Tax Savings Strategies
There are several ways you can lower your taxable income and benefit from lowering your tax liability. To lower your taxable income, you can use “Adjustments to Gross Income, Standard Deduction, and Itemized Deductions.” Apparently, some of the Adjustments to Gross Income items will not apply to everyone but some of them will – the good thing is that you can focus on what does apply to you to maximize your tax savings. For example, if you are not self employed your main focus could be on making IRA contributions or H.S.A. contributions to lower your taxable income and benefit from tax savings – it all depends on your situation. However, the Standard Deduction and Itemized Deduction can be used by anyone if applicable.
Adjustments to Gross Income includes:
1) Educator Expenses
2) Certain Business Expenses of Reservists, Performing Artists, and Government Officials
3) Health Savings Account Deduction
4) Moving Expenses for Members of the Armed Forces
5) Deductible part of Self Employment Tax ( 50% of Self Employment Tax)
6) Self Employed SEP, Simple, and Qualified Plans
7) Self Employed Health Insurance
8) Penalty on Early Withdrawal of Savings
9) Alimony Paid
10) IRA Deduction
11) Student Loan Interest Deduction
12) Tuition and Fees
Educator Expenses: If you were an eligible educator in 2019, you can deduct up to $250 of qualified expenses you paid in 2019. If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year.
Certain Business Expenses of Reservists, Performing Artists, and Government Officials: you can deduct certain business expenses of National Guard and reserve members who traveled more than 100 miles from home to perform services as a National Guard or reserve member. Performing-arts-related expenses as a qualified performing artist. Business expenses of fee-basis state or local government officials.
Health Savings Account Deduction: You may be able to take this deduction if contributions (other than employer contributions, rollovers, and qualified HSA funding distributions from an IRA) were made to your HSA account for 2019.
Moving Expenses: You can deduct moving expenses if you are a member of the Armed Forces on active duty and due to a military order you move because of a permanent change of station.
Deductible Part of Self Employment Tax: If you were self-employed and owe self-employment tax, the deductible amount is equal to 50% of the total self-employment tax which is 15.3%. Therefore, the deduction for self employment tax is 7.65%.
Self Employed SEP, SIMPLE, and Qualified Plans: If you were self-employed or a partner, you may be able to take this deduction. To set up a SEP (Simplified Employee Pension), you must execute a formal written agreement to provide benefits to all eligible employees; you must give each eligible employee certain information about the SEP; A SEP-IRA must be set up for each eligible employee. Contributions you make for 2019 on your behalf as self employed to a SEP-IRA can't exceed the lesser of 20% of the net income (net income adjusted for 50% of self-employment tax) or $56,000. In general, it can’t exceed $56,000. The amount that is deductible is the lesser of the following amount: your contributions or 20% of the net income (net income adjusted for 50% of self employment tax) during 2019 from the business that has the plan, not to exceed $56,000. In general, the maximum deduction is $56,000. If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. However, if you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax, be aware! Aside from that, you can also get taxed for making early withdrawals (before the age of 59.5), and not making required withdrawals (by age 72).
A SIMPLE plan (Savings Incentive Match Plan for Employees) is a written arrangement that provides you and your employees with a simplified way to make contributions to provide retirement income. A SIMPLE plan can be set up in either of the following ways, using SIMPLE IRAs (SIMPLE IRA plan) or as part of a 401(k) plan (SIMPLE 401(k) plan).
You can set up a SIMPLE IRA plan if you meet both the following requirements. You meet the employee limit and you don't maintain another qualified plan unless the other plan is for collective bargaining employees. The employee limit is 100 or fewer employees who received $5,000 or more in compensation from you for the preceding year. The amount the self employed chooses to contribute to a SIMPLE IRA on his or her behalf can't be more than $13,000 for 2019 and $13,500 for 2020. A SIMPLE IRA plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. The catch-up contribution limit for SIMPLE IRA plans is $3,000 for 2019 and 2020. The maximum deduction is $13,000 for 2019 and $13,500 for 2020.
You can adopt a SIMPLE plan as part of a 401(k) plan if you meet the 100-employee limit. The maximum contribution for a self employed, on his behalf, is $13,000 for 2019 and $13,500 for 2020. Participants are also allowed a catch up contribution of $3,000 if age 50 or over. The maximum deduction is $13,000 for 2019 and $13,500 for 2020.
There are two basic kinds of qualified plans—defined contribution plans and defined benefit plans—and different rules apply to each. The self employed maximum contribution to a defined benefit plan is the lesser of the following amounts, 100% of the self employed average net income for his or her highest 3 consecutive calendar years or $225,000 for 2019 ($230,000 for 2020). In general, the self employed maximum contribution is $225,000 for 2019 and $230,000 for 2020.
The self employed maximum contribution to a defined contribution plan is the lesser of the following amounts, 100% of the self employed net income or $56,000 for 2019 ($57,000 for 2020). In general, maximum contribution is $56,000 for 2019 and $57,000 for 2020.
The employer maximum deduction for a Defined Benefit Plan is based on actuarial assumptions and computations. Consequently, an actuary must figure your deduction limit.
The employer maximum deduction for contributions to a defined contribution plan is 20% of the net income earned from the business (Net Income is adjusted for 50% of Self Employment Tax).
Self Employed Health Insurance: You may be able to deduct the amount you paid for health insurance for yourself, your spouse, and your dependents. One of the following statements must be true: you were self-employed and had a net profit for the year; you were a partner with net profit; you were a more-than-2% shareholder in an S – Corporation with net profit.
Penalty for Early Withdrawal of Savings: The Form 1099-INT or Form 1099-OID you received will show the amount of any penalty you were charged which is deductible.
