Tag: tips and tricks

Using Retirement Plan Contributions to Reduce Your AGI

AGI stands for adjusted gross income. This number sets the threshold for certain deductions such as medical expenses. It also determines eligibility for tax credits like the retirement savings credit and American opportunity credit. As its name implies, AGI is something that can change based on certain factors. That’s why we want to cover the effect that contributing to your IRA can have on it, along with another aspect of a retirement plan contribution that can reduce tax liability.

 

How Traditional IRA Contributions Adjust Income

When you make a contribution to a traditional IRA, it receives classification as an adjustment to income. The impact this will have on adjusted gross income is reducing it on a dollar-for-dollar basis. So if you make a fully qualified contribution of $3,000, that’s the exact amount your AGI will be reduced.

While that’s the basic overview of how this type of contribution affects AGI, as with many aspects of the tax code, there are some important considerations to take into account. One is how much of a traditional IRA contribution is deductible. For an unmarried individual who isn’t covered by an employer plan like a 401(k), the amount contributed will be fully deductible.

For people who are married, this type of contribution is only guaranteed to be deductible when neither spouse is part of an employer-sponsored retirement plan. If that criteria is met, contributions made will reduce adjusted gross income. It’s worth noting that while contributing to a Roth IRA can be a smart financial decision, this specific contribution won’t reduce AGI due to it involving after-tax dollars.

 

other Important Notes About Contributions and Retirement Plans

Even for people who are single, if they are covered by an employer plan and their AGI exceeds a certain threshold, their traditional IRA contribution won’t be deducted. Another thing to keep in mind about both traditional and Roth IRA contributions is they can qualify you for the retirement savings credit. If you’re eligible for this credit and claim it, you’ll be able to directly reduce your tax liability.

What’s interesting about the retirement savings credit is even though it lowers tax liability, it does not reduce AGI. That’s because it’s classified as a credit and not a deduction. The main criteria for claiming this credit are being over 18, having a modified AGI that falls below a specified level and not being a full-time student.

As this issue demonstrates, optimizing your tax situation can be quite a challenge. If this is something you want to do but are feeling overwhelmed by the number of questions you have, the best way to get answers and guidance is by enlisting the help of our professional tax services.

 

The 179 Expense Deductions Guide for 2016

If you’re a business owner, you don’t need to be an expert about the IRS tax code. Although it’s obviously very important to meet your tax obligations, you can hire an experienced tax professional to assist you. By getting tax assistance and guidance from the right professional, you can stay on top of all your obligations and ensure you don’t miss out on any opportunities to reduce how much you owe.

Section 179 is the perfect example of an option that can help businesses reduce what they owe. While sections of the tax code can seem very complicated or even mysterious, this one is relatively straightforward. The purpose of Section 179 is to give businesses the ability to fully deduct qualified purchases in the year they make them. So instead of needing to spread this deduction out over several years of depreciation, businesses can reap these benefits all at once.

 

Is Section 179 a Loophole?

The answer to that question is no. However, having that association with it is completely understandable. When the US government created this section of the tax code, they did so to incentivize businesses to invest in themselves by purchasing the equipment they need to thrive and grow. Where the “loophole” aspect of Section 179 comes into the picture is there was a time when plenty of businesses used this section of the tax code to write-off the purchase of vehicles which qualified at the time.

Because that specific aspect of Section 179 did start to be viewed as a widespread loophole, the current limits on business vehicles have been significantly reduced from where they were. The good news is the rest of Section 179 is still very useful for small businesses (as well as larger ones).

 

The Deduction Limit, Spending Cap and Bonus Depreciation for 2016

The deduction limit for the twelve months of 2016 is half a million dollars. That deduction applies to both used and new equipment, along with off-the-shelf software. In terms of what qualifies equipment for this deduction, the main criteria the IRS follows is it must be used for business purposes more than 50% of the time.

The other notable aspect of Section 179 for 2016 is the spending cap. The amount for this year is two million dollars. In the event a small (or larger) business manages to exceed that threshold, they can still take advantage of bonus depreciation. This year’s bonus depreciation is set at fifty percent.

 

Are Vehicles Still Eligible?

Yes, there are still some benefits available for business vehicles. The summary is certain passenger vehicles have a total depreciation deduction limitation of $11,060, while other vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes qualify for a full Section 179 deduction. If you have specific questions about this aspect of Section 179 or other business tax issues, contact us for a free consultation.

