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Tax Planning Tips for Individuals

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Businesswoman working at the officeYou may not think about taxes often, but they can prove to be a large expense. That’s why it’s important to make the most of any opportunities you may have to lower your tax liability. Here’s a look at some of the factors you may want to consider in your planning.

Standard Deduction or Itemizing

The Tax Cuts and Jobs Act (TCJA) contained many provisions that will be in place through the 2025 tax year. For example, there are significantly higher standard deductions for each filing status and various itemized deductions have been reduced or eliminated. As a result, many people who previously itemized are now better off taking the standard deduction. But don’t automatically rule out itemizing, especially if you expect to make a large charitable contribution or will have a lot of medical and dental expenses. By bunching these items in one tax year, to the extent possible, you may have enough to make itemizing worthwhile that year.

Home/Work Tax Breaks

If you are a traditional full-time employee and work from home, home office expenses are not deductible, even if you itemize. The deduction for unreimbursed employee business expenses (and various other miscellaneous expenses) won’t be restored until 2026. However, if you are a self-employed/gig worker, you may qualify to deduct your home office expenses. Certain requirements apply.

Moving Expenses

Work-related moving expenses may now be deducted only if you are an active-duty member of the Armed Forces and the move is per a military reassignment. This deduction is available whether you itemize or claim the standard deduction.

Health Savings Accounts (HSAs)

HSAs continue to offer tax breaks. If you are covered by a qualified high-deductible health plan and meet other requirements, you can contribute pretax income to an employer-sponsored HSA or make deductible contributions to an HSA you open on your own. An HSA can earn interest or be invested, growing in a tax-deferred manner similar to an individual retirement account (IRA). And HSA withdrawals for qualified medical expenses are tax free. You can also carry over a balance from year to year, allowing the account to grow.

Family Related Tax Credits

The TCJA expanded tax credits for families, doubling the child credit and adding a family credit for dependents who don’t qualify for the child credit. Credits include one for each child under age 17 at the end of the tax year (under age 18 for 2022) and another for each qualifying dependent who isn’t a qualifying child. The latter category includes an older dependent child or a dependent elderly parent.

The adoption credit and the income exclusion for employer adoption assistance are still in place. You’ll want to check into the details if you are adopting a child.

Section 529 Plans*

These tax-advantaged savings plans assist in paying for education. While initially used to pay for a college education, 529 plans may now cover elementary through high school education as well. Some states offer tax breaks for 529 plan contributions. However, contributions are not deductible on your federal return. Growth related to 529 contributions is tax deferred, and withdrawals for qualified education expenses — including elementary and secondary school tuition of up to $10,000 per year per student — are free of federal income taxes.

A special break allows you to front-load five years’ worth of gift tax annual exclusions and make up to a $80,000 contribution per beneficiary in one tax year free of federal gift tax. If you make the contribution with your spouse, the total can be extended to $160,000. (These limits may be inflation adjusted.)

Other Education Tax Breaks

As before, you may be able to take advantage of either the American Opportunity credit or the Lifetime Learning credit for higher education costs. The first credit can be up to $2,500 per student per year for the first four years of college. The second credit is limited to $2,000 per tax return and is available for qualified expenses of any post-high school education at an eligible educational institution, including graduate school.

In addition, if you are paying off your student loans, you may be able to deduct the interest, up to $2,500 per year. This deduction is available whether you claim the standard deduction or itemize.

Keep in mind that there are income limits for these tax breaks.

Investments

To help reduce the taxes you pay on investment gains in taxable accounts, you may want to consider:

  • Selling securities with unrealized losses before year end to offset realized capital gains.
  • Choosing mutual funds** with low portfolio turnover rates that tend to generate long-term capital gains, since the lower long-term rates offer a tax savings.
  • Factoring in that you can deduct only $3,000 of net capital losses per year against other income ($1,500 if you’re married filing separately), but you can carry forward excess losses to subsequent tax years.

You should also be aware that if you have modified adjusted gross income of over $200,000 ($250,000 if married filing jointly; $125,000 if married filing separately), you may owe a 3.8% “net investment income tax,” or NIIT.

Retirement

While the TCJA made only minimal changes in the area of retirement planning, there are still issues to consider. The main one is whether you want to pay taxes on your retirement account contributions later (when you eventually take distributions from your account) or pay taxes on them now (which means potentially tax-free distributions when you retire). It all depends on the type of savings vehicle you use.

