Tax Planning: What Are the Differences Between Tax Credits & Tax Deductions?

As you prepare to file your income tax return, you’ll probably run across the terms tax deduction and tax credit. Both individuals and businesses can take advantage of tax deductions and credits to lower their income tax and possibly increase their refund. In today’s blog from LongSchaefer, our tax planning experts take a look at the differences between tax credits and tax deductions. 

Related Post: How Filing Taxes Electronically Works

Reducing Income Versus Reducing Taxes You Pay

The major difference between a tax deduction and a tax credit is that deductions lower the income on which the government bases its tax calculations, while tax credits directly reduce the amount of tax you owe.

For example, you get to take a tax deduction of $18,650 because you’re the head of a household. If you made $50,000 in that year, the head of household deduction lowers the amount of your gross income to $31,350. Rather than pay 15% of your income at $50,000, you pay 15% of $31,350. You would pay $4,702.50 rather than $7,500 for taxes in this simplified example.

After you calculate how much money you owe in taxes, a tax credit can lower the amount of tax you pay (or even lead to a higher income tax return). For instance, your tax bill comes to $700. However, you qualify for two tax credits. One is refundable for $500, and one is non-refundable for $750. The $750 credit reduces the amount of tax you owe to $0, while the refundable tax credit means you receive $500 from the IRS.

Deferring income to retirement also has tax benefits for you before you retire. The IRS allows an annual $19,500 elective deferral to 401(k) plans. When you reach age 50, that maximum amount increases to $26,000. You don’t pay income taxes on that pre-tax deduction when you’re working because you’ll pay income taxes after you retire.

Tax planning services can point you to the right types of tax credits or tax deductions available to you.

Examples of Tax Credits

The most common tax credit for individuals is the Child Tax Credit from the Internal Revenue Service. In general, your child must be 16 years old or younger and meet certain qualifications. Each individual can earn up to $2,000 per qualifying child, and up to $1,400 of that is refundable, meaning you can get money back from the IRS. 

There’s also the Earned Income Tax Credit for working people with low to moderate incomes who have children. The EITC is in addition to the Child Tax Credit. 

Business owners can take advantage of tax credits, too. Small employers can take the General Business Credit for undertaking certain activities, such as investing in electric vehicles, increasing research activities, retaining employees, and having employer differential wage payments. Tax planning staff at LongSchaefer will show you what tax credits you may be eligible for.

A refundable credit means you could get that money back from the IRS. A non-refundable credit simply lowers the amount of taxes you may owe, all the way down to zero.

Examples of Tax Deductions

Tax deductions work differently for individuals and businesses. Individuals can take a  standard deduction based on your filing status (single, head of household, or married filing jointly). 

Individuals may choose to deduct certain health care expenses, interest paid on mortgages, and charitable donations. There is one caveat: You can itemize your deductions for federal income taxes, but they must be more than your standard deduction. 

You can deduct certain business expenses from your income to lower your income. Let’s say your business earned $200,000 in 2020. But you invested in new equipment that cost $25,000, advertising for $5,000, and computer software at $3,000. All of these items could lower your income to $167,000. At 25%, you would pay $41,750 in income taxes rather than $50,000 in this simplified example.

Related Post: Tax Credits You Didn’t Know About

Tax Planning From LongSchaefer

The tax planning pros at LongSchaefer can help you get the most out of your income taxes, whether you’re a business or an individual. Contact us online or call (513) 245-0300 for more information on how our firm can help.

Tax Planning for the Taxes You Must Pay as a Business Owner

All businesses must pay taxes to state and federal governments. The types of taxes vary, so paying taxes every year can get confusing. That’s why you need a tax preparation and tax planning partner on your side. In today’s blog, LongSchaefer’s tax planning experts discuss the taxes you must pay as a business owner.

Related Post: Tax-Saving Strategies for Small Business Owners

Income Tax

All businesses must pay a tax on their income, much in the same way individuals pay income taxes. Your business structure determines how you pay income taxes. Self-employment taxes are essentially double what you pay as an employee of a business. Sole proprietors may have similar income taxes to that of self-employed individuals, in that both self-employment and sole proprietors pay taxes on the net income of the business (profit minus expenses).

Partners in a partnership arrangement pay their income taxes separately, based on their share of the business. Limited liability companies and S-corporations pay income taxes based on the owners’ share of the companies. Corporations pay income taxes as separate entities from the owners. LongSchaefer’s tax planning experts help you determine what income tax strategy is right for you based on your company structure as a legal entity.

Employment or Payroll Tax

Business owners pay their share of payroll taxes based on the number of employees on staff. How much payroll tax you must withhold is based on an employee’s gross pay. Each employee’s portion of the payroll tax (called FICA, collectively) lowers their overall paycheck. Business owners must pay their portion of Social Security, Medicare, and federal unemployment taxes based on their employees’ income. Our tax planning experts can show you what this means for your workers and your revenue.

