Tax reduction and tax savings ideas to pay less

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm  jeff@jbrookswa.com 602-292-2009 Please consult with your professional tax CPA regarding your specific circumstances!

 

Here are just a few of my 56  tax savings strategies we use to help our clients reduce taxes and protect their tax savings:

1. If you own a building, investigate a cost segregation study to write off depreciation faster.

2. If you are on a cash basis (see my previous article that explains the difference between accrual and cash basis rules), prepay expenses for the following year but get a deduction in the current year.

3. Avoid careless errors such as showing that you drove exactly 10,000 miles and had exactly 10,000 business miles.

4. Use common sense.  I am defending a client who is being audited by the IRS because the previous tax preparer classified utilities as “uniforms” in error.

5. Advertising deduction is a much better deduction than a charitable deduction because advertising reduces your adjusted gross income and  increases your itemized deductions.  Also with the new net investment income rules, you will possibly pay less medicare surtax and less capital gains tax.

 

HSA plans let you divert part of your salary to an account which you can then tap to pay medical bills. The advantage? You avoid both income and Social Security tax on the money, and that can save you 20% to 35% or more compared with spending after-tax money. Starting in 2013, the maximum you can contribute to a health care flex plan is $2,500.

Medical reimbursement plans will be better now that you have to exceed 10% of your adjusted gross income to get any medical deduction for federal.  If you get married or divorced, or have or adopt a child during the year, you can change the amount you’re setting aside in a medical reimbursement plan. If you anticipate more medical bills, steer more pretax money into the account; if you anticipate fewer, you can pull back on your contributions so you don’t have to worry about the use-it-or-lose-it rule.

Child care expenses after taxes, can easily take $7,500 or more of salary to pay $5,000 worth of child care expenses. But, if you use a child-care reimbursement account at work to pay those bills, you get to use pre-tax dollars. That can save you one-third or more of the cost, since you avoid both income and Social Security taxes. If your boss offers such a plan, take advantage of it.

IF you are concerned about skyrocketing taxes in the future, or if you just want to diversify your taxable income in retirement, considering shifting some or all of your retirement plan contributions to a Roth 401(k) if your employer offers one. Unlike the regular 401(k), you don’t get a tax break when your money goes into a Roth. On the other hand, money coming out of a Roth 401(k) in retirement will be tax-free, while cash coming out of a regular 401(k) will be taxed in your top bracket.

If you receive restricted stock as a fringe benefit, consider making what’s called an 83(b) election. That lets you pay tax immediately on the value of the stock rather than waiting until the restrictions disappear when the stock “vests.” Why pay tax sooner rather than later? Because you pay tax on the value at the time you get the stock, which could be far less than the value at the time it vests. Tax on any appreciation that occurs in between then qualifies for favorable capital gains treatment. Don’t dally: You only have 30 days after receiving the stock to make the election.

If you have your own business, you have several choices of tax-favored retirement accounts, including my favorite..the Solo 401K where you can not have any other employees other than you and your spouse,  Keogh plans, Simplified Employee Pensions (SEPs) and individual 401(k)s. Contributions cut your tax bill now while earnings grow tax-deferred for your retirement.

If you have an unincorporated business, hiring your children can have real tax advantages. You can deduct what you pay them, thus shifting income from your tax bracket to theirs. Because wages are earned income, the “kiddie tax” does not apply. And, if the child is under age 18, he or she does not have to pay Social Security tax on the earnings. One more advantage: The earnings can serve as a basis for an IRA contribution.

 

If you use part of your home regularly and exclusively for your business, you can qualify to deduct as home-office expenses some costs that are otherwise considered personal expenses, including part of your utility bills, insurance premiums and home maintenance costs. Some home-business operators steer away from these breaks for fear of an audit. But a new IRS rule that takes effect this year will make it easier to claim this tax break.   The tax break only works best for corporations and partnerships and less for sole proprietorships.

Generally, the costs of starting up a new business must be amortized, that is, deducted over years in the future. But you can deduct up to $5,000 of start-up costs in the year you incur them, when the tax savings could prove particularly helpful.

 

Keep track of what you spend while doing charitable work, from what you spend on stamps for a fundraiser, to the cost of ingredients for casseroles you make for the homeless, to the number of miles you drive your car for charity (at 14 cents a mile). Add such costs with your cash contributions when figuring your charitable contribution deduction.

. If you plan to make a significant gift to charity this year, consider giving appreciated stocks or mutual fund shares that you’ve owned for more than one year instead of cash. Doing so supercharges the saving power of your generosity. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, not the amount you paid for the asset, and you never have to pay tax on the profit. However, don’t donate stocks or fund shares that lost money. You’d be better off selling the asset, claiming the loss on your taxes, and donating cash to the charity.

A charitable-remainder trust can avoid capital gains taxes on appreciated assets, allow you to receive income for life and receive a tax deduction now for a charitable contribution that will be made after your death. A charitable-lead trust can avoid taxes on appreciated assets, earn an immediate tax deduction and still provide an inheritance for your heirs later. A donor-advised fund can earn you a tax deduction for the full value of appreciated assets now, even though you don’t have to determine the recipients of your generosity until later years.

 

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com