Tax Strategies

Grandparents can help with college and lower taxable income.

A grandparent helping their grandchild pay for college can be a win all around. When a grandparent that contributes to a 529 savings plan, it lowers assets within the grandparent’s estate. This helps lowering estate tax.

Another great thing about a grandparent who owns a 529 college savings plan is that the account isn’t taken into consideration when the grandchild is applying for financial aid.

Grandparents and other taxpayers can contribute $70,000 at one time to a Section 529 college savings plan. It should be noted that $14k is the annual gift deduction amount and the $70k accounts for what would be spread out over five years and in this case can be made at once. A married couple can contribute up to double that amount to a grandchild’s 529 plan account by “splitting” the gift.

We’re always happy to help you set up a 529 or provide any other service that helps you meet your goals for saving for college. Everyone has a unique situation and it’s always best to get advice from a professional that understands where you are financially.

Tax planning is the practice of analyzing multiple tax options to decide how you want to operate your business as well as your individual transactions to minimize or wipe out your tax liability.

Most small business owners are good at what they got into business for and overlook the importance of tax planning. They sometimes are not in their tax mindset until it comes time for them to review with their CPA. However, tax planning is not a “set it and forget it” practice; it’s ongoing and high quality tax counsel is a valuable asset. You’ll greatly benefit by analyzing your income and expenses on a monthly basis. Then, on a quarterly basis, you’ll be super productive when meeting with your accountant or tax advisor to assess how you can benefit from legal tax advantages such as deductions and credits.

You’re not required by law to take advantage of tax planning. What is illegal though is tax evasion, which is reducing income through false pretenses—also known as Tax Fraud. Below are 4 areas the IRS typically focus on to identify possible tax fraud:

• Not reporting significant income. For example, a shareholder not reporting dividends or a business owner not reporting some or all of its business receipts—selling things under the table.
• Making false claims or inflating travel expenses or charitable deductions and no record to show for it, or a record that’s been falsified.
• Discrepancies between what’s been reported on the business’s return and what’s reported/recorded in financial records. This can happen simply as a result of a business not keeping adequate books.
• “Paying your kids” or someone related to you in order to lower the filer’s tax bracket and thus, avoiding higher taxes.  

Strategies for Tax Planning

There are a multitude of available strategies for tax planning for owners of small businesses. Usually, these are targeted at the business or at the owner of the business. The strategy may be simple or it may be complex but it needs to be built around accomplishing one of these objectives:

• Lowering taxable income
• Decreasing tax rate
• Taking control of when the tax needs to be paid
• Taking advantage of eligible tax credits
• Managing the impact of Alternative Minimum Tax
• Preventing typical tax mistakes

To plan well, determine your estimated individual income as well as your business income for the upcoming 3-5 years. This is critical as most strategies for tax planning save your tax dollars for a certain level of income, however, it creates a higher tax bill at other certain levels of income. Ideally, you’ll make the appropriate plan based on accurately projected income. After you’ve identified your estimated income, you can then determine your estimated tax bracket.

Accurately projecting your income can be difficult as so many things could happen—such as being wildly successful financially, which is a good problem. However difficult these projections may be for tax purposes, you’ll still need to forecast your sales, expenses, income, and cash flow for planning to meet the needs of your business. The more accurate your forecasts, the more efficient your tax planning can be.

Benefit from Entertainment Expenses Related to Business

Expenses for entertainment related to business are deemed lawful deductions which reduce your tax owed and thus, makes you more profitable. However, you need to adhere to specific guidelines laid out by the IRS.

To be eligible for an entertainment expense deduction, business matters have to be discussed at some point during the entertainment. It’s important that the environment is appropriate for discussing business. For example, a quiet restaurant would be ideal and a loud nightclub would be less ideal.

The IRS entitles you to deduct up to 50% of expenses on entertainment. However, make sure you are maintaining accurate records and the business meal is a legitimate business meeting.

Deductions for Work-related Vehicles

There are deductions to take advantage of if you’re using your car as transportation to do business. For example, if you’re driving to a sales pitch or to a meeting with a client and it’s outside of your normal commute, you can deduct a certain amount of mileage.

In 2015, the standard mileage reimbursement rates determined by the IRS are 57.5 cents per business mile, 14 cents per mile when volunteering for a qualifying charity and 23 cents for moving (more than 50 miles from your home and the move is related to your new work) and also 23 cents per mile for medical reasons.

You can also take advantage of this deduction if you have two cars. The amount of miles driven is determined by business use and not by a specific car—although you have to own the car you’re taking the deduction with. To take this deduction, take the total business miles accumulated and divide by the total miles driven.

It’s important to keep accurate records: when, where, the purpose, the date—anything that’s helpful in establishing credibility for the deduction.

Home Office Deductions

Home office deductions can be a significant reducer of taxable income. For example, if you can legitimately claim $500 per month as a home office deduction, that lowers your taxable income by $6,000. That could potentially put you in a lower tax bracket.

