Donating an asset that has appreciated in value, such as a stock, is an excellent strategy for generating a tax deduction and saving on capital gains tax, while benefiting a favorite charity (requires the charity to have 501(c)(3) status). The tax deduction received by the donor is the full fair market value of the asset at the time of the donation and the organization receiving the asset does not pay on the sale of that asset.
Family Medical Expenses
In some cases, a sole proprietor or small business owner may benefit from hiring their spouse and providing the spouse with family health insurance benefits and medical reimbursements. These plans are commonly referred to as Health Reimbursement Arrangements (HRA plans). These benefit plans can provide a significant tax deduction, in many cases.
Mortgage Interest Points
Points paid on a home mortgage are usually deductible as interest. If the mortgage is for the purchase or improvement of your principal residence, you can either deduct the full amount of the points in the year of payment or amortize them over the term of the loan.
Very few taxpayers reach the level of medical expenses required to use these expenses as a tax deduction. Total medical expenses must exceed 10% of your adjusted gross income, or 7.5% for those age 65 or older, before you are eligible for a deduction. Be sure to include all applicable medical expenses, including doctors, hospitals, dentists, eye care, prescription drug costs and medical devices. If you do not have health insurance through your employer and pay for it out of your pocket,. the premiums may add to your potential deduction. If you are unsure whether an item qualifies, just ask!
Unlike other plans, a profit-sharing plan is flexible. It can be designed so that the employer is not required to make an annual contribution or designed to save the maximum amount in the owner's retirement plan. It's a great tax deduction for your business!
Itemizing Deductions Every Other Year
For those on the borderline between taking the standard deduction or itemizing deductions, in some cases, planning to itemize every other year is a great strategy. In the itemizing year, if property taxes are not escrowed with a mortgage payment, the property taxes on principle residence can be pre-paid for the following year, so that double the tax is paid during the itemizing year and no property tax is paid during the "off year". In addition, charitable contributions can be doubled up in the itemizing years and omitted during the non-itemizing years.
Tax law can be complex. Here are some personal and business tax tips to help you get what you deserve. Check back for new tips and reference the below calendar for important dates. We also mail out newsletters with important changes, reminders, and news. Give us a call if you have further questions.
Home Office Expenses
To qualify for a deduction related to an office in the home, you must have an area of your home used exclusively as your principal place of business. This includes a place of business where you meet or deal with patients, clients, or customers.
Hiring Your Children
If you have your own business, consider hiring your child to work after school or on vacations. The wages you pay your child for bona fide work are tax deductible. Even better, the earned income paid to a child can qualify the child to contribute to an IRA. If the child is paid $5,000 per year and the money is put into a Roth IRA account, where it can grow tax-free and eventually be withdrawn tax-free, the child could accumulate a significant amount of money that could be used for college education expenses, saved until retirement or put to some other use. Using this strategy to hire a child at $5,000 per year for filing work, cleaning services, copying, deliveries or other tasks from age 10-18 and invested to earn 10% per year, the child would accumulate roughly $50,000 by age 18. If no additional money was contributed after age 18 and the money was left to grow until age 65, the value of the account would be about $5.3 million and could be withdrawn tax free at that time.
One of the most powerful tax shelters available is a qualified retirement plan. Within certain limits, contributions to fund the plan are immediately tax deductible, plan investment earnings are tax deferred, and plan participants do not have to pay income taxes on benefits until they receive their distributions. Deferring a portion of your wages to the maximum extend affordable to you is an excellent option for higher income earners to save on taxes.
Review of Entity Type
It's important every few years to review your business's entity type to determine whether any changes could or should be made. This may mean changing from a sole proprietorship to an LLC or from an LLC to an S-Corporation, etc. Talking to your accountant regarding these types of decisions is key to making the right decision for your unique situation.
You can claim deductions for the business-related use of an auto using either the standard mileage rate method or the actual expense method. You should use the method that will yield the largest deduction and make sure to keep accurate records.
Self-Employed Health Insurance
If you are self-employed or receive wages from an S-corporation, in which you own at least 2% of ownership shares, you may qualify to take the self-employed health insurance deduction. This can include health insurance, long-term care insurance, supplemental coverage and prescription drug insurance.
If you are over the age of 70 and are required to take minimum distributions from IRA or other retirement accounts in excess of what you need, you may consider making a Qualified Charitable Distribution (QCD). A QCD can be made directly from your IRA account to the charitable organization of your choosing, which means it is not income to you. This can be a great strategy to reduce the income on your tax return.
Health Insurance Premium Credit
If you signed up for health insurance through the medical insurance exchange, you may be eligible to receive a reduction in your insurance premium. Eligibility occurs when your income is below certain Federal thresholds. You also have the option of applying the premium credit directly against your insurance premium or as a reduction of your taxes. In some cases, individual income tax returns may be impacted due to premium credit received if income estimates were inaccurate.