Alimony Paid: If you made payments to or for your spouse or former spouse under a divorce or separation agreement entered into on or before December 31, 2018, you may be able to take this deduction. You can't take a deduction for alimony payments you made to or for your spouse if you entered into your divorce or separation agreement after December 31, 2018.
IRA: If you made contributions to a traditional IRA for 2019, you may be able to take an IRA deduction. But you or your spouse if filing a joint return must have had earned income to do so. If you were covered by a retirement plan at work or through self-employment, your IRA deduction may be reduced or eliminated. But you can still make contributions to an IRA even if you can't deduct them. In any case, the income earned on your IRA contributions isn't taxed until it is paid to you. . If you weren’t covered by a retirement plan but your spouse was, you are considered covered by a plan unless you lived apart from your spouse for all of 2019. The annual contribution limit for 2020 is $6,000 or $7,000 if you’re age 50 or older (same as 2019 limit). The maximum amount that can be deducted for 2020 is $6,000 or $7,000 if your age 50 or older. Any excess contribution could be taxable, be aware!
Student Loan Interest Deduction: You can take this deduction only if all of the following apply. You paid interest in 2019 on a qualified student loan; your filing status is any status except married filing separately; your modified adjusted gross income (AGI) is less than: $85,000 if single, head of household, or qualifying widow(er); $170,000 if married filing jointly; you, or your spouse if filing jointly, aren't claimed as a dependent on someone else's 2019 tax return. The maximum deduction is $2,500.
Tuition & Fees: If you paid qualified tuition and fees for yourself, your spouse, or your dependent(s), you may be able to take this deduction for 2019. The maximum deduction is $4,000.
Aside from the Adjustments to Gross Income which I just mentioned, another way to claim deductions and benefit by paying less taxes is by claiming the Standard Deduction or Itemized Deduction.
The Standard Deduction is $12,400 if single and $24,800 if married filing jointly. If head of household, its $18,650. Therefore, if your standard deduction is more than your itemized deductions, generally you should choose the standard deduction since its more than itemized deductions which will help you save more tax dollars. If the itemized deductions is greater than standard deduction than you generally should choose itemized deductions.
The Itemized Deductions include: Medical & Dental Expenses; State & Local Taxes paid; Interest paid; Mortgage Insurance Premiums; Gifts to Charity; Casualty & Theft Losses; and Other Itemized Deductions.
Medical & Dental Expenses: You can deduct only the part of your medical and dental expenses that exceeds 7.5% of the amount of your adjusted gross income. You can deduct what you paid for: Insurance premiums for medical and dental care, including premiums for qualified long-term care insurance; prescription medicines; medical examinations, X-ray and laboratory services, or any other medical expenses.
State & Local Taxes: The state & local taxes that are deductible is: State and local income taxes or general sales tax (most of times, state income taxes will be deducted instead of sales tax), real estate taxes, personal property tax (auto tax). The maximum that you can deduct in state & local taxes is $10,000.
Interest Paid: you can deduct home mortgage interest and points and investment interest expense. Home Mortgage interest: you can only deduct interest to the extent that the loan proceeds from your home mortgage are used to buy, build, or substantially improve the home securing the loan, which could be your primary or secondary home. For qualifying debt taken out on or before December 15, 2017, you can only deduct home mortgage interest on up to $1,000,000 ($500,000 if you are married filing separately) of that debt. If the outstanding debt exceeds $1,000,000 ($500,000 if you are married filing separately) then the mortgage interest deductible will decrease. For qualifying debt taken out after December 15,2017 you can only deduct home mortgage interest on up to $750,000 ($375,000 if you are married filing separately) of that debt. If the outstanding debt exceeds $750,000 ($375,000 if you are married filing separately) then the interest deductable will decrease.
Investment Interest Expense: Investment interest is interest paid on money you borrowed that is allocable to property held for investment. It is fully deductible.
Mortgage Insurance Premiums are deductable. However, the deduction begins phasing out when a homeowner’s adjusted gross income, or AGI, is more than $100,000. This income limit applies to single, head of household or married filing jointly taxpayers. The phase-out begins at $50,000 AGI for married persons filing separate returns. The deduction disappears completely for most homeowners whose AGI is $109,000 or $54,500 for married filing separately taxpayers.
Gift to Charity: You can deduct contributions or gifts you gave to organizations that are religious, charitable, educational, scientific, or literary in purpose. Contributions can be in cash, property, or out-of-pocket expenses you paid to do volunteer work for the kinds of organizations described earlier. Your deduction for the cash contributions is deductible up to 100% of your AGI. Your deduction for the noncash contributions is limited to 50% of your AGI minus your cash contributions. A 30% limit applies to noncash contributions of capital gain property if you figure your deduction using fair market value without reduction for appreciation. Any contributions in excess of limited amounts will be carried forward to future years and applied in future years.
Casualty and Theft Losses: You can deduct casualty and theft losses of personal assets to the extent that: the amount of each separate casualty or theft loss is more than $100; the total of the losses is more than 10% of adjusted gross income. A casualty is an event that happens rarely.
Other Itemized Deductions: Gambling losses to the extent of gambling winnings. Casualty and theft losses from income producing property (business property). Federal estate tax on income in respect of a decedent. A deduction for amortizable bond premium. An ordinary loss attributable to a contingent payment debt instrument or an inflation-indexed debt instrument (for example, a Treasury Inflation-Protected Security). Deduction for repayment of amounts under a claim of right if over $3,000. Certain unrecovered investment in a pension. Impairment-related work expenses of a disabled person.
These are all of the items available for reporting on your tax return which could help reduce your taxes and increase your tax savings. Before getting your tax return done, it would be beneficial to consider these items and determine which one applies to you, which will allow you to implement them and save tax dollars.