tax planning

Frivolous Tax Arguments

I don’t know anyone who likes to pay taxes. But, you won’t win with these arguments:

Filing tax returns are voluntary: Filing tax returns are not voluntary.  The IRS uses the word voluntary to mean that you determine your own initial tax liability by filing your own tax returns, and not have the government determine your liability for you. Actually, if you do not file a tax return, the IRS will give you notice, and may eventually file a “substitute for return” and assess a tax liability. This is fairly common.

Filing tax returns are not constitutional: All you need to do is read the sixteenth amendment. Actually, it is not a bad idea to read the constitution every so often anyway. There are many court cases that support this.

The Internal Revenue Service is not an agency of the United States: The Secretary of the Treasury has full authority to administer and enforce the internal revenue laws and has the power to create an agency to enforce such laws.

If you want to minimize your tax liability, there are many legal ways, otherwise there are penalties and possible criminal prosecution if you try to make these arguments.

Correct Your Mistakes Before It’s Too Late!

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The end of the year is approaching, and now is the time for some last minute tax planning before it is too late. Almost every time a financial transaction is made it has an impact on your taxes. Here are some things to look out for and consider:

Don’t hesitate to ask questions. If you think that there may be a tax or financial impact, then just ask us.

Take advantage of employer benefits: This includes contributing to your retirement plans,  flexible spending accounts (FSA), and dependent care accounts. By contributing to these accounts you save not only income taxes, but sometimes payroll taxes as well.

Make Your Estimated Tax Payments: This usually applies to business owners and retirees. If you don’t make quarterly estimated tax payments when required, then you will most likely receive penalties. Sometimes, you can get around this by having extra taxes withheld from your spouse’s paycheck or from pensions and social security.

Obtain a Receipt for Donations: It is likely that you have donated much more than you have realized, especially when you donated household goods or clothing to a charity.  Make sure the organization provides you with a receipt, and also make sure to write down what you donated and the value. If you wait until tax season, you may not remember what you donated, or even have a receipt, which is a requirement.

A little planning and organization go a very long way to save taxes and money. Don’t wait until it’s too late.

Bad Tax Planning

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Tax planning can prevent you from overpaying taxes, but it has to be done before the year is over. Good tax planning takes a proactive approach, and bad tax planning includes either not planning, breaking the law, or taking it upon yourself without using a competent tax professional.

Without planning you may not be able to take advantage of the ever-changing tax laws. When we work with business clients throughout the year we are able to understand their business finances much better. By doing so we can suggest proactive ways to reduce taxes, run their businesses better, and help with cash flow and profitability. For example, if your business is doing well, it makes sense to review the current structure to make sure that it is tax-efficient. Our services are designed to save much more in taxes and produce more value than our fees.

A bad strategy is to pay for personal expenses through the business and take a deduction for it. Personal expenses should be kept separate and paid for personally. An IRS auditor can easily spot this, assess more taxes, and even assess penalties of 20% or more.  And of course, underreporting your income is not wise either and may result in criminal prosecution.

I know what I know and know what I don’t know. I use other qualified professionals when it comes to legal matters, insurance, and healthcare. If you take it upon yourself to do your own tax planning, you usually end up unknowingly paying more in taxes than the cost of using a professional. The key is to make certain that you choose the right professional and ask a lot of questions.

Children and Tax Benefits

With the upcoming birth of our son or daughter, I thought it would be appropriate to write about the tax benefits of raising children. The rules can get tricky, and your children must meet certain criteria to become your qualifying children for tax purposes. Here are a few highlights:

Dependency Exemption: For each qualifying dependent child, you can exempt from your income $4,000.

Child Tax Credit: For each qualifying child under 17 years of age you can receive a credit of up to $1,000 per child. The credit phases-out after your modified adjusted gross income is greater than $110,000 for filing jointly and $75,000 for filing as single or head of household.

Child Care Credit: If you pay for daycare, after-care or preschool so that you can work, you may be eligible for a credit of 20% to 35% of the cost, up to a maximum of $3,000 of qualified expenses for one child and $6,000 for two or more. Your children must be under age 13 to qualify.

Education Credits: There are several credits and deductions available for education expenses:

– The American Opportunity Credit provides a credit of up to $2,500 per eligible student for the first four years of college (100% of the first $2,000 of expenses and 25% of the next $2,000).