Traditional 401(k), 403(b), and 457 plans and traditional IRAs allow you to save for retirement on a tax-deferred basis. Your employer may also choose to make contributions to your plan account. Salary deferrals to 401(k) and similar plans are generally pretax, while traditional IRA contributions are tax deductible under certain circumstances.

Roth alternatives – available in some employers’ 401(k), 403(b), and 457 plans, as well as through a Roth IRA you open on your own – provide no tax break on contributions. However, investment earnings accumulate tax deferred. And, when requirements are met, distributions from your account are tax free. Since Roth accounts in employer plans lack income restrictions, you may be able to make larger contributions to an employer’s Roth plan than to a Roth IRA.

As always, make sure that you obtain professional advice before making tax-related decisions. Your tax professional can provide detailed information and help you evaluate what might be appropriate for your personal tax situation.

Source/Disclaimer:

*Certain 529 plan benefits may not be available unless specific requirements (e.g., residency) are met. There also may be restrictions on the timing of distributions and how they may be used.Before investing, consider the investment objectives, risks, and charges and expenses associated with municipal fund securities. The issuer’s official statement contains more information about municipal fund securities, and you should read it carefully before investing.

**You should consider a fund’s investment objectives, charges, expenses, and risks carefully before you invest. The fund’s prospectus, which can be obtained from your financial representative, contains this and other information about the fund. Read the prospectus carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax circumstances are different. You should contact your tax professional to discuss your personal situation.

8 QuickBooks Online Tips

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There are always more things to learn about the applications we use every day. Here are some tips for expanding your use of QuickBooks Online.

We tend to fall into the same old patterns once we’ve learned how to make a computer application work for us. We learn the features we need and rarely venture beyond those unless we find we need the software or website to do more.

QuickBooks Online is no exception. It makes its capabilities known through an understandable system of menus and icons, labeled columns and fields, and links. But do we really see what else it can do? Expanding your knowledge about what QuickBooks Online can do may help you shave some time off your accounting tasks and better manage the forms, transactions, and reports that you work with every day. Here are some tips.

Edit lines in transactions. Have you ever been almost done with a transaction and realize you need to make some changes farther up in the list of line items? Don’t delete the transaction and start over. QuickBooks Online comes with simple editing tools, including:

  • Delete a line. Click the trash can icon to the right of the line.
  • Reorder lines. Click the icon to the left of the line, hold it, and guide it to the new position. This is tricky. You may have to work with it a bit.
  • Clear all lines and Add lines. Click the buttons below your line items, to the left.

Explore the More menu. Saved transactions in QuickBooks Online have a link at the bottom of the screen labeled More, as pictured above. Click it, and you can Copy the transaction or Void or Delete it. You can also view the Transaction journal, which displays the behind-the-scenes accounting work, and see an Audit history, which lists any actions taken on the transaction.

Create new tabs. Do you ever wish you could display more than one screen simultaneously so you can flip back and forth between them? You can. Right click on any link in QuickBooks Online, like Sales | Customers, and select Open link in new tab.

Use keyboard shortcuts. Not everyone is a fan of these, mostly because they can’t remember them. Hold down these three keys together to see a list: Ctrl+Alt+?. Some common ones include those for invoices (Ctrl+Alt+i) and for expenses (Ctrl+Alt+x).

Modify your sales forms. Do you need more flexibility than what’s offered in your sales forms? It may be there. Click the gear icon in the upper right and select Account and settings under Your Company. Click the Sales tab. In the section labeled Sales form content, notice that you can add fields for Shipping, Discounts, and Deposits by clicking on their on/off switches. You can also add Custom fields and Custom transaction numbers.

Add attachments. Sometimes it’s helpful to have a copy of a source document when you enter a transaction. To attach a receipt to an expense, for example, look in the lower left corner of the transaction. Click Attachments and browse your system folders to find the file, then double click on it.

Record expenses made with credit cards. Who doesn’t use credit cards for expenses sometimes? You can track these purchases in QuickBooks Online, as pictured above. Click the gear icon in the upper right and select Chart of Accounts under Your Company, then click New in the upper right. Select Credit Card from the drop-down list under Account Type. Enter Owner Purchase in the Name field and then Save and Close. When you create an expense, select Owner Purchase as the Payment account.

