Understanding the Domestic Production Activities Deduction

Did you know that some companies are able to take a 3% deduction for their business activities, providing they are based in the United States? This discount applies to small businesses in the manufacturing industry. However, there are extensive rules surrounding who qualifies for these deductions, but, if your business meets them, it can equal some nice savings.   

This deduction, referred to as the Section 199 deduction, applies to businesses with “qualified production activities.” The deduction can be taken from the net income of qualified businesses. Using cost accounting mechanisms, the tax deduction can be accurately calculated and properly received. However, making sure all the math is correct can be tricky, which is why it’s recommended that people apply for this deduction with the help of a financial professional who is familiar with the deduction and its rules.

If you’re curious about whether or not your business will qualify, consider if it engages in any of these eligible activities:

·         United States based manufacturing

·         Software or video game development within the United States

·         Selling, licensing, or leasing items manufactured in the United States

·         Engineering and architectural services for construction jobs in the United States

·         Selling, leasing, or licensing movies that were produced in the United States

Keep in mind, however, that some activities are specifically excluded from being eligible for these deductions. Activities that are on the excluded list include:

·         Cosmetic construction services

·         Selling food and/or beverages from a retail location

·         Leasing or licensing of party items/materials

If your business is engaged in these prohibited activities, you cannot qualify for the deduction. However, if your business is engaged in one of the qualifying activities, then your next step is to speak with a financial adviser. These professionals can tell you how to go about applying for and receiving this great deduction.

The Basics of Backup Witholding

You may have heard of backup withholding and wondered what, exactly, it is. Basically, backup withholding is a type of tax withholding on certain types of income. It is also a relatively rare type of withholding since most taxpayers are exempt from it.     

With that said, though, backup withholding can and often does occur on the following types of income: 

·         Interest

·         Commissions

·         Dividends

·         Fees paid to independent contractors

·         Patronage dividends

·         Royalties

·         Rents

·         Payments from fishing boat operators

·         Payments from brokers for stock and bond transactions

Of course, a person can be exempt from backup withholding under certain circumstances.  In fact, United States citizens and resident aliens who report their name and social security number via Form W-9 and whose information properly matches the IRS’ information are generally exempt.

However, backup withholding, as mentioned, can and does happen. And, when it does, it is often for very specific reasons. These include:

·         The payer was not provided with your taxpayer identification number

·         You do not certify that you are not subject to backup withholding when required

·         The taxpayer identification number you provided was found to be incorrect

·         You have underreported interest or dividends

Obviously, you do not want to be subjected to backup withholding. Thus, it is important that you do not make any of the mistakes above. You can help keep these mistakes from happening by using a financial adviser. These professionals can ensure that there are no mistakes on your tax returns and that you have done everything possible to avoid backup withholding, thereby making it a lot less likely that it will happen to you.

Health Savings Accounts: Are They Worth It?

If you’re a working adult, then there is a good chance that you’ve heard of health savings accounts. You may have also wondered whether or not these accounts are worthwhile. The answer is yes, in most cases. Health savings accounts come with many excellent benefits as long as you set them up correctly.   

These accounts are basically tax-exempt trust accounts or custodial accounts. You should set them up through an experienced health savings account trustee to ensure that they are set up correctly and in such a way as to have maximum benefits for you.

As long as you do that, you can enjoy many advantages by having a health savings account. These include:

·         Tax-deductible contributions

·         Tax-free distributions

·         Allow you to save pre-tax dollars for healthcare expenses that may be incurred in the future

·         Can be paired with high-deductible health insurance plans

·         Earnings, including interest and dividends, are tax-exempt at the federal level.

·         Funds are withdrawn tax-free as long as they are used to pay for eligible medical expenses

As you can see, there can be a great many benefits to having a health savings account. If you think that these benefits could work in your favor, then talk with a financial professional about getting one set up for yourself!

Claiming the Same Dependent

If you and another person are both responsible for the same dependent, you may have wondered whether or not both of you are eligible to claim the person as a dependent. Unfortunately, tax law is written in such a way that only one person can claim a dependent on his or her tax return. However, in some cases, both parents can claim a dependent and receive certain associated tax breaks as long as the custodial parent agrees.    