Property Taxes

Do you own your facility or office? What about any company vehicles? Chances are good you’ll pay property taxes to the city or county in which your business is located. Contact your local tax authority, usually a county treasurer, auditor, or assessor, to find out how much property taxes you owe and when they are due. LongSchaefer can help with this process.

Sales or Excise Taxes

Sales and excise taxes are similar to each other. Your company pays sales tax on products and services bought or sold. For example, your company sells lawnmowers. Your business pays sales tax to state and local authorities based on a percentage of the sale price. If your business purchases certain goods or services, you’ll pay sales tax as part of the overall price (but the company selling the item distributes the tax).

Excise taxes involve using or consuming certain products, such as fuel used in transportation. If you have a fleet of vehicles, your business may have to pay state or federal excise taxes. Tax planning experts at LongSchaefer can teach you how to account for excise taxes and when to pay them based on your company’s unique situation.

Related Post: Tax Services: Three Common Tax Problems Faced by Businesses

Tax Planning From LongSchaefer

The tax planning pros at LongSchaefer can help you get the most out of your income tax filing every year. Contact us online or call (513) 245-0300 for more information on how we can help.

Tax-Saving Strategies for Small Business Owners

It’s the final quarter of the year. You’re looking to end the year strong while planning for next year’s budget. LongSchaefer showcases some relevant and practical tax-saving strategies for small business owners in today’s tax planning blog.

Related Post: Strategic Business Planning for the Last Quarter of Any Given Year 

Capital Investments

Capital investments in equipment offer huge tax deductions for your federal income tax return. In 2020, the deduction maxes out at $1.04 million. The deduction covers new and used equipment as well as software. Accountants and tax planning specialists call this a Section 179 Deduction. The team at LongSchaefer can advise you as to what kind of equipment applies to this deduction.

Depreciation

Congress passed a law in 2017 to make it easier to depreciate any property you purchase. Depreciation occurs when a piece of equipment loses its value over time. For example, you buy a new car worth $20,000 in 2020, but in 2021 it’s worth only $15,000 because it depreciates due to wear and tear as well as normal use.

In the past, you needed to depreciate your property over time. Until the 2023 tax year, business owners can depreciate the entire value of qualifying property. You record the depreciation as an expense on your taxes, thereby lowering your tax liability. The IRS lets you depreciate up to $1.04 million in property this way.

Qualifying property includes, but is not limited to, computers, machinery, furniture, vehicles, and building equipment. The LongSchaefer tax planning team can point out what assets you have that may qualify for this deduction.

Deferring Income

Businesses can defer income by delaying sending invoices in the fourth quarter of the current year and sending them in January of the next year. The main benefit is that taxes on the income aren’t paid until next year. This strategy works if you plan on having about the same income next year. 

If your business expects to take off and you make significantly more income next year, you might consider sending those invoices in the current year versus next year. The tax planning pros at LongSchaefer will examine your situation and plan the best possible strategy for you.

Related Post: 4 Reasons to Hire a Small Business Accountant 

Tax Planning Services From LongSchaefer

We recognize that everyone’s definition of success is different. It’s part of our company culture. The tax and accounting pros at LongSchaefer can tailor a tax planning strategy to your specific situation. Contact us or call (513) 245-0300 for more information on our tax planning services and end-of-year tax strategies.

Tax Planning: End-of-Year Tax Strategies to Plan for Now

It’s the last quarter of the year, and you’re prepping for the holiday season. The last three months of the year are a great time to employ some end-of-year tax planning strategies so you can optimize your return and lower your income tax liability. LongSchaefer explains in today’s blog.

Related Post: Tax Planning Tips for the Holiday Season

Know Which Deduction to Take

Before you make any firm tax planning decisions, you need to determine which deduction to take. The standard deduction is a set amount by which the IRS reduces your income liability. Amounts of the standard deduction vary, depending on if you’re filing as a single person, married and filing jointly, or submitting your taxes as the head of a household. 

It makes sense to itemize deductions if your total annual deduction will be greater than the standard tax deduction. Common itemized deductions include interest on mortgage payments, certain healthcare expenses, and charitable contributions. 

Contribute to Retirement Accounts

Contributions to retirement accounts are a tried-and-true tax deduction that individuals and businesses can make for tax planning purposes. That’s because the annual contribution limits for these plans are $19,500, as of 2020. Those limits may go up in the coming years.

Do you have any extra income in savings heading into the end of the year? Have you lagged in your contributions to IRAs and 401(k) plans? As you decide how best to invest your money at the end of the year, contributions to retirement plans can defer taxes until you use the money for your retirement. 

If you’re 40 and you want to retire at 70, you can put off paying income taxes on those contributions for 30 years. Suppose you put the maximum amount, $19,500, into your retirement account by the end of 2020. That reduces the income used to figure your tax liability by $19,500.

