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Common Questions Regarding Tax Strategies

Paper cutouts 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.

Do you have the support you need to manage your small business bookkeeping? Contact us to schedule an appointment to speak with a local small business advisor.

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