The tax breaks that are generally associated only with the custodial parent include:

·         The dependent’s personal exemption

·         The child and dependent care tax credit

·         Head of household status where eligible

·         Exclusion for dependent care benefits

·         Child tax credit

·         Earned income tax credit

When the custodial parent waives the right to claim a dependent and passes that right down to the non-custodial parent, however, that parent can receive the following benefits:

·         The dependent’s personal exemption

·         Tuition and fees deduction/ Education tax credit

·         Child tax credit

Waiving these exemptions can be very helpful, financially speaking, for the non-custodial parent. And, furthermore, doing so doesn’t leave the custodial parent “out in the cold” when it comes to tax benefits. This parent can still receive:

·         Head of household filing status when applicable

·         Exclusion for dependent care benefits

·         Child and dependent care tax credit

·         Earned income credit

If you are considering allowing someone else to have some of your benefits and claim a child as a dependent or if you’re on the other end and are hoping to get some of these benefits for yourself as the non-custodial parent, you and the other parent are encouraged to speak with a financial adviser about how to make the change. It’s usually a fairly simple and quick process, but these professionals can handle all your forms and paperwork carefully and answer any questions or concerns that you may have to ensure that everything goes as smoothly as possible.

Understanding Tax Rates

Understanding personal income taxes and how they work can be a bit harrowing. However, with a little help from a financial professional and some research into the processes of the IRS, it doesn’t have to be all that difficult.   

Basically, all personal income taxes are taxed on a graduated scale. This means that your tax rate might be:

l  10%

l  15%

l  25%

l  28%

l  33%

l  35%

l  39.6%

The tax percentage that you will fall into, referred to as a “tax bracket” is dependent on your income and your filing status. Your type of income also matters. Most people just face ordinary tax rates like those described above, though some will face a separate, specialized tax rate due to income related to qualified dividends or long-term capital gains.

There are also, outside of these, specialized tax rates to consider, such as:

l  Social security tax rates

l  Alternative minimum tax rates

l  Medicare tax rates

l  Additional Medicare tax rates

l  Net investment income tax rates

Whether or not these and other specialized tax rates will apply to you and to what degree will be dependent upon several factors.

Hopefully, all of this makes you see just how complex understanding your tax rate can be. And, while doing research on your own is vital and helpful, never underestimate the importance of hiring a financial professional to help walk you through it all and to guide you into making the best possible decisions for your needs, goals, and circumstances.

The Truth About Adult Dependents

Logo of the Internal Revenue Service (Photo credit: Wikipedia)

When you think of dependents, you probably think of children. And, while it is true that most dependents are children, there are also some circumstances under which the IRS allows you to classify adult dependents as dependents for tax purposes. The key is just knowing the rules and whether or not they apply to your situation.   

What’s Your “Relationship Status?”

Sometimes, whether or not you can classify a person as an adult dependent is all about your relationship with that person. Some people count as “qualifying relatives.”

People who generally count are sisters and brothers or half or step sisters and brothers, parents and stepparents, grandparents, nieces, nephews, aunts, uncles, and the like. As long as you are providing verifiable monetary support for these people, you can generally classify them as dependents as long as other guidelines are met, even if they don’t live with you.

You can also claim an unrelated dependent, as long as that person lives in your home. If you think you might have a qualifying dependent relationship, check with your tax professional to learn how to proceed.

Multiple Support

Another thing you should know is that you don’t necessarily have to provide all of the support for another person in order to count him or her as a dependent. Even if you are getting help from others, as long as your own personal contribution is 51% of more, you can still count the person as a dependent. Even if you’re not, if the other caregivers sign a Multiple Support agreement allowing you to do so, you can claim that person as a dependent.

As you can see, the rule about claiming adult dependents can be tricky, and these are just a couple of many. Thus, before attempting to claim an adult dependent, it is always wise to seek help from a tax professional.