Your home office has to be a space in your home that’s used exclusively for conducting business. So, it can’t be a bedroom or where you work from the dining room table. Typically, this deduction is meant for people who have a spare bedroom they turned into an office or a garage turned into an office or studio. You can take a deduction based on the square feet of your home. If your home is 1000 square feet and the mortgage is $2000, and your home office is 200 square feet, you can deduct $400 per month—a total of $4,800.

Keep in mind, there are some deductions that can be taken even if you don’t qualify for the home office deduction alone.

Partner with a tax expert like us to ensure you meet all of your legal tax obligations and keep as much money as you are entitled to.

With a working knowledge of how mutual funds are taxed along with some diligent bookkeeping, you can reduce the amount your mutual investments are taxed on. The below gives you the understanding you need of mutual fund taxation.

Income is usually reported on any mutual fund distributions, regardless if they are or if they are not reinvested. Tax law typically sees mutual fund shareholders as direct owners of a portion of the fund's portfolio of securities. Ergo, dividends, interest and capital gains from the sales of securities, are counted as taxable income of the shareholder.

The 2 types of taxable distributions, dividends and capital gains:
1. Ordinary Dividends: When you earn dividends and interest on a mutual fund, these are considered taxable income since these are paid out to shareholders at fixed intervals. Similar to returns on other investments, the payments from mutual funds dividend decrease or increase each year according to the earned income of the fund in regards to the fund’s investment policy. These payments resulting from dividends are defined as ordinary income and you’ll need to report it as so on your tax return.

 Qualified dividends: Like capital gains, qualified dividends are ordinary dividends that are taxed the same zero or fifteen percent maximum rate which applies to capital gains. The gains are taxed at the fifteen percent rate and if the regular rates that apply is twenty-five percent or higher. Thirty-nine percent is the highest tax bracket and it is taxed at a twenty percent rate. Should the regular rate be applied and is below twenty-five percent, then the qualified dividends are taxed at the zero percent rate. Dividends awarded from corporations that are foreign become qualified when their shares or ADRs are traded in U.S. exchanges or when the dividends are umbrellaed by U.S. tax treaties. Mutual funds’ dividends qualify where the fund results in qualified dividends and then those dividends are proportionately distributed.
2. Capital gain distributions: When a fund being sold makes more than it loses, the gains are allocated amongst the investors. Like ordinary dividends, capital gain allocations increase or decrease each year. The dividends are viewed as long-term capital gain no matter how long you’ve owned your shares of the fund.

An owner of mutual funds can also have capital gains from the sale of mutual fund shares.

Tax Rates on Capital Gains
The rates resulting from the sale of mutual fund shares apply to profits generated on shares you’ve had more than a year. However, the profit from shares held a year or less before selling is considered ordinary income—nonetheless, capital gain allocations are considered long-term no matter the duration of time the shares were held being allocated.

Consider if your taxable income (excluding long-term gains and qualified dividends) has you in a tax bracket below twenty-five percent (that's under $74,900 for a married filing jointly return in 2015). In this scenario, you'll benefit from the lower rate which is zero percent for qualified dividends and long-term gains on the sum of the gain that’s in between your taxable income and the beginning of your twenty-five percent bracket.

It’s important to note the qualified 5-year capital gains on stock where specific rules imposed on the gains of selling capital assets possessed longer than 5 years became expired as of 12/31/2012—this was permanently repealed as the result of the American Taxpayer Relief Act (also known as ATRA) of 2012.

Reporting Mutual Fund Income
Your mutual fund facilitator is required to send you a 1099-DIV prior to doing your taxes. The 1099-DIV is a record of what you earned and what you need to report on your tax return as well as how much of it constitutes qualified dividends. Since tax rates for qualified dividends are equal to the capital gains distributions and long-term gains of sales, these items should be combined when reporting reporting so that qualified dividends are added to long-term capital gains. Furthermore, capital losses are subtracted from capital gains prior to being applied to the favorable capital gains rates. However, losses will not be subtracted from dividends.

Non-Allocated Capital Gains
In some cases, a mutual fund may retain a portion of its capital gain and pays taxes on them. You’re required to report your share of these type of gains and you’ll be eligible for a credit on the tax paid. The mutual fund facilitator will report these amounts to you on Form 2439. The cost basis of your shares increase up to sixty-five percent of the gain—thus, representing the gain decreased by the credit.

Medicare Tax
Beginning in 2013, an additional 3.8 percent Medicare tax is applicable to net investment income for filers with modified adjusted gross income (AGI) above $200,000 (single filers) and $250,000 (joint filers).

What's type of loan is ideal for big ticket items?
An equity loan is best for those who own their home. Interest paid that comes from credit card debt and auto loans are not eligible for reducing your taxable income. However, you can use the interest from an equity loan on your home to reduce your taxable income. So if you want to buy a car, you could take an equity loan out on your home and buy a car.

