Before tax season rolls around each year, most small business owners and first-time tax filers are probably figuring out what tax savings they can achieve this year. The tax savings achieved will vary from person to person based on a variety of factors such as the local property and casualty valuation, current tax laws, and the company’s ability to implement new tax laws. Most importantly, the time horizon for reducing tax liability depends on the amount of available deductions. If you fall into one of the following categories, you should be working to maximize your tax return:
– Beneficiaries that don’t itemize – Any non-profit organization that receives payments from any source is subject to the alternative minimum tax. To calculate your tax savings attributable to various tax benefits, calculate the applicable depreciation percentage for the property. Subdivide the total depreciation cost by the current corporate tax rate to arrive at your taxable income amount. To conclude the previous example, if your local corporate tax rate is 15 percent, your tax savings would be $1,500 (minus your standard deduction and self-employment taxes). You could further reduce your tax savings by allowing some or all of your deductions. For example, you could receive payments from an entity that owns your property and deduct the payments as a business expense.
– Self-employed individuals – You can increase your tax savings by identifying those tax items that you can contribute to and those that you cannot contribute to. Self-employed individuals may contribute to an income tax refund; however, they cannot contribute to Social Security payments or Medicaid. For this reason, you must identify the portion of your paychecks that you can legally contribute and the portion that you can legally subtract. For individuals who contribute only a portion of their income to Social Security and Medicare, there are tax refund provisions that allow you to claim a tax refund for the remaining balance.
– College savings plan – If you have a college-age child, you may also want to consider a college savings plan. Under the law, there are several tax credits you can claim for your child’s education, including the earned income tax credit (EITC) and the child tax credit (CTC). The tax credits vary according to the family structure, but most families receive some or all of these tax credits. If you elect to use these tax credits, be sure to understand the tax implications of making these contributions. Because these credits grow with inflation, your investment in education will be a good investment over the long-term, but you will need to pay tax on these contributions beginning in 2021.
– Filing your tax returns – If you’re unable to avoid paying taxes in full during the filing season, don’t worry. There are several ways to “defer” taxes while you wait for the tax season to end. For instance, you can hold onto assets like your real estate property or your boat until tax season arrives. Or, you might be able to file joint returns, thereby saving money on the taxes due to one or more of your dependent spouse or qualifying children.
– Deductions – It is possible to claim deductions for many non-taxable items, including charitable donations, education, mortgage interest, childcare, health care expenses, travel expenses, and depreciation expense. These deductions are rolled over into the next year, so you never pay them all. However, you must itemize each deduction, which requires a more in-depth knowledge of tax laws. Be aware that a lot of people get hit with a hefty tax return because of mistakes made in the preparation of their tax statements. Consulting a tax professional is the best way to learn about the various deductions you can take, as well as how to properly structure your monthly finances to maximize tax savings.