Tips to Perfect Your W4

The W-4 that you fill out can seem like yet another piece of paperwork you don’t have time for. However, in truth, it is actually much more than that. This form is important for providing your employer with information it needs to calculate your withholdings. Obviously, since this form plays a vital role in the final amount of your actual pay, you want to get it right! And, fortunately, there are several tips that can help you to do just that.   

Increase Your Withholdings

There are few things worse than finding out that you owe a large chunk of money come tax time. If this keeps happening to you and you’re sure your W-4 is correct, then you should make allowances to have more withheld from your check.

An easy way to do this is to determine how much you’re typically charged for your taxes and then divide that amount by the number of pay periods you go through per year. You can then ask your employer to deduct that amount from each paycheck as withholdings, thereby keeping you from owning a large sum come tax time.

Make Changes

As your life grows and changes, so should your W-4. So many people make the mistake of not updating their W-4s after a major life event. If you go through any big change such as a divorce or marriage, a new job, a home purchase, or anything of the sort, then you need to go and update your W-4 so it reflects these changes. Otherwise, you could end up overpaying in taxes or even find yourself in trouble with the IRS.

Seek Professional Advice

One final thing to do, anytime you’re filling out or updating a W-4 is to always seek professional financial advice. Most people aren’t tax experts, and there’s no shame in that, but there is shame in trying to do it all yourself. Don’t be afraid to ask for help from those with “know how.” It can only benefit you in the long run.

As you can see, you have more control over that W-4 than you think, so wield it by following these tips!

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What Freelancers Need to Know about Taxes

Being a freelancer of any type definitely has its benefits, such as setting your own schedule and controlling the amount of money you make. With that said, though, taxes are something that can be a bit more complicated for a freelancer than for the average person.  

When you’re a freelancer, any profit you earn through your freelancing will increase your taxable income, which will thereby increase your regular income tax and your self-employment tax. Furthermore, as your own employer, you have to pay the full amount, instead of the half that traditional employees pay, for your Social Security and Medicare taxes. Obviously, navigating all of these responsibilities, especially if you are new to freelancing, can be difficult. Fortunately, you can manage it all by following some simple advice.

Set Aside Money For Your Self Employment Tax

First things first, one thing you should get into the habit of doing is setting aside money on a regular basis, preferably once a month, to pay your self employment tax. You can get a decent idea of how much money you need to set aside each quarter by taking your estimated net profit, multiplying it by 15.3% and then dividing that into four monthly payments. As long as your estimations are decently accurate, this should prove to be an effective strategy for budgeting for your self employment tax.

Enroll in the Electronic Federal Tax Payment System

Another good tip that you can follow is to enroll in the Electronic Federal Tax Payment System. Once you register with this site, you should find it very simple to make estimated tax payments online via your checking account. This is another simple way to ensure your taxes get paid in full and that you don’t find yourself in trouble with the IRS.

While these two tips are extremely helpful, they are really just the tip of the iceberg when it comes to all that freelancers need to know. If you can follow these tips, though, and seek the help of a qualified financial adviser who is familiar with dealing with freelancers and their needs, you and your taxes should get along just fine!

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Do You Have to Pay Taxes When You Sell Your Home

People, especially people who are considering putting their houses on the market, often wonder if they will have to pay taxes on the sale of their home.

The answer to that is, fortunately, in most cases, no! Unless you have gains of over $250,000 for single individuals and over $500,000 for married couples, you typically will not have to pay taxes.

There is no age requirement related to this rule as there once was either. Today, all people are entitled to avoid paying taxes on home sale profits up to the amounts specified above, providing that they have lived in the home for at least two years.   

Keep in mind, though, that you only get to use this exclusion on one home. If you exclude gain from another home within the same two year period, you will not qualify for the exclusion again.

If you’re unsure about how to calculate capital gains and how to make sure you’re within your limits, you can do so by subtracting any selling costs minus the cost basis from the original price of the home that you paid.

On the off chance that you do go above the allowed limits, you will have to pay taxes on the money above the exclusionary amount.