Leverage Stock Losses to Offset Capital Gains

The stock market took a beating in 2020 due to the COVID-19 pandemic. Although the stock market has climbed back up, you can deduct up to $1,500 ($3,000 if filing a joint return) of capital losses in excess of capital gains per year from your ordinary income. Although this isn’t as great as contributing to a retirement account, these smaller deductions add up when it comes to tax planning and reducing your income tax liability every year.

Related Post: Tax Planning: Charities and Tax Deductions

Tax Planning Services From LongSchaefer

The tax and accounting pros at LongSchaefer can tailor a tax planning strategy to your specific situation. We recognize that everyone’s definition of success is different. Contact us or call (513) 245-0300 for more information on our tax planning services and end-of-year tax strategies.

Tax Services: Three Common Tax Problems Faced by Businesses

For large businesses and small businesses alike, tax problems present themselves each year for a variety of reasons. There are many precautions that your business can take to avoid certain tax problems, but without professional tax services, it can be difficult to stay on top of every potential problem. Today, LongSchaefer wants to help your business avoid these problems. In this blog post, we’ll evaluate three common tax problems faced by businesses. 

Failure to Track Deductible Expenses

For businesses that do not utilize expense accounts, it’s crucial that you are keeping track of all of your deductible expenses. Failing to keep track of deductible expenses is a common tax problem for businesses that don’t have a specific credit card or banking account for expenses. Failing to keep track of these expenses means that you are likely missing out on tax savings. Make sure to keep all your receipts to avoid the need for professional tax services. 

IRS Audits

Few things are more stressful for a business than receiving an audit letter from the IRS. There are several red flags that might get your business audited, including year-over-year net losses, consistent late filings, and salaries that are higher than usual for your industry. Audits take significant time and energy, as you gather documents and records to substantiate items on your tax return. The IRS is thorough and isn’t going to let you off easy, so it’s important to have proper representation if faced with this tax problem. At LongSchaefer, we offer IRS audit representation that will help save your business time and money during the audit process. 

Payroll Taxes

There aren’t many things worse in the eyes of the IRS than failing to pay your payroll taxes. A significant portion of payroll taxes are your employees’ withholdings, which immediately puts the IRS on guard. The penalties that come with failing to pay your payroll taxes are often more severe than other tax problems, so you shouldn’t take payroll taxes for granted. If you are behind on these taxes, you will want to make it a priority for your business and avoid the IRS knocking on your door. 

Contact LongSchaefer for Tax Services

If your business is facing a tax problem, whether it’s an audit, payroll taxes, or another issue altogether, LongSchaefer tax services can help. For more information on the tax services we can provide for your business, get in touch with us at (513) 245-0300 or contact us online today. 

Tax Planning Tips for the Holiday Season

During the Christmas season, you are going to be spending money early and often on gifts for family and friends. It can be easy to lose track of how much you are spending, especially without a set budget. During the hectic holidays, many people overlook the tax implications of the holiday season. In today’s blog post, LongSchaefer offers a few tax planning tips for the holiday season.

Don’t Lose Track of Your Receipts

It’s important to keep track of your receipts all year round, but it’s especially true during the holidays. When tax season hits, you’ll want to have all of your receipts for deductible expenses, and that includes holiday receipts. Make sure to keep all of your holiday-related receipts, including gifts, childcare expenditures, and travel expenses. Whether you are filing your taxes or returning a gift, saving your receipts will pay off.

Don’t Forget Child and Dependent Care Tax Credits

One of the most common headaches during the holiday season is childcare over winter vacation from school. While the adults of the home are still working, children are out of school, many needing some sort of childcare. If you have to hire a babysitter or send your kids to winter camp, you might be eligible for child and dependent care tax credits. In fact, you could be eligible for up to $2,100 in tax credits for your childcare.

Consider When to Payout Your Holiday Bonus

If you are expecting a holiday bonus from your employer in the coming weeks, you might want to consider waiting until 2020 to cash it out. For a bonus that comes with a significant payout, it could actually bump you into the next tax bracket. When working through your tax planning for 2020, it might benefit you to defer your bonus to 2020 so that it doesn’t impact your 2019 tax return. If you don’t immediately need the extra income, it might serve your family best to wait. 

Contact LongSchaefer for Tax Planning

As we head into 2020, tax season will be upon us in no time. If you are looking for tax planning help in 2020, give LongSchaefer a call at (513) 245-0300 or contact us online today.

May 2020 COVID-19 Update

In order to comply with the Ohio Health Department Order & CDC social distancing recommendations, our offices are closed until further notice. Rest assured that our established protocols and available technology will allow us to provide the same level of service and quality you expect from LongSchaefer during this time.

The SBA has announced details of how it’s helping small businesses through the Coronavirus outbreak. The IRS is sending payments to families affected by this crisis. 

Please click on our Coronavirus information pages for more information.