Act was signed into law. As a direct result of this bill, there have been many changes made to the tax code, changes that you should be aware of since

they could affect you and your 529 plan, particularly if you have children who are in private school or who may be in the years to come. 

For example, 529 plans can now, under the new law, be used for financing as much as $10,000 per year per child for a private school education.

It is important to understand, however, that while this change is federal, states can and likely will make their own new laws regarding 529 plans. It is likely, for example, that, in the near future, private schools will begin factoring 529 plans into their financial aid packages, which could mean that students are now eligible for less financial aid since, in theory, they will have other funds- their parents’ 529 funds- to access.

If you have a child in private school or you are thinking about putting your child in private school, talk to your financial advisor about whether or not investing in a 529 plan is a smart idea. Many are speculating that this change, while it seems positive at first, could actually end up hurting more than helping, as least as far as individual taxpayers are concerned. Plus, there is the uncertainty factor since no one knows exactly what regulations individual states are going to put into effect.

Thus, don’t be too quick to jump on the bandwagon of seeing this change as a good one. Talk about the potential implications with your tax advisor before making any quick decisions about how best to save for your child’s education, both now and in the future.

Easy Ways to Save on Your Taxes

Paying taxes is not something that anyone looks forward to. In fact, for many, they can prove to be a big financial burden. However, if you know what you’re doing and you play your cards right, there are many ways that you can end up saving money on your taxes.  

Tax Credits

Tax credits are wonderful because they reduce how much you owe in taxes. And, if you take enough of them, you can often end up with a nice refund come tax time.

There are all kinds of tax credits available such as credits for buying energy efficiency products for your home. Check with a tax professional for a full list and then take whatever credits you possibly can.

Deductions

Deductions are similar to tax credits in that they can save you money. They can “cut you a break” on taxes that you may owe.

And, as is the case with credits, there are a lot of them. You can earn deductions for everything from charitable contributions you make to having a home office. Talking with a financial professional about your situation is the best way to learn about deductions available to you and to take full advantage of this opportunity to save.

As you can see, there are plenty of legal ways to save money on taxes. And, with so many legal options to save, it would not be wise to resort to anything illegal or unethical. Not only can an illegal course of action be dangerous, but it can also get you in serious trouble with the law. So, always save in legal ways with the help of a professional; after all, there are plenty of ways “on the up and up” to save.

Tax Breaks You Should Know About

With the recent tax reform, many people are unsure what to expect when it comes to tax breaks. Some are concerned that there are no tax breaks left, but that’s certainly not the case.

Sure, some tax breaks may not be available any longer, but there are still a great many tax breaks available. In fact, here are a few that you should know about.

SALT

Many people are not familiar with the State and Local Tax deduction, or SALT as it is commonly known.

However, this useful deduction allows people in some states to deduct their state income and property taxes.

While the deduction isn’t for quite as much as it once was, it is still around and still applicable in some states, including California, New York, and New Jersey among others.

Medical Expenses

Everyone knows that healthcare is expensive. What you might not know, however, is that if your healthcare costs are more than 7.5% of your adjusted gross income, you qualify for a sizeable deduction.   

If you’re unsure if you qualify or just need some help running the figures, speak with a tax professional in your area.

Mortgage Interest

Many people are under the impression that the mortgage interest deduction has been eliminated. Thankfully, that is not the case.

However, the deduction has been changed somewhat. You can’t deduct quite as much anymore, but you can still deduct the interest on a new home loan up to $750,000.

As you can see, deductions do still exist even if they’re a little bit different than they used to be.

To find out more about these deductions or to learn about other deductions for which you may qualify, contact a tax professional.

About Filing Tax Returns

There is a common saying in life that talks about how taxes are inescapable. And, while that may hold true most of the time, there are some situations in which you can get away with not paying taxes.

If, for example, your income for the tax year doesn’t go over the standard deduction and one exemption, then you won’t have to file a return. That’s just one situation, however, out of many in which you might not have to pay taxes.   

Because tax laws can be tricky and because you don’t want to fail to file when you’re supposed to, it’s important to understand how it all works.

Gross Income

To begin with, it is important to understand that all taxpayers can claim a “standard deduction.” And, providing that these taxpayers are not listed as dependents on someone else’s return, they can file one exemption too.

The standard tax deduction as well as the allowed exemption amount is determined by the IRS each year  and will typically change from year to year, so it is always wise to be aware of what the current standard is.

Keep in mind,  however, that if your income is equal to or less than the sum of the exemption and standard deduction, it will not be taxable. In this situation, you would not be required to file a tax return.

Dependents

So, what if you are listed as a dependent on someone else’s tax returns? When that’s the case,  your filing requirements are a little different.

For example, you cannot claim your own exemption, but you will need to file a tax return if you earn more than the standard deduction for a single taxpayer.

As you can see, tax laws are complex, change regularly, and can be hard to navigate. If you need some help understanding it all or if you’re uncertain about whether or not you need to file a return this year, be sure to check with a tax professional before you assume anything. After all, it is always better to be safe than sorry.