If you have questions related to how the sale of your home will affect your taxes, be sure to seek advice from a qualified tax professional. These professionals can also help you to put the amount of money you make from selling your home to good use. This money provides an excellent source for retirement savings and more, so, no matter where you are in the home selling process, it’s definitely smart to get some professional tax advice at this point!

Tips for Estimating Retirement Taxes

Taxes are a fact of life. They don’t go away, even when you’ve finally retired. Once you’ve retired, your taxes will be calculated based on your income. As such, it’s important to have an accurate estimate of how much taxes you’ll have to pay in retirement. That way, when you’re planning for retirement, you can plan fully and thoroughly.   

It’s important to remember that, if you’re like most people, you’ll receive several different types of income in retirement, and each income type will have its own particular tax rules that apply to it. Thus, you’ll need to know not only what your approximate income will be but also the types of income- some of the common ones are discussed below- you’re likely to have and how they will affect your taxes.

Social Security Income

You will likely have social security income in retirement. In fact, for some people, this is their only income source. If that’s the case for you, then you probably won’t have a tax bill during your retirement years.

If, however, social security income is one of a few different types of retirement income that you generate, then some of your social security income will likely be taxed. Several factors will determine how much of your social security income is taxable, but it can vary from 0% to 85%, so it’s definitely smart to make sure you’re doing all the figuring right and that you’re paying the correct taxes on your income when applicable.

Pensions

If pensions are providing part of your income, then you can expect to pay taxes on this money. Basically, any money you put into your pension that wasn’t taxed will be taxed when you withdraw it.

There are ways to make paying pension taxes easier, however, such as automatically having taxes withdrawn from the amounts you receive. Furthermore,you can also avoid taxes by putting already-taxed money into the pension. It’s smart to work with a financial adviser to find the best way of handling your pension taxes for your particular situation.

These are just two of many types of income that you may have available to you during retirement. It’s important to consider all possible types of income you may have and the way in which they will be taxed. If you’re having trouble doing all of that on your own- and it definitely can be an arduous process- don’t hesitate to seek help and retirement planning advice from a tax professional.

What Not To Do With Your Tax Refund

For some people, getting that tax refund is like getting an excuse to go out and waste money. And, while that can be tempting, the truth of the matter is that a tax refund should be used responsibly and in such a way that it will make your financial situation better, not worse. So, with that in mind, here are a few things that you definitely should not spend your tax refund on.   

Don’t Spend it on a Big but Unnecessary Purpose

First things first, don’t do what a lot of people do, which is to go out and finally buy that new television or that new computer they’ve been dying to have. This kind of thing is only going to give you temporary satisfaction, and, once that passes, you’ll be left with nothing. Use your money to benefit your life in a meaningful way, not just to buy something “cool.”

Don’t Just Stick it in the Bank

If you get some extra money from your tax refund and you decide to put a portion of it in savings, that’s great and responsible.

Don’t, however, just stick it in your regular checking account. When you do that, this money has a way of disappearing a little bit at a time, and, before you know it, it’s all gone.

Don’t Use it to Create New Debt

One big mistake that people often make with their tax refund is using it as a down payment on an expensive item, like a car or a boat or a vacation home.

When you do this, all you are doing is creating new debt. Sure, that down payment is taken care of, but now you have to pay on your new item each month!

In short, don’t use your money to give yourself more money problems.

The bottom line is that your tax refund should be used responsibly. Put it in savings. Start a savings if you don’t have one. Pay down debt. Just do something worthwhile and beneficial in the long run, not something that you’re going to regret soon after!

Stay Away from Home Business Tax Schemes

Owning a home-based business is a great way to bring in extra money and to catch some tax breaks as well. Home business-owners are able to deduct a great many business expenses from their taxes.

Unfortunately, though, there are some people out there who try to avoid paying taxes altogether through tax avoidance schemes.   

Furthermore, there are people who sell “tax toolkits” or “tax toolboxes,” which are designed to help you set up a fake business and make illegitimate deductions. Whatever you do, don’t get involved in these types of schemes as they are illegal and can cause you serious problems if and when you’re discovered.

Your Business Must be Fully Legitimate

If you’re going to set up a home business, make sure you do so the right way.