How can I reduce my taxable income if I work for myself?
Starting in 2015, the IRS allows you to take an immediate deduction of business expenses of up to twenty-five thousands dollars. This is different than in the past where you had to spread it out over five years. Also, people working for themselves are allowed to deduct 100% of premiums paid towards health care insurance. Self employed people can also deduct their contributions on qualified retirement plans.

Should I file as an individual or jointly?

There are cases where filing separately is beneficial. It may be worth it if:

• Your spouse has significant medical expenses.
• Your spouse has itemized deductions.
• Your spouse has casualty losses.
• Both you and your spouse have approximately the same income amounts.

How does health care expenses or enrolling in an FSA impact my taxes?
As of 2015, you can only deduct health care costs that exceed ten percent of your adjusted gross income. So unless you have really large medical expenses, there is no tax breaks available. The only alternative would be if your company offers an FSA (aka Flexible Spending Account), HSA (Health Savings Account) or sometimes a cafeteria plan. With a plan like these, you elect to have a portion of your wages go towards contributions to an account like this and those contributions can be pre-tax. Usually with accounts like this you can also pay for over-the-counter medicines and such—just depends on what plan you have.

How do I optimize my charitable contributions for tax purposes?
Donating assets instead of selling the assets and donating the cash is the best for tax purposes. You prevent the capital gains tax from being applied when you sell an asset. Additionally, you can use the full market value of the asset to reduce your taxable income.

How do I handle a significant capital gain in a tax year?
The best way to handle this is by offsetting the gain with a loss. So if you have an investment and by selling it, you’d incur a loss, it may be best to go ahead and sell it in the same year as the sale of your investment that resulted in a capital gain. You can deduct three thousand dollars in capital losses in addition to the amount up to your capital gains.

What investments are tax-friendly?
Long-term growth stocks are great because you won’t be taxed on the appreciation until they are sold. And for your heirs, capital gains are not taxed when they are bequeathed.

Gains received from interest on bonds are usually not taxed by the applicable government agency. For example a city will usually not tax you on a municipal bond if the bond is for the same city.

If your income is high and you live in a state that has high taxes, investing in treasuries can be beneficial for significant savings in state taxes.

Working for myself, what investments are available that defer tax?
Create a Keogh, Simple IRA or SEP and then put as much into it as you can. Even if are employed and have a side business, you can create one of these accounts.

What other investments allow for deferring taxes?
Retirement accounts allow you to invest money—money that in other investments would be going to taxes instead of the investment. Most employers offer some kind of plan that allows you to pay into a tax deferred account. A lot of companies even match what you contribute.

How does deferring income help?
You can defer income which means that you don’t receive the income in a tax year you’re going to file for and you receive the income in the following year. Typically people do this by delaying bonuses and such. You can also pay January’s estimated tax in december to bring down your taxable income—this is a short-term tactic. Deferring the income reduces your taxable income.

Great tax management is keeping and receiving all the money you’re entitled to while meeting your legal obligations. Here are some common mistakes you don’t want to make.

Many times, people don’t even realize all the money they’re leaving on the table when they file their taxes as well as not being aware taking actions that are required by the IRS. Of course, this is totally understandable with tax laws being so complex and frequently changing from year to year. Sure, there are data entry errors that delay the filing but preventing these mistakes below will help you put more money into your coffers.

Not Writing Off Tax Expenses
When expenses for tax preparers and financial advisors exceed two percent of your AGI (adjusted gross income), you can write off your costs of fees. So let’s say you have an adjusted gross income $200,000 and you have financial advice fees of $7k, you can write off $3k of that.

Paying More Taxes On Retirement Investments Than You Have To
For those seventy and over, a common mistake is that when taking out the mandatory funds from the retirement account, sometimes people already had optioned to have taxes taken out upon withdrawal. Then when it comes time to do taxes, they pay taxes it on again not realizing that taxes had already been paid on the money withdrawn. Sometimes the Internal Revenue Service catches the mistake but sometimes they don’t. So don’t depend on them to correct it for you.

Not Taking Advantage of Home Office Deductions
If you’re an IT manager by day and a wedding photographer on the weekends, it’s easy to not think about how a second job can be a tax advantage to you. But maintaining your receipts and records as well thinking of your home office as your legitimate home office can be incredibly helpful—especially if you live in a market where property values are high and space is small.

And if you can’t keep track of everything down to the penny, the IRS allows you to take $5 per square foot of business only space in your house—a deduction up to $1500 with no paper trail necessary.

Failing To Catch An Overpayment When Changing Jobs
If you get a new job making more money during the tax year, the new job is going to tax you based on your yearly salary which could cause the employer to take out a higher percent of social security taxes. But if all together in the year you made less than what your new salary annual salary will be, you could have possibly overpaid by almost a thousand dollars. A CPA or Enrolled Agent will usually catch this where filers doing their own taxes may not.

