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What are some common mistakes people make on their taxes that cost them money?
In 2021. people with high incomes would use schedule A Form 2106 and tax deductions for unreimbursed employee business expenses. The problem is that Alternative Minimum Tax would add those back in the tax calculation, so it was better to not claim them at all, clients would get more money back.Also, I see clients tax schedule A itemized deductions that exceed 33% of adjusted gross income (that’s Schedule A / AGI). It’s pretty much a guaranteed red flag for the IRS.Some people claim negative Schedule C in order to maximize the Earned Income Tax Credit.Others claim fuel tax credits and educational credits without being eligible or going to school.Just to name a few.
What are some tax write offs the average person doesn’t take advantage of?
There are many deductions which may help to lower your tax, I’ve listed several that you may qualify for depending on your own situation. I’ve also provided links where you can find additional information. I hope you find this helpful.What Is a Tax Credit?Subtract tax credits from the amount of tax you owe. There are two types of tax credits:A nonrefundable tax credit means you get a refund only up to the amount you owe.A refundable tax credit means you get a refund, even if it's more than what you owe.What Is a Tax Deduction?Subtract tax deductions from your income before you figure the amount of tax you owe.Business TaxpayersFind credits and deductions for businessesCredits for IndividualsFamily and Dependent CreditsIncome and Savings CreditsHomeowner CreditsHealth Care CreditsEducation CreditsDeductions for IndividualsWork Related DeductionsItemized DeductionsEducation DeductionsHealth Care DeductionsInvestment Related DeductionsRE: Deductions for IndividualsTaxpayers may deduct contributions made to retirement plans. But, you need to understand the difference between two retirement plan categories.A Simplified Employee Pension (SEP) plan is for self-employed people.An Individual Retirement Account (IRA) is available to both employees and self-employed workers.When you contribute after-tax dollars into these plans, your contribution is tax deductible.Student Loan Interest: in the 2021 tax year, if you’re not “married filing separately,” you can deduct up to $2,500 in interest on qualified student loans.Educator Expenses: Many educators pay for school supplies and equipment out of their own pockets.For tax year 2021. you can deduct up to $250 of the qualified expenses that you paid during the year. If your expenses are more than $250, you may be able to deduct the higher amount as an unreimbursed employee expense on Form 1040, Schedule A.To be eligible for this deduction, you must be a K-12 teacher, counselor, principal, or aide. You also must work at least 900 hours during a school year.Qualified expenses include:Professional development course feesBooksSuppliesComputer hardware or softwareItemized Deductions: Page 2 of Form 1040 asks you to take the standard deduction or to compute your itemized deductions.The standard deduction for 2021 is $12,000 for individuals and $24,000 for married couples filing jointly.Always use Schedule A and calculate your total itemized deductions. Take the higher amount if itemized deductions are greater than the standard deduction.Here are some itemized deductions that you should take:Casualty and Theft LossesCasualty and theft losses are losses due to:TheftVandalismFiresStormsCar accidentsAs of 2021. you can deduct the dollar amount of the loss over $100. If you have more than one loss, you deduct $100 from the dollar amount of each loss to calculate the tax deduction. You also subtract any funds received from an insurance policy claim.Charitable Contributions: This deduction may be the most difficult to track if you make dozens of small donations throughout the year. Keep a log of the donations you make in cash, and document the checks that you write to a charity.If you donate clothing or other items, ask the charity to give you a written receipt.Donations above a certain dollar amount require a letter from the charity for tax documentation purposes, and the dollar amount changes frequently.Home Mortgage Interest: The tax deductibility of home mortgage interest can have a huge impact on your tax bill.The IRS allows you to deduct interest on mortgage loans used to buy, build, or improve your home.To deduct the interest, mortgages taken out before December 15, 2021 cannot exceed $1 million for married couples filing jointly or $500,000 for married taxpayers filing separately.Our friends at TurboTax have written a great F.A.Q about deducting home mortgage interest that is well worth the read.Medical and Dental Expenses: If the total amount of your medical and dental expenses exceeds 7.5% of your AGI, you may deduct them on your Schedule A .If your total expenses are below the 7.5% floor, they are not deductible at all.Keeping track of this deduction during the tax year can be challenging. If you have a large medical bill in a given year, you’re likely distracted.This deduction is a good reason to find a CPA to help you with your tax return. A tax professional can ask the right questions to help you maximize your deductions.State and Local Taxes: This tax deduction is particularly important if you live in a state with a high state tax rate.You can deduct state and local income taxes on Schedule A of your federal return. But federal contributions such as Social Security, Medicare, or Federal Unemployment are ineligible.401(k) Matching Contributions: This isn’t a deduction but rather a tax strategy that’ll have a long-term impact on your retirement.Many employer-sponsored retirement plans offer an employer matching contribution to your 401(k). If your employer offers a matching contribution, take full advantage of the benefit.Here’s an example. Assume that your company offers a 3% match on 401(k) retirement plan contributions. You decide to contribute 3% of your annual salary, or $1,800. These are pre-tax dollars, meaning that 100% of the $1,800 you earn is invested.Since you contributed 3%, your employer invests another $1,800. You now have $3,600 invested, and you don’t