You are going to have a hard time qualifying for any legal deductions if your business is not legitimately set up. It should have a clear purpose and a clear way to make a profit.

To ensure that your business is set up correctly, make sure you:

·         Choose a legitimate business type, such as a sole proprietorship or a limited liability company (LLC)

·         Get an official employer identification number (EIN)

·         Open and maintain a business-only checking account

·         Keep business and personal expenses completely separate

Don’t Take Bogus Deductions

Setting up your business properly will help you to qualify for many deductions, especially if you maintain a home office.

However, don’t fall into the temptation of taking extra or “bogus” deductions. These are an easy way to get flagged and investigated by the IRS, and, as a result, you could find yourself in a world of trouble.

Some “deductions” you’ll want to avoid include:

·         Deducting any payments you make to your own children, even for legitimate services they provide

·         Deducting personal home purchases as business expenses

·         Deducting a lot of vehicle expenses as business expenses

·         Deducting travel, meals, and entertainment for others who are not part of your business

As you can see, honesty is key in dealing with the IRS and not getting your home business into trouble. Follow these tips, get help from a professional when needed, and, above all else, don’t try to cheat the IRS because you won’t win!

Business Losses and Income

Generally, losses are regarded as a bad thing in the world of business. When you do have a loss, however, you may think that you can make a bad situation better by getting a tax refund for your loss, and, in some cases, this may actually be true. Whether or not you can get a refund for your loss will depend on the legal classification/type of your business and if your investment is considered “at risk.” Other sources of income you have may also play a role.   

Corporations

For those whose businesses fall under the “corporation” classification, they are not taxed on business profits or losses. This is because the corporation’s taxes are kept separate from the business owner’s taxes. Instead, they are taxed on dividends.

Pass-Through Entities

For some business owners, their business income and losses affect their own personal tax returns. The business types for which this occurs, often called pass-through entities, include:

·         Sole proprietors

·         Single-Member LLCs that calculate business taxes on Schedule C

·         Partnerships, multiple-member LLCs, and S corporations that calculate business taxes on partnership returns

Net Operating Losses

On your personal tax return, you will be able to calculate your net operating loss, and, if it turns out that you have one, you may be able to get a refund for your loss.

At-Risk Rules

There are also “at-risk” rules that can determine if your business will qualify for a refund or not. A qualified tax professional can help you to understand these rules and if and how they affect you and your business.

In fact, consulting with a tax professional can be helpful whenever you have any type of business loss. Often, these professionals will be familiar with effective ways to help you minimize and recover from the loss tax-wise. Thus, don’t go it alone; seek help from a tax professional!

The Golden Rule of Business Tax Planning

Business tax planning is never easy, and it also tends to take a lot of time. It’s the kind of thing, though, that, if you do it correctly, can really benefit you and your business in the long run.

As you deal with your business tax planning, there is one “golden” rule to keep in mind: balance is everything! Balance all of the different types of taxes that you have to pay with one another and with your overall business goals as well.  

As a business owner, you will likely have to pay income taxes, personal taxes (in some cases), and other types of taxes as well, so all of these need to be carefully balanced and taken care of if you and your business are going to have success.

Minimize Where You Can

As you engage in business tax planning, remember that you ultimately want to minimize taxes as much as you possibly can. Don’t just try to minimize business taxes either. Also work toward minimizing personal costs and taxes, as these will have an impact and help your business in the long run.

Sometimes, minimizing may mean taking big steps, like changing the “structure” or “type” of business that your business is classified as or how or when you file your taxes or even where you operate. The most important thing, though, is to consider all of the possible options and to minimize wherever and however you can.

The best way to minimize costs, to ensure you get all possible deductions you are entitled to, and to ultimately have success as a business owner is to not handle your taxes and your tax planning alone. Really, isn’t that better left to professionals?

Find a good tax adviser that you can trust and then go to that person for all your business tax planning questions and needs.

The Basics of Bartering

When you think of bartering, you probably think of the olden days. However, believe it or not, bartering is still very much alive and well, just in a more advanced form.   