There are also lots of breaks for those searching for jobs. You can write off non-reimbursed expenses for travel for a job interview and the paid premium version of Linkedin for example.

Tax Overpayment on The Sale of Investments
Take the price you paid for an investment out of what you sold the investment for and you have the amount of what you owe taxes on. However, it’s not always that simple and this is where people miscalculate and overpay on the sale. Factors such as broker commissions, stocks that split, dividends that were reinvested and so on all impact the amount you owe. Since financial companies track the base cost of these, most people forget to include the costs they made along they way in the journey of that investment. Consequently, you’re paying more taxes on capital gains than you should.

For example, if you originally bought the stock for five thousand dollars and you reinvested a few times paying fees and commissions each time you reinvested and then sold the investment for ten thousand dollars, you’d might have spent $5,550 dollars instead of $5,000. In this case you would have overstated your income by gains of $5,000 when really it was only a gain of $4,450.

Neglecting To Claim Retirement Contributions
Retirement brokers don’t send out contribution confirmations until after taxes are done. So prior to filing taxes, check with your broker to see how much you contributed during the tax year. Not doing so can generally cause you to miss out on tax breaks. Even if your contributions were not eligible for a deduction, you’ll still want to fill out Form 8606 so you don’t have to pay taxes on a part of your retirement withdrawals when the time comes.

Not Making The Distinction Between Higher Education Deductions & Credits
You’re allowed to deduct up to four thousand dollars in higher ed costs such as tuition and fees. There is another option, a twenty-five hundred dollar tax credit on tuition and fees. The $4k deduction seems like the obvious choice. But it’s a deduction which only reduces the amount of taxes you owe. The $2500 is a credit which increases the amount of your refund (or lessens the amount you owe).

Forgetting About Digital Receipts
Not having an organized system for digital receipts can cause you to overlook eligible deductions for either business expenses or charitable contributions. You should at least have a folder set up in your email for receipts emailed to you so you can file these away. Ideally, you’d break these up by year and type such as Charitable Contributions 2014 and Business Expenses 2015 making it easier on you at tax time. Also, some sites don’t email you a receipt and only give you a confirmation page when you’ve completed the transaction. You can use an app like Evernote which will save the page as a note that you can use as a receipt. In fact, you can use an app like this to save all your receipts and give them tags like “Business Name, Travel Expenses, 2014” so you can track and view them easily.

The best way to plan for taxes is to start at the beginning of the tax year. So it’s important to know how the tax laws change so you can plan to take every advantage to keep as much of your income as you’re entitled to.

What’s New for Business Owners

• Standard Mileage: You’re now able to expense .57.5 cents per mile, a .1.5 percent increase over last year.
• Limit for Small Business Health Expenses: Health expenses are set to a limit of $25,800 to qualify for the Small Employer Health Care Tax Credit.
• Big Ticket Expenses: In 2015, you can no longer claim the entire expense of major equipment all in the tax year you purchase it. Also, the maximum deductible is now $25,000 of the initial $200,000 of the purchase. The fifty percent bonus depreciation and accelerated deduction have both been eliminated.

What’s New for Individuals

Inflation has impacted scores of tax mechanisms for 2015 such as retirement contribution maximums, tax bracket cutoffs and personal exemptions.

• The Kiddie Tax: A child’s unearned income can be reduced now by $1,050 starting in 2015—this is up $50 from 2014. A parent can include the child’s unearned income on their own tax return as long as the total is between $1,050 and $10,500. If the income is over the max, the child will have to have their own separate income filed for them.
• AMT or, Alternative Minimum Tax: The exemption amounts for 2015 are $53,600 for single taxpayers and for married filing jointly taxpayers it’s $83,400.
• HSA or, Health Savings Accounts: The minimum deductibles for a qualified High Deductible Health Plan did not increase for 2015 ($1,250 filing single and $2,500 for families). However, the limit on out-of-pocket expenses went up $100 to $6,350 for single taxpayers and for families the limit increased $200 ($12,700) for families.
• MSA or Medical Savings Accounts: Beginning in 2015, Self-only coverage with a high deductible of at least $2,200 and a max of $3,300 are deductible and the out of pocket expense can not exceed $4,450. For Family coverage, the minimum deductible is $4,450 and the max is $6,650; the annual out-of-pocket expense must not go over $8,150.
• Adjusted Gross Income for Medical Expense Deductibles: The amount remains at 10% of your AGI in 2015. But if you or your spouse are over the age of 65 on December 31st of 2014, the ten percent will not take effect for you until 2017. It will continue to be 7.5% of your adjusted gross income.
• Taxes on Medicare: The .9% Medicare tax on people making over $200k ($250k married filing jointly) remains in effect for 2015. Also, the 3.8% Medicare tax on unearned income remains as well.
• Premiums for Long-term Care: People younger than forty can deduct $380 of premiums on long-term care. Those forty to forty-nine can deduct $710, and those fifty to fifty-nine can deduct $1,430. Taxpayers age sixty to sixty-nine can deduct $3,800 and the maximum those over seventy can deduct is $4,750.
• Dividends & Long-term Capital Gains: Previous tax rates will continue for 2015 although the cutoffs were adjusted to account for inflation. Zero percent for those in the ten and fifteen tax bracket. Those at twenty-five, twenty-eight, thirty-three and thirty-five are at fifteen percent. And those in the highest bracket of 39.6%, which is at or above $413,200 for single taxpayers and $464,850 married filing jointly, the rate maxes out at twenty percent.
• Foreign Income: The exclusion for foreign earned income is up $1,600 from $99,200 to $100,800.
• Taxes on Gifts and Estates: The exclusion for descendants was raised from $5,340,000 to $5,430,000. The max rate and yearly exclusion remained at forty percent and $14k.
• Personal Exemption Phaseout (PEP) and Pease: Both PEP and Pease have been extended permanently and for 2015 single taxpayers with income over $258,250 will be affected—those married filing jointly with over $309,900 will be affected.