Previous Transaction Button. Are you trying to find a transaction that you entered recently but don’t want to do a full-on search? With a transaction of the same type open, click the clock icon in the top left corner. A list of Recent Expenses will drop down. Click on the one you want.

Whether you’re new to QuickBooks Online or you’ve been using it for years, there’s always more to explore. We’d be happy to help you expand your use of QuickBooks Online by introducing you to new features, building on what you’re already doing on the site to improve your overall financial management. Call us to schedule some time.

5 Common (and Costly) Payroll Errors and How to Avoid Making Them

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Payroll is one of the most important aspects of any business, but it’s one that, when running smoothly, business owners don’t tend to think about; however, when there’s a payroll glitch, it jumps to the forefront of an owner’s mind. Here are several payroll mistakes that can cost you a bundle and how to avoid them in your business.

1. Misclassifying Employees

How you classify employees when you hire them impacts how you and your employees are taxed. If you hire an office staffer to answer phones and file paperwork for an hourly wage, that is a non-exempt employee. Alternatively, if you employ an individual as a salaried Head of Operations, they are exempt. The main difference is that non-exempt employees are eligible to receive overtime pay; exempt employees are not.

There is also a distinction between employee, freelancer, and contractor. An employee receives a regular wage, while freelancers and contractors are typically paid per project. Misclassifying employees may not seem like a big deal at first, but in time, the IRS will find out, and your business will end up paying the taxes due, the associated fines, and of course, the interest on the past-due taxes.

To avoid this issue, understand the classifications and the capacity in which you hire your employees. To classify employees, be sure to use IRS definitions. For example, the IRS defines independent contractors this way: “the general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”

2. Miscalculating Pay

There are many payroll aspects to consider, such as overtime, commissions, deductions, paid time off (PTO), and more. When it comes to calculating pay, payroll admins should keep in mind that different policies apply to each state, and that must also be considered. For example, the federal overtime law dictates that overtime wages (pay for hours worked over 40 hours in a workweek) are paid at 1.5 times the employee’s regular hourly rate. However, some states have different policies regarding overtime. For example, in Alaska, California, Colorado, and Nevada, overtime is also based on hours worked in a day. As a general rule, a business should comply with the more generous law for the employee.

In addition to overtime pay miscalculations, poor time tracking capabilities also contribute to miscalculated pay. To avoid an issue miscalculating pay, be sure to know your state’s guidelines on overtime pay. Further, be sure that your company has a reliable tracking system for keeping up with employee hours so that pay, overtime, and other payroll aspects like PTO are correctly recorded and calculated. This process will significantly reduce the chance of payroll overpayment or underpayment mistakes that could become costly payroll corrections.

3. Missing Deadlines

One of the most damaging payroll mistakes for a business is missing payroll tax deadlines. Missed deadlines can cost thousands of dollars in penalties, and in extreme cases, a company’s business license can be suspended.

To avoid this critical error, use the IRS Calendar Connector to help you remember your tax deadlines. However, if you miss a tax deadline, contact the tax agency immediately because late payment penalties pile up quickly. The quicker you get in touch with the IRS, the lesser penalty you will have to pay.

4. Messy Recordkeeping

What is the word a small business owner least likes to hear? There are likely a few, but “audit” has to be right at the top of the list. The anxiety that term induces should be reason enough to keep accurate, complete payroll records that are well-organized. The price you pay for not doing that could be fines, penalties, and a plethora of costly payroll-related tax issues. For example, if you accidentally file W-2 forms late, you will pay between $50 and $260 in fines depending upon how late the W-2s are filed.

The same goes for late-filed 1099 forms or any other tax-related documentation. The fines vary. For example, if you do not provide a contract employee with a 1099 form, that’s a $250 fine.

To avoid this issue, keep accurate, complete, up-to-date payroll records for all employees. Mind your paperwork like W-2 forms, timesheets, 1099 forms, and pay records. Also, be sure to retain employee records for the four-year minimum that the IRS requires after an employee leaves your company. FYI: The SBA recommends retaining payroll records for six years.

5. Missed Tax Forms

An extension of point four above targets the end-of-year task that some payroll admins dread – preparing and sending all the necessary tax forms to all employees, whether they are full-time (W-2), part-time (W-2), or independent contractors (1099). Remember, form 1099 is required to be sent to an independent contractor who earned $600 or more during a tax year.

To avoid this issue, make sure tax rates are in order, payroll is correctly calculated, and all forms are correctly filled out and sent to employees promptly.