Today, bartering is when businesses exchange services with one another. The barters that they engage in are taxable. Thus, if your business engages in bartering, any barter income you generate will be taxable to your business in the year that it is realized. You must record this income on your tax return form.

Tax Liability

Though bartering can actually be very useful, many people shy away from it for fear that it will increase their tax liability, something the IRS warns against. While it is true that your tax liability may be increased through bartering, this is really no different than any other type of income.

You might, for example, notice an increase in self-employment taxes, or you might have more types of business income to report. If you’re smart about it, though, and don’t overuse it, bartering can be beneficial and end up not having much of a negative effect on your tax liability.

Reporting Your Barter Income

If you do end up generating some barter income, you can report it to the IRS on Form 1099B. The business that you enacted the barter with will also be reporting the transaction, so do not make the mistake of not reporting it.

Be sure to record and submit the fair market value for the products and/or services that you received as a result of the barter.

Bear in mind, however, that not all barter transactions have to be reported. You do not have to report transactions in the following instances:

·         You’ve had fewer than 100 transactions in the tax year

·         The value was less than $1

·         The barter was enacted with “exempt foreign persons”

If you are unsure of whether or not your barter is exempt, check in with a tax adviser or other tax professional before filing to ensure that you do everything correctly.

In fact, seeing a tax professional is always a good idea since bartering and reporting bartering can sometimes be a bit tricky. With the help of a pro, you can file everything correctly and maybe even catch a tax break or two!

Understanding Use Taxes

If you own a business, then you may have to pay something called a “use tax.” These taxes, however, do not exist everywhere, so if you have never heard of a “use tax,” you may be confused about exactly what it is and how it works. Fortunately, though, these taxes really aren’t that difficult to understand.

Use Tax and Sales Tax: Not One and the Same    

To start off with, people are often confused in thinking that use taxes and sales taxes are the same thing. This is not the case. Sales taxes are more common and are taxes paid on personal property.

Use taxes, on the other hand, are excise taxes that are enacted when a property is first used within a given state.

How Use Taxes Affect Businesses

As a business owner, your personal property may be subject to a use tax. Some common reasons for use taxation that you may encounter include:

·         Resales

·         Business items that you take out of inventory for a taxable purpose

·         Some purchases for which the sales tax was less than the sales tax in another state

·         If taxes have not been paid on supplies, fixtures, and/or equipment from an out of state vendor, at the time of the purchase of an existing business, or when items are purchased over the internet

·         Your business manufactures items for its own use

States without Use Taxes

As mentioned earlier, not all states require a use taxes. The few that do not include:

·         Alaska

·         Delaware

·         Montana

·         New Hampshire

·         Oregon

In these states, however, use taxes may be enacted on certain items and/or in certain localities, so never just assume you are exempt from all use taxes.

And, if you live in a state where use taxes are in place, make sure you fully understand how they work and that you have paid all taxes that you owe for this reason.

Tips for Changing Your LLC Tax Status

Does your business currently have an LLC tax status? If so, you should know that it could actually be quite beneficial for you if you were to choose to file an election to have your business taxed as a corporation or an S corporation.

If you do ultimately choose to make this change, then be aware that the legal status of your LLC will stay the same. The only thing that will change is your taxes and your tax status in general.  

LLC Status

Businesses that are currently classified as LLCs (limited liability companies) are not considered “taxing entities” by the IRS. As such, these businesses simply pay income taxes based on their membership structure. Single-member LLCs, for example, pay income taxes as a sole proprietorship, while multiple-member LLCs pay income taxes as a partnership.

Corporation Status

If you are not happy with your business’ LLC status as described above, then you could fill out Form 8832 to change your LLC to being taxed as a corporation.

S Corporation Status

If corporation status is not the right fit for you either, then you may want to see if you are eligible for qualifying for S corporation status.If you are eligible, you will benefit by avoiding double taxation and also by being viewed, at least for tax purposes, as an employee of your own business.  If you qualify, you can file for S Corporation Tax Status by filling out Form 2553. Even if you think, based on this information, that you have found the right “filing fit” for you and your business, be aware that any change in filing status will have implications for which you may or may not be prepared. As such, before making any decision about how you should file or making a change, be sure to speak with a tax adviser who understands you and your business and its goals and needs.