What’s New in Tax Credits for Individuals?

• Adoption: A tax credit of up to $13,400 is obtainable for each child’s adoption expenses where eligibility is met and adoption expenses meet requirements. It’s important to note this credit is non-refundable. It lowers the tax you owe however, should it lower it causing you to have “overpaid”, you will not receive a refund for the difference.
• Child Tax Credit: The credit is $1k per child.
• Child Care & Dependent Care: Those that qualify can get a credit up to a max of $1,050 or 35% of $3k in qualifying expenses. Two, or more than two dependents, may allow you to claim up to 35% of $6k or $2,100 for expenses that meet the requirements. For those with high income the credit is lowered but will not be lower than twenty percent.

What’s New in Education Taxes?

• Education Loans Interest: The deduction limit of 60 months on interest has been removed and the maximum remains at $2,500. 
• The American Opportunity Tax Credit: The max credit of $2,500 has been extended until 2017. It remains at $2k for the Lifetime Learning Credit.

What’s New In Retirement Tax Laws?

• Saver’s Credit: The Adjusted Gross Income required for this credit is now $61k for those filing jointly and those filing as Head of Household it’s $45,750. Married couples filing separately the AGI is $30,500 and if filing single, it’s $30k.
• Phase-Out Incomes: When making contributions to a basic IRA, the deduction is being phased out for head of household filers and those filing single and covered by a plan provided by an employer. This is for those just mentioned that have an adjusted gross income between $61k and $71k. If married, that AGI is between $98k and $118k. Should the plan not be an employer-provided plan, the AGI for phase-out is between $183k and $193k. For taxpayers paying towards a Roth IRA it is $183k to $193k for married couples filing jointly. Those filing single or head of household, the income is between $116k and $131k.Those married but filing a separate return and are covered by a plan, the AGI is between $0 and $10k.

For most newly divorced people, doing taxes the following year after the divorce brings up important questions that can be stressful. Here’s what you need to know to successfully make the transition.

Taxes can be complicated after a divorce due to the divvying up of assets and splitting income as well as paying or receiving alimony. If you have kids, it get’s even more complex.

Re-allocating Property

If you sell your house, the tax on the principal gain on the sale can be avoided up to $250,000 and now, since you are 2 separate taxpayers, that can be applied to both parties making $500,000 of the capital gain be tax-free. This can be helpful towards getting a refund or reducing your tax bill. However, you will have to have lived in the house as a primary residence for 2 of the last 5 years.

If one of you were to keep the house, that person can use the tax credit for the mortgage interest deduction. Basically, the portion of your mortgage payment that goes towards interest and not principal is deductible.

If the home has not been lived in as a primary residence for 2 years and the sale of the house was after the divorce, you may be able to avoid tax on a portion of the capital gains. For example, if you only lived there a year, you may be able to have up to $125,000 be non-taxed.

Filing Status

Whatever your marital status is as of December 31st determines how you are able to file. So if you were officially divorced within a tax year, you’re not able to file jointly for that year—even if you were married most of the year. However, you may be able to file as head of household which has a larger benefits and you’ll more than likely have a lower tax bracket as well.

Child Support Vs. Alimony

Essentially, income you receive from Child Support is not taxable but, Alimony is taxable income. Conversely though, Child Support is not deductible by the person paying it and Alimony payments made are deductible.

Claiming Dependents

You can claim your dependents if you meet the criteria to be considered a custodial parent. To be a custodial parent, your dependent will need to have lived with you for more than 50% of the time more than with your ex-spouse.