Payroll-related tax issues are avoidable. Take time to speak to your trusted tax preparer or CPA today so that you avoid these mistakes and keep your business running as it should.

4 Tips for Saving Money on Real Estate Taxes

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business-consultingIf you’re a real estate investor, saving money on your taxes can be just as crucial to your bottom line as the deals you make daily. While numerous tax strategies that you can implement to save on taxes exist, a few of them are more valuable than others. Here, we discuss four of the top tips for saving money on real estate taxes.

1. The 1031 Exchange

A 1031 exchange is a way for real estate investors to defer capital gains taxes when selling an investment property by reinvesting their profits in a replacement property. This is also called a like-kind exchange. It is essentially a swap of one investment property for another. “Like-kind” refers to the fact that the properties in the exchange must be similar, and the exchange property must be of equal or greater value than the property sold. Because it is rare for an even property swap to occur between parties, the most common type of exchange is the delayed “forward” exchange. In this case, the sold property funds are sent to a qualified intermediary. The intermediary holds the transaction funds from the sale of the first property until they are transferred to the seller of a replacement property.

2. The Business Tax Deduction

The expenses that you incur from owning a property are deductions that can be advantageous for part- and full-time real estate investors. Qualifying expenses include mortgage interest, insurance, fuel used for travel to and from the property, phone, internet, home office, etc. If some expenses are shared for business and personal use (such as your phone or internet), be sure to divide the expenses accordingly and only deduct what is used for your business.

Also, note that the allowable expense deductions must be ordinary (common in your field) and necessary (aid you in conducting business).

3. Long-Term Capital Gains

When selling a property for profit, a capital gains tax can be assessed. If you sell a property in the short term (within one year of purchasing it), the profit you make from the sale is considered income. This can put you into a higher tax bracket and increase taxes that you owe significantly (the short-term capital gains tax can be as high as 35 percent!). However, you can avoid a large tax bill due to selling an investment property if you can hold onto the property until after the first anniversary of purchasing it. That’s because the long-term capital gains tax rate is lower than the rate on income tax that applies for short-term gains (the long-term capital gains tax usually tops out at 15 percent, depending on tax filing status and income).

4. Depreciation Losses

Depreciation, the gradual loss of an asset’s value, allows you to take a tax break for property wear and tear over time. By deducting depreciation of real estate investments on your taxes as an expense, you lower your taxable income. This could potentially lower your tax liability.

According to the IRS, the expected life of a parcel is 27.5 years for residential properties and 39 years for commercial properties. The depreciation deduction for the entire expected life of a parcel can be taken. For example, if you buy a house valued at $300,000 (value of the structure, not the land it sits on) as an investment property to rent, you divide that value by 27.5 years, which gives you $10,909. That is the amount you can deduct in depreciation each year on your taxes.

Be aware that if you ever sell the property, you will have to pay the standard income tax rate on the depreciation you claimed (Note: this is “depreciation recapture” and can be avoided with strategies like a 1031 exchange discussed in point 1.) You can also possibly depreciate improvements you make to investment properties like replacing the roof or similar significant upgrades.

Speak to your accountant about these money-saving strategies, as well as other potential ways to keep more profit in your pocket when conducting your real estate investment business.

Discover how our accounting services and tax strategies can benefit your real estate business. Call us now at 703-971-2422 or request a free consultation to find out what we can do for you.

Avoiding Capital Gains Taxes with a 1031 Exchange

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Savvy investors can build wealth by deferring capital gains taxes via a 1031 exchange. Learn how it works and how it can help you as a real estate investor. For the in-depth information required to execute a 1031 exchange, a qualified intermediary is necessary.

What is a 1031 Exchange?

A 1031 exchange allows real estate investors to avoid paying capital gains taxes when selling an investment property and reinvesting in a replacement property. The name 1031 exchange comes from Section 1031 of the U.S. Internal Revenue Code.

A 1031 is also called a like-kind exchange. It is essentially a swap of one investment property for another. The “like-kind” refers to the fact that the properties in the exchange must be similar (i.e., of like kind) and the exchange property must be of equal or greater value as the property sold.

How Does a 1031 Exchange Work?