Enjoy a Deduction Just for Getting Good Advice

More often than not, smart people who want to make smart choices with their money will choose to pay for expert financial advice and help. This payment might come in the form of investment management fees or financial planning fees, to name a couple.   

The good news, however, is that this is certainly not money spent in vain. First of all, as long as you’ve hired quality financial help, you’re likely to have better managed finances and investments, which should help your money to go further. Furthermore, many of these “money management” fees that you’ll pay are tax deductible.

In many cases, money management fees can be counted as miscellaneous itemized deductions, helping you to save on your tax return. The only stipulation is that you can only deduct to the extent that these fee exceed 2% of your adjusted gross income. As such, this may mean that you can’t deduct all of your money management fees, but really, being able to deduct something is always better than nothing!

If you don’t quality for a basic deduction as described above, don’t worry; you still have other options for saving big! If, for example, the fees you’ve paid are structured as a percentage of your assets, you can pay for fees out of the correlated account, which will likely be counted as a tax-free withdrawal. Of course, this can vary from one type of account to the next, but if your account qualifies for tax-free withdrawals, go for it!

Even if none of these options apply in your situation and with your specific fees, many accountants and other professionals know special loopholes and other legal ways to save you money or save you from spending any of your own money on money management fees, so definitely don’t hesitate to ask. After all, what’s the point of having a financial professional on your side if you can’t get advice when you need it!?

Tips for Tax Deductible Mortgage Interest

If you’re like most people, then you’d very much like your mortgage interest to be tax deductible. Fortunately, there are many ways to make this happen.    

The first step is to choose to itemize deductions on your tax return. From there, you just have to follow some basic tips, including:

l  Use Form 1040 (with your itemized deductions) when you file your taxes

l  Be the named person, or at least one of the named persons, on the mortgage debt

As long as you can meet those basic points, you can typically deduct interest paid up to $.1.1 million! The only “catch” is that this option doesn’t apply if your mortgage was taken out before October 13, 1987. As long as your mortgage is more recent than that, however, you’re good to go!

Just keep in mind these basic limits as you deduct away:

l  You can deduct as much as $1 million in funds used to buy, improve,or build your home

l  You can deduct up to $100,000 of mortgage debt for any other purpose

If you need further help deducting mortgage interest of if you’re not sure that your mortgage uses fall into the above limits and are thus tax deductible, don’t worry; there is plenty of help available! A good financial professional can provide you with the advice and guidance you need, in any circumstance, to make the most of tax deductible mortgage interest or, failing that, other options to save you money come tax time!

Taxes on Earned Income vs. Unearned Income

If you’ve been filing taxes, then you are probably already aware that there is a difference between “earned income” and “unearned income.”    

To put it simply, earned income is any money that you make from working, such as and including wages, tips, and salaries. It also includes union strike benefits, long-term disability benefits (in some cases), and more.

Unearned income, on the other hand, is money that you get not from working but from investments or through chance. Things like annuity payments, retirement account distributions, interest income, alimony, bond interest, and more all count as unearned income.

While earned and unearned income are obviously different, both are subject to being taxed, and it is important to understand the basics of taxation as they relate to both types of income.

Earned Income

When it comes to earned income, you will typically have to pay both social security/medicare taxes, as well as federal and state income taxes.

Your social security tax is based on your earned income up to your contribution and benefit base while Medicare tax is 2.9% of your wages.

Your state income taxes will vary based on a number of factors.

Unearned Income
Fortunately, when it comes to unearned income, you don’t have to worry about payroll taxes. You do, however, need to count any unearned income in your adjusted gross income, which will, in turn, be taxed.

As you can see, no matter what type or types of income you are dealing with/have, taxes are going to happen. To help make these taxes as low as they possibly can be and to receive maximum tax benefits all around, be sure that you hire a tax professional to work on your side! This can make all the difference when it comes to paying less money in taxes, no matter what your income type or types.