A non-custodial parent can claim a dependent if the custodial parent has signed form 8332, which is the “Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent.”  There are times where this makes the most financial sense. For example, should a custodial parent not be eligible for the dependent deduction due to qualifying for the Alternative Minimum Tax (also known as, AMT), it may make sense for the non-custodial parent to be able to claim the dependent so that benefit is not left on the table.

Some ex-spouses alternate years of who can claim—usually in a joint custody situation. In the past, a divorce agreement could specify who could claim the dependent(s). However, this is no longer the case and the above mentioned form 8332 must be used to designate rights to claim dependents.

Child Tax Credits

It’s important to note that a tax credit is different than a tax deduction. A deduction, like you would receive for claiming a dependent, reduces the amount of taxable income you are responsible for—lowers your tax bracket. A tax credit reduces the amount of taxes you owe.

In order to be able to be eligible for child tax credits, you have to be eligible for the claiming the dependent deduction(s).

Retirement Account Transfers

Cashing out a retirement plan such as a 401k is considered a taxable event. However, in a divorce you may be able to avoid paying taxes on distributed funds from the retirement account to an ex-spouse should you take the necessary precautions in the divorce agreement.

You’ll need to do the retirement account transfer within what’s called a Qualified Domestic Relations Order—also referred to as a QDRO. This allows for your ex-spouse to receive the the funds without you having to pay taxes on the distributed amount. However, the ex-spouse receiving the funds will be taxed on the amount distributed to them.

Use a Tax Professional

With divorce bringing about so many complications, it’s best to use a qualified tax professional to navigate your unique tax situation.

You may be able to elect a tax year that suits your business; how will you choose?

The IRS requires your business to determine your taxable income based on your tax year and file a return accordingly. Your tax year is the yearly accounting timeframe for reporting income, reporting expenses and maintaining records.

There are 2 main choices for eligible tax years: Calendar Year and Fiscal Year. A calendar year is the same timeframe for individual taxpayers—January 1st through December 31st. A fiscal year is twelve straight months that ends on the last day of any month with the exception of December. Your fiscal year can also be a 52-53 Week Tax Year and that does not have to land on the last day of the month but it does need to cover 12 straight months and it does have to end on the same day of the week every year.

Why choose a Fiscal Year over a Calendar Year?

A fiscal year can be advantageous to some businesses. For example, many retailers’ fiscal year lasts 52 weeks (or 53 depending on the year) and starts on the first Monday closest to the first day of February and ends on the last Sunday that is closest to the end of January. This allows the retailer to start the year stronger than if they started at the beginning of January due to the post-Holiday low volume in sales—it’s the slowest month for retail. So instead of the first quarter looking fiscally weak, January gets lumped in with Q4’s Holiday peak sales which looks more attractive and it also helps the company spread the quarterly budget out over January.

Another example is the travel and tourism industry whose fiscal year is typically from July 1st to June 30th. This allows travel and tourism companies to start their year with their highest volume but also absorb the steep dropoff that happens in September.

Some business have required tax years set by the IRS

Partnerships, S-Corps and Personal Service Corporations are usually required to follow a tax year determined by the IRS. However, an organization can request approval for using another tax year and once approved, makes the election under section 444 of the Internal Revenue Code.

Can you choose between a Calendar Year and a Fiscal Year?

In most cases, anyone can choose the Calendar Year. But, some organizations are required to choose a Calendar Year if they meet any of the following criteria:

• You do not keep any books or records
• You’ve not established a yearly accounting method
• Your current tax year doesn’t qualify as a fiscal year
• The Internal Revenue Code has required you to use the Calendar Year

Fiscal Year vs. 52-53 Week Year

If the IRS allows you to elect a Fiscal Year, you can elect the month your fiscal year begins and the 12th month after it that your year would end. So if you chose May as the month you want it to start, your fiscal year would be from May 1st through April 30th of the following year. Again, you must keep your books and records during this period and report your income and expenses for the pre-defined period.

Should you elect a 52-53 Week Fiscal Year, you can choose the either a certain day of the week that falls within the month or a certain day that is closest to the end of the month. For example, you can choose to end your year on the last Thursday of a month or, you can end it on whatever Thursday is closest to the end of the month, which in some years, the actual date may be in the next month. So let’s say the month ends on Wednesday the 31st but the Thursday closest to the end of the month is the on the 1st of the following month.

To choose a 52-53 Week Year as your tax year, you must adhere a statement to your return and include:

• The month the tax year ends
• The day of the week the tax year ends
• The date the tax years ends and whether it’s a day that occurs last in the month or a day that is closest to the end of the month.

If you choose a 52-53 Week Tax Year, you should begin your tax year on the earliest date of the calendar month that is nearest to the first day of the first month in your 52-53-Week Tax Year.

What if the business didn’t exist for a whole year or you want to change your fiscal year?

A Short Tax Year can be filed if the business was not in existence for part of a 12 month period. Also, if you’ve changed your tax year with the IRS and State, there may be a return that you need to do based on a Short Tax Year to make up the difference.