Under IRS code section 1031, which applies to real estate, investors can reinvest proceeds from the sale of one property into another property within a specified time frame to avoid paying capital gains taxes (the taxes on the growth of an investment when it is sold). Because it is rare for an even property swap to occur between parties, the most common type of exchange is the delayed “forward” exchange. In this case, the sold property funds are sent to a qualified intermediary and later used to acquire a replacement property from a seller.

What is a Qualified Intermediary?

A qualified intermediary facilitates a 1031 exchange. They hold the transaction funds from the sale of the first property until those funds are transferred to the seller of a replacement property. The qualified intermediary also prepares the legal documents required for the exchange. The qualified intermediary can have no formal relationship with the exchange parties outside of the exchange.

1031 Exchange Important Deadlines

  • The seller of the first property (the relinquished property) must identify a replacement property (their new investment property) within 45 days of the transfer of the relinquished property.
  • The replacement property must be received by the exchanger within either (1) 180 days of the date the exchanger transferred the first Relinquished Property or (2) the due date of the exchanger’s tax return for the year that the transfer of the first relinquished property occurs.
  • These are strict timelines and are not extended even if the 45th or 180th days fall on a weekend or holiday.

What You Need to Know about a 1031 Exchange

1031 exchange transactions should be handled by a professional qualified intermediary that is a third party (i.e., not a family member, friend, acquaintance, or business associate of either party involved in the exchange).

Exceptions

The IRS does not allow capital gains tax avoidance if the exchange:

  • is U.S. real estate for real estate in another country
  • involves property for personal use
  • is between related parties and either disposes of the property within two years

Why Do Investors Use a 1031 Exchange?

  • They can use what they would have paid in capital gains taxes to put more down on a replacement property to improve their buying power.
  • The savings on federal capital gains taxes could be 15 to 20 percent.
  • There could be savings at the state level (this varies by state, so your qualified intermediary should be consulted for this information).
  • The amount of income taxes paid could be reduced due to depreciation of the investment property.

A 1031 exchange is a tool that savvy real estate investors use to build wealth over time. To further understand how a 1031 exchange can benefit you, ask your CPA or accountant to help put you in touch with a qualified intermediary. Their guidance is critical in executing a 1031 whether you’re swapping two properties or working with a full portfolio of investment real estate properties.

 

Understanding Installment Sales

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Businessperson Calculating Property TaxThe majority of sales and purchases of property are usually settled by the buyer paying the seller an agreed on lump sum up front. However, there are circumstances when it makes sense to structure the sale of property so that payments will be received in installments over a number of years. What are those circumstances and what are the tax consequences of such transactions?

When an Installment Sale Makes Sense

An installment sale can be helpful if a potential buyer of your property lacks sufficient cash to pay the full purchase price in a lump sum. The interested party suggests an installment sale in which he or she makes a partial payment now and pays the balance over several years, with interest.

An installment sale may be something to consider if you want to sell a business or a rental property but there has been limited interest from prospective buyers. It can also be an attractive option for tax planning purposes. With an installment sale, you spread out the capital gain (and the tax liability) on the sale over the years you receive payments rather than reporting the income in a single year. By spreading out the income, an installment sale may help keep your income within a desired tax bracket and reduce your potential exposure to alternative minimum tax, net investment income tax, and tax on any Social Security retirement benefits you are receiving.

The Tax Rules

The rules on installment sales are complex and can trap the unwary. Since you receive payments over more than one tax year, you can defer a portion of any taxable gains realized on the sale. Your total gain on an installment sale is generally the amount by which the selling price of the property you sold exceeds your adjusted basis in that property. The selling price includes the money and the fair market value of any property you received for the sale of the property, any of your selling expenses paid by the buyer, and any existing debt on the property that the buyer assumed or paid.

When you report the sale on your tax return, you include in income each year only the part of the gain you receive or are considered to have received. You do not include in income the part of the payment that is a return of your basis in the property. You have to report interest on an installment sale as ordinary income. Essentially, an installment sale allows you to pay your taxes over time as you collect from the buyer.

What’s Not Allowable

The installment sales method is not available for sales of publicly traded securities and certain other sales. You have the option of electing out of installment sale treatment and reporting your entire gain in the year of sale. Electing out may be advantageous under certain circumstances: for example, if you have a large capital loss that can offset your entire capital gain in the year of the sale.

Before entering into an installment sale, we recommend that you consult with a tax professional.

Discover how our accounting services and tax strategies can benefit your real estate business. Call us now at 703-971-2422 or request a free consultation to find out what we can do for you.