 

 

5 Tax Planning Tips for 2016-2017

Although we’re officially in the last quarter of 2016, there’s still time to optimize your tax situation. And while there are still a few months left until 2017 arrives, getting a head start on thinking about your future tax planning can pay off big down the line:

 

1. Get Organized

Not only is having organized records crucial in the event you’re ever audited, but having all of your information together is the starting point for being able to save. When your financial information is a mess, things are going to fall through the cracks. By finding the system that works best for you and then sticking to it, you’ll be able to have all the necessary information to take care of your taxes.

 

2.Health Insurance and Child Tax Credit

The penalty this year for not having health insurance is increasing to $695 for adults and $347.50 for children. The total penalty a family can face is $2,085. So not only do you want to ensure all your health insurance information is up to date, but you’ll want to periodically review your policy to ensure you’re getting all the available benefits.

For families who are welcoming a new child, be sure to get a Social Security Number for your new addition so you’ll be able to claim your child tax credit. The maximum credit amounts for 2016 are $3,373 for 1 child, $5,572 for 2 children and $6,269 for 3 children.

 

3. Retirement

If you’re concerned about the amount of taxable income you’re going to have, one of the best ways to address this issue is by contributing more to your retirement plan. Increasing the amount you contribute up to the maximum allowed for your 401(k), 403(b) or Traditional IRA can significantly reduce your tax burden.

 

4. Charitable Contributions

Another option for reducing your tax liability while also helping others is to make charitable contributions. As a general rule of thumb, be sure to properly document all donations. And if you’re planning to make any type of large donation, it’s worth first speaking with a tax professional to ensure it will actually have the effect you’re planning on.

 

5. Going Green

Plenty of people decide to purchase a car during the holiday season. If you’re in this position, you should consider a hybrid. Purchasing that type of vehicle can make you eligible for a tax credit of between $2,500 and $7,500 depending on the vehicle’s battery size.

 

Donohoo Accounting Services has over two decades of experience helping clients with taxes. You can learn about the different tax services we offer, as well as get a free consultation about your tax planning needs by calling 513-528-3982.

Tax Saving Tips for 2016

Even though we’re getting close to the last quarter of 2016, there’s still time to save on your taxes. If you want to be in the best possible position when the time comes to file this year’s taxes, here’s what to focus on for the remainder of the year:

 

Contributing to a Deductible Retirement Accounts

One of the best ways for just about anyone to reduce their tax bill is to make a contribution to a deductible retirement account. Although earnings and withdrawals for Roth IRAs are generally tax-free, it’s important to understand that they don’t provide tax breaks for contributions. However, most traditional IRAs, along with Keogh and SEP plans, are tax deductible.

For 2016, the contribution limit for all IRAs is $5,500 if you’re under 50 and $6,500 if you’re over 50. The other requirement for a full IRA deduction is those filing as single must have adjusted gross income of under $61,000 (the limit for joint filings is $98,000). And for individuals who are self-employed, the 2016 maximum annual addition to SEPs and Keoghs is $53,000.

 

Keeping Up with Estimated Tax Payments

A common reason that business owners end up getting hit with a big tax bill is they don’t make the correct estimated tax payments during the year. This is especially common with new business owners, as well as those who experience sudden growth in their business. Making this type of mistake can also result in an underpayment penalty. While some people panic and end up significantly overpaying, that’s not ideal. instead, it’s best to be diligent and try to pay as close as possible to what you owe.

 

Staying Organized with All Records

This is just as important for those who make estimated payments as it is for individuals who won’t file until next year. Keeping all your records and documents organized throughout the rest of 2016 means you won’t have to stress when tax season rolls around. Another advantage of staying organized is it makes it easier to itemize deductions.

Although the standard deduction is faster, itemized deductions can benefit individuals who are self-employed, as well as a variety of people in other situations. Having records that are in order when tax season comes around means you’ll be able to choose the deduction path that’s best for your bank account instead of avoiding itemized due to it requiring too much time.

 

Being Aware of Available Tax Credits

By being aware of what we covered in our blog post on the top tax credits, you can take care of any necessary requirements during the remaining months of 2016.

If you have any additional questions about maximizing your tax savings for 2016, professional tax planning from Donohoo Accounting Services can help.