So if your business entity did not come into existence until May and you’ve chosen February 1st through January 31st to be your Tax Year, then your tax year will be a Short Tax Year—May 1st to January 31st (January 31st of the following calendar year). Since keeping records and books is required for electing a Fiscal Tax Year, by filing under a Short Tax Year, you’ll only need to be able to provide proof of consistent bookkeeping from May 1st to January 31st.

If you changed your tax year or were required to change your tax year, your new tax year begins the very next day after your former tax year ends. To change your tax year, you must "file form 1128".

Generally, a Short Tax Year is annualized (spread out over a year) but, self-employment tax is based on the income that coincides with the actual period of the Short Tax Year.

It’s important to know what your tax obligations are when starting out as well as how you can keep as much of your hard-earned money as you can.

If you’re already, or becoming, an independent professional with high overhead expenses but without a storefront per se, such as a carpenter, mechanic, locksmith, photographer or videographer, taxes can a little more complicated than it may be for a web designer or a leadership consultant whose capital assets are the sum of a mobile phone and a laptop. The main difference is what you’re able to deduct—since you have so much more invested in gear.

Most of the example professions listed above are professions that start out by friends asking you to provide a service that you seem to have a knack for. And what starts out as a side business becomes a full-time job.

This guide is intended to get you on the right track but its not all inclusive of all you need to know. It’s always best—especially owning your own business—to have a professional tax preparer help you do your taxes and help with tax strategies. You have your thing you’re good at doing, well, so do tax professionals.

Expenses

Expenses can be broken down into 2 categories: Overhead and Travel.

Overhead Expenses

Essentially, overhead expenses is the “cost of doing business.” Expenses are costs incurred that are not what you invest in products. Expenses are things you buy in order to provide a service or product.  Expenses are things like your equipment and gear. It’s also the costs of marketing yourself, buying insurance, renewing licenses, hiring contractor help, and maintenance and repairs of your equipment as well.

If you are claiming a portion of your home as your office, you can deduct this cost as well. You use form 8829 for that.

Using a 1040 form, you’ll use Schedule C to deduct expenses. Schedule C is a Sole Proprietor form that essentially, is populated with your profit and loss.

For Mileage, there is another form for the Standard Mileage Deduction and that is form 2106.

Travel Expenses

The basic principle is that if you incurred a cost as a result of travelling for business, it’s deductible—deductible to a point. For example, if you’re a photographer and travelled to LA to shoot a wedding, your flight, meals, ground transportation and gear you rented are all deductible (rented gear isn’t exclusive to travel expenses, that just goes along with your equipment expenses). Meals are deductible when travelling because it’s understood that you’re not at home and are required to go out to dinner. However, a meal in your hometown can be expensed as long as it’s ordinary and necessary to doing business. Taking a client out as a thank you or meeting a potential client over a cocktail can be deducted but there is a limit to how much you can deduct.

If you think you can fudge a little here and there on what you count as a travel expense, you’re treading on thin ice, travel expenses commonly raise the audit flag.

Make sure you keep all your receipts, should you be audited, you’ll have to prove and justify your deductions to the IRS. Deductions for travel expenses also go on the Schedule C form.

Depreciation

This is where you really need to pay attention. Because many sole proprietors have gear and equipment that can be a total of $10,000 to $25,000 dollars and even more sometimes, depreciation can be what really helps bring your taxable income down.

Using form 4562, you can deduct new equipment bought in the tax year you are preparing for—again, if you have your receipts. And because equipment depreciates in value, you’re able to deduct a portion of the cost of the major item by about 20% per year for the following five years depending on what the law states at the current time. As of 2012 in the Taxpayers Relief Act, you were allowed to deduct up to 50% of the original cost of the equipment in the following year. So a table saw bought in 2014 can be deducted for the full amount for 2014 and then, for the 2015 tax year, you can deduct 20% of the original cost—or 50% should you qualify.

So, if you bought a studio camera body that cost $6,000 and made $75,000 in a year, you’ve brought your taxable income down to $69,000. And if you have another 15,000 in equipment sitting around, you can deduct another $3,000 bringing your taxable income to $66,000. Now add in other deductions such as home office, business insurance, marketing costs and so on, you could really bring your income down to a bracket that can be truly advantageous for you. And if you’re married and have 3 kids, even better.

Social Security and Medicare

Don’t forget about this. You’ll need to fill out Schedule SE of the 1040 form to calculate these taxes.

Estimating Quarterly Taxes

Using form 1040-ES, you can estimate and pay your quarterly taxes and avoid being hit with a huge tax burden in April. Think of this as an employer that withholds taxes from your paycheck. You’re not having to pay it with every paycheck, but you’re paying it. Since you’re the employer of you, you’re taking out your own taxes and then making the payment to the IRS and state on your behalf.