– The Lifetime Learning Credit provides a credit of up to $2,000 for an unlimited number of years (20% of the first $10,000 of expenses).

– The tuition and fees deduction provides a deduction of up to $4,000 as an adjustment to income (this means that you do not have to itemize).

– Student loan interest deduction allows for a deduction of up to $2,500 as an adjustment to income.

There are income limitations for each credit and deduction which vary widely based upon your modified adjusted gross income and filing status.

Income Shifting: If you are self-employed, you may be able to hire your minor children, pay them wages, and not have to pay income taxes or payroll taxes. Even if you do not own a business you may still be able to shift investment income to your children to minimize taxes. It takes a lot of planning, but strategizing can save a lot of taxes.

These are just some of the tax benefits to having children. Hopefully this will help to offset some of the cost of raising a family.

But It’s Tax Deductible!

Paying mortgage interest, property taxes, equity loan interest, and business expenses are all generally tax deductible. But does it make sense to incur excessive expenses just to produce a tax benefit?

For example, if you are looking to move to a bigger house, you will save a lot of money in taxes, right? Yes, you may actually save income taxes, but at the same time you will have spent much more money. Spending a dollar to save a quarter doesn’t make much sense at all.

Just because qualified business meals and entertainment may be deductible (generally only 50% deductible), it may not make sense to spend excessively. I have seen some business owners spend so much on meals that they could have used this money to hire an assistant so they can work less. Now, that’s real savings!

FSA Plan = Money Saved

What exactly is an FSA plan and how can it save you money? FSA stands for flexible spending account, which is a special account that is used to pay for medical expenses on a pretax basis. In other words, the money put towards the plan is not subject to income taxes and social security/medicare taxes.

An FSA plan must be set-up by your employer for the benefit of its employees. For this reason, sole proprietors, partners, and S-corporation owners are not eligible to participate. Each year you need to decide how much money you want to put towards the FSA plan, which will then be deducted equally from each paycheck. For example, if you decide to put aside $1,200 and you get paid twice each month, then $50 will be deducted from your paycheck. For a person in the highest tax bracket the tax savings would be over $500 each year! The maximum amount that can currently be contributed is $2,550.

There are of course some drawbacks to an FSA plan from both an employee and employer perspective. First, if you don’t use the full amount that you elected to set aside by the end of the year, then you will forfeit the money to your employer. The best way around this is to set aside the absolute minimum that you project you will need for medical expenses. Additionally, even if you come up a little short, the tax savings may still be much greater than the shortfall.

The drawback to the employer is the extra cost of for administration of the plan, although it is offset partially by the social security/medicare tax savings. Another point is that if an employee leaves during the beginning of the year and has already spent their maximum, you cannot ask the employee to repay you back. This is why you want to set the threshold to a reasonable level so you lower your risk.

We all seem to be paying more and more for healthcare, but the FSA plan is one way to help lower our costs by lowering our taxes. Regardless of what the current administration elects to implement regarding healthcare, an FSA plan should still remain a viable way to help us out.

Backwards Tax Planning

The title of this article should really be “Proactive Tax Planning.” Backwards tax planning is what you want to avoid by taking steps to minimize your taxes throughout the year. Steps you should be taking throughout the year include:

Businesses:

Entity Selection: The entity that you use to operate your business has a very large impact on your tax situation. Although there are ways you can make changes to the way your business is taxed retroactively, there are additional hurdles you will have to jump through, and there is no guarantee that your elections will be accepted. Generally, these elections have to be made within the first 75 days of the year.

Large Purchases: This includes purchasing vehicles and equipment, which must be placed into service before the year is over. If you were looking for a large deduction for 2014 and have not done so, then it is too late.

Timing of Receipts: If you are on the cash-basis, which means that you record sales when your customers pay you, then you can delay sending out December’s invoices so that you can get paid in January.

Individuals:

Investment Planning: The nature of your investments can have a large impact on the amount of taxes you pay, especially if your investments generate a lot of income. Your investments should be allocated to be tax-efficient.

Benefit Elections: Some elections can be made at any time during the year, but others, such as FSA (flexible spending accounts) and dependent care accounts usually need to be made at the end of each year.

Charitable Contributions: Properly planned charitable contributions, including donations of appreciated stock or valuable household items can produce an excellent tax benefit.

There are numerous tax strategies that can be employed, but you must be proactive to be able to take advantage of them.