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Tax Planning

Although taxes are necessary in everyday operations, it is each individual’s responsibility to ensure they are not an unnecessary burden. These tips and insights will help reduce the amount of taxes owed by a taxpayer, and increase the legal deductions.

Items of Note

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403(b) Plan Contribution Limits

A 403(b) retirement plan is a thrift savings plan or tax-sheltered annuity plan offered by some charities and most public schools. They are similar to a 401(k) plan in terms of how an employee contributes and employer matches, as well as how an employee can elect to deduct money directly from their paycheck and redirect it into their plan.

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The Tax Benefits of Health Savings Accounts (HSAs)

Health savings accounts (HSAs) are tax-deductible savings plans that allow you to save pre-tax dollars for future health care expenses. The designated amounts are subtracted from an employee’s pay before taxes are calculated, therefore the savings become tax free.

The Internal Revenue Service (IRS) states, an HSA is a tax-exempt custodial or trust account set up with a trustee. Distributions are not taxed as long as the money is used to pay for qualified medical expenses.

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What Is IRS Form 1099-A?

IRS Form 1099-A is an informational statement that reports foreclosure on a property. Homeowners will typically receive an IRS Form 1099-A from their lender after their home has been foreclosed upon. The IRS will receive a copy as well. The information contained in the Form 1099-A is reported on the tax return.

Form 1099-A vs. Form 1099-C

Taxpayers might receive a Form 1099-C in lieu of or in addition to a Form 1099-A if the lender foreclosed on the property and also canceled the remaining mortgage balance that is owed. Debt forgiven will be reported on Schedule 1099-C and is considered taxable income.

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Estimated Taxes and the Estimated Tax Penalty

Paying estimated taxes is one way to ensure there will not be a large amount of taxes due at filing. This payment to the Internal Revenue Service (IRS) is the contributed funds during the year towards the PAYE system and includes payments into FICA (Social Security and Medicare). This allows taxpayers to avoid owing a huge sum at the time of filing. If an amount is owed, it will attract penalties and fees calculated on the outstanding amount. For this reason, taxpayers are encouraged to make substantial estimated tax payments to the IRS during the year if income such as investment, self-employment, rental, and capital gains are earned and subject to tax withholding.

Even for clients who receive a W-2, we tend to recommend adding an extra deduction for federal, state & local payments. If there is an over-payment, the balance is returned as tax refund at filing.

Finally, taxpayers should consider making estimated tax payments in 2021 even if you don’t have any of these types of income but are in receipt of unemployment compensation (not stimulus), or participated in the gig economy during  the coronavirus (COVID-19) pandemic.

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Payment Deadlines for Estimated Tax Payments

The IRS stipulates estimated tax payments are to be paid quarterly. The due dates are:

  • April 15
  • June 15
  • September 15
  • January 15

They are extremely strict with these dates and both penalties and interest can apply because of late payments.

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Tax Planning Tips for Depreciation Recapture

Depreciation recapture can have a significant impact on your taxes. It is a provision in the tax code which allows the government to collect taxes on the sale of property/an asset that produces for the taxpayer an excess over the tax basis or adjusted cost basis. This asset must have been used previously to offset/reduce taxable income. The difference between the “cost price” and the “sale price” is what the government wants to know as that is reported as “ordinary income.” The rest is history, as you know what happens with ordinary income.

To reduce the amount you owe in taxes each year, some capital assets can be depreciated over several years. Rental properties are also affected by depreciation.

From here onward the process can be very intricate, so it is best to consult us for the best option.

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Self Employed Year End Tax Planning Using Deferred Income

Income and Deductions can be deferred to a future year or accelerated to the current year.  Self-employed individuals and persons with gigs can benefit from several tax strategies which can help to reduce some taxes and/or optimize the tax situations between present and future years.