The several tactics listed below help you meet all your tax obligations while keeping as much of your income as possible. If you have any questions about any of these tactics, we’re more than happy to help. We understand each person’s tax and financial situation is unique to them. We’re experts in helping people identify just the right strategy and tactics that meets their needs.

Defer Income

If you work for yourself and pay your taxes in cash, it may be a good idea to hold off on sending out invoices until towards the end of the year. And if your clients pay you net 30 or 60, there’s a good chance you won’t receive payment until the following year. By doing so, you can lower your tax bracket which will lower your taxes.

Another way you can defer income is to make deductible purchases this year that you have been planning on making in the following year. This will lower your taxable income and save you money on taxes you could owe.

Pay Towards Retirement

Making payments towards your retirement plan such as a 401(k) or 403(b) reduces your taxable income. There is a maximum amount you are allowed to invest in a tax year. This max though, includes any money paid by your employer if they have a matching program. So make sure you pay just enough that you get all that your employer matches as well as much as you can pay to bring down your taxable income. If you’re self-employed paying into a retirement plan is also an option

Take Losses and Delay Gains

If you have any capital that needs to be sold, or sold soon, whether or not that sale results in a loss or profit can help you determine when you should sell it. If you’ll be selling your asset at a loss, go ahead and sell it this year in order to write it off your taxable income. If you’ll be making a profit, hold off until next year so you don’t increase your taxable income.

Stay Up-To-Date on Investments

If you have someone else managing your investments, make sure your stay in the know. If a broker sells a stock at a profit to buy another stock, that’s consider taxable income even though the funds went directly into another investment. To avoid this, you can invest in long-term investments and you’ll not pay taxes on the appreciation until you sell the stock. The goal is to minimize turnover.

Move Income By Gift-Giving

The IRS allows taxpayers filing as an individual $14,000, and if filing jointly, $28,000, for each recipient (as of 2014) for each year and not have to pay federal gift tax. There is no limit to how many recipients can receive $14,000. These gifts are taxed at the recipient's tax rate. There are some exceptions and special rules if the recipient is a child under 18. The gift is not considered taxable income if you pay education expenses or medical expenses directly.

Back Treasury Bills (T-Bills)

If your income is high and the state you live in has a high income tax, a treasury bill can potentially defer into the next tax year when the bill or bond matures. Also, the interest awarded to you from treasury bills is not taxable by either state and local authorities.

Invest in Bonds From a Local Government

Income gained by buying a bond from a local or state government (municipal bond), is more than likely exempt from federal taxes. However, municipal bonds generally have lower interest rates. Also, the selling of municipal bonds is subject to either being taxable income or a deduction.

Donate Assets Instead of Cash

Donating assets that have gained in value since you purchased it, will prevent you from having to pay taxes on profit you made on the sell. Also, you’re able to give more to the charity because you’re not having to pay taxes on the capital gains tax—essentially, having to give less money.

Deduct Mileage for Charity

You can deduct $.14 per mile for driving to and from for charity-based work—$.23.5 for medical charities and also for moving as a result of charity work. It’s required by the IRS that you keep accurate and detailed records.

Use a Flexible Spending Account

In most cases, you can’t deduct health and dental expenses however, if the expenses exceed ten percent of your adjusted gross income, you may be able to deduct the excessive expenses. What is deductible is an FSA, or Flexible Spending Account (also known as a Health Savings Account). FSAs can be advantageous for saving money on your taxes. If you know you’re going to spend a certain amount of money in the coming year on medical expenses, putting the money into a Health Savings Account can lower your taxable income. Some plans even allow you to buy items that insurance doesn’t cover, such as over-the-counter medications.

Consider Not Filing Jointly

Filing jointly benefits couples in most cases. However, there are a couple situations where it may be more prudent to file separately. If the 2 spouses income is equal, filing separately allows each of you to benefit from a lower tax bracket. If a spouse has medical expenses, filing separately may lower the taxable income enough so the spouse can deduct expenses that are over 10% of adjusted growth income.

Make The Most of Working for Yourself

As of 2014, you can potentially deduct up to $25,000 dollars in equipment expenses versus previously only being able to deduct its depreciation spread out over several years. You can also deduct all of your health premiums as business expenses as well. And, as long as you’re not incorporated, and if your child is under the age of eighteen, you can hire them without having to pay employment taxes. Also, this decreases your taxable income.

Shift Non-Deductible Debt to a Deductible Loan

Interest on most loans is not deductible—for example, car loans, credit cards and personal loans. It may be more beneficial to you to take out a home equity loan (where the interest is deductible) to pay off these non-deductible loans.

Delay and Combine Deductible Expenses

Certain types of expenses are only deductible when they reach a certain amount. You may not reach that amount in 1 year but you might in 2. If you’re able to, delay those expenses until the next year when they can be combined with the expenses slated for next year thus, bring down your taxable income.