pay taxes on the earnings until you start to withdraw funds in retirement.It may be the most valuable tax strategy available to you.Keep Detailed Records: Preparing to file your taxes can be time-consuming, but getting the most out of your available tax deductions will save you money. Use these tips and keep detailed records during the tax year. Consider working with an experienced tax preparer who can help you file your taxes accurately.RE:10 Tax Deductions You Should Take In 2021 - QuickBooks20 popular tax deductions and tax credits for individualsThere are hundreds of deductions and credits out there. Here’s a drop-down list of some common ones, as well as links to other content that will help you learn more.Student loan interest deductionAmerican Opportunity Tax CreditLifetime Learning CreditChild and dependent care tax creditChild tax creditAdoption creditEarned Income Tax CreditCharitable donations deductionMedical expenses deductionDeduction for state and local taxesMortgage interest deductionGambling loss deductionIRA contributions deduction401(k) contributions deductionSaver’s CreditHealth Savings Account contributions deductionSelf-employment expenses deductionHome office deductionEducator expenses deductionResidential energy creditRE:Tax Deductions Guide and 20 Popular Breaks for 2021 - NerdWallet1. Charitable Donations: Donations to a qualified charitable organization are deductible (qualified organizations should be able to give you proof of status). Make sure that you can supply all necessary receipts or acknowledgement letters to the IRS. If you receive any goods or services in exchange, subtract the value of the goods and services from the contribution amount.For tax year 2021. you may deduct donations worth up to 50% of your income. Starting next year, this cap will be raised to 60% per the TCJA. The new law eliminates your ability to deduct donations made to a college in exchange for the right to buy athletic tickets.2. Medical and Dental Expenses: You can deduct the amount of your unreimbursed medical and dental expenses that exceeds 7.5% of your Adjusted Gross Income (AGI). For example, if your AGI is $50,000, you may deduct the portion of your medical expenses over $3,750. Under the TCJA, this threshold will increase to 10% of your AGI in tax year 2019.3. Performing Artist Expenses: Are you the stereotypical starving artist? Certain unreimbursed business expenses of performing artists, as well as reservists and fee-basis government officials, are handled separately from other deductible business expenses. See the instructions for Form 2106, "Employee Business Expenses," for details. This tax season is the last time you will be able to claim this deduction, as it has been eliminated completely under the TCJA.4. Tax Preparation Fees: Generally, you can deduct fees that you pay for tax preparation in that year. This means that on your 2021 return, you can deduct the fees incurred in 2021 for preparing your 2021 return. Fees for tax preparation software, tax publications, and electronic filing fees are all included, but the TCJA has also eliminated this deduction starting in tax year 2018.5. Mortgage Interest, Points, and Insurance: The mortgage interest that you pay on your home, as well as a portion of the points you paid to reduce your interest rate, may be deductible if you meet the criteria listed in IRS Publication 936, "Home Interest Mortgage Deduction." This applies to mortgage debt of up to $1 million for home loans taken before December 15, 2021. and mortgages of up to $750,000 taken after that date. Mortgage insurance premiums also qualify under the mortgage interest deduction through tax year 2021. but they are subject to phase-out beginning at $100,000 AGI (for married filing jointly status).6. Home Equity Loans: Interest on home equity debt of up to $100,000 may be deducted in 2021. For next year, experts say interest on HELOCs should still be deductible provided that homeowners use the proceeds of the loan to make home improvements, and the first mortgage balance plus the HELOC does not exceed $750,000.7. Gambling Losses: Was it a bad year for you at the racetrack but a good year with lottery tickets? Believe it or not, you can deduct gambling losses with sufficient documentation ‡ but only to the extent that you offset other gambling winnings.8. Real Estate and Personal Property Taxes: Generally, taxes that are levied through home ownership, such as real estate taxes are deductible.9. State/Local Taxes: You can deduct your state and local taxes paid in the previous year, or you can deduct the sales taxes that you paid (preferable for states that levy no state income tax). If you choose to deduct sales taxes, consult the 2021 Schedule A instructions to get a baseline value and then add the tax on big-ticket items that were purchased during 2017.Despite attempts to eliminate this deduction, the TCJA keeps it in place, but limits the total deductible amount of income, sales, and property taxes to $10,000, beginning in tax year 2018.10. Job-Hunting Expenses: If you are looking for a new job within your present occupation and meet other criteria in IRS Publication 529, "Miscellaneous Deductions," you may deduct certain job-hunting expenses such as fees to employment agencies, even if you don't get a new job. Good luck with the job hunt, because thanks to the TCJA, you won't be able to deduct these expenses going forward.NOTE: The following deductions have even greater value, as they are "above the line" deductions. These deductions are subtracted off your AGI directly and are available to you whether or not you itemize.11. Moving Expenses: If you succeeded in the above job hunt and must move because your new job is at least fifty more miles away from your current home, you can deduct some moving expenses. See Publication 521, "Moving Expenses," for details. The TCJA eliminates this deduction for the 2018-2021 tax years.12. Retirement Plan Contributions: Contributions to tax-deferred retirement accounts may be deductible. Roth IRAs are not since they are funded with post-tax dollars. This deduction has been kept in place by the TCJA.13. Alimony: Amounts that you pay to a former spouse, excluding child support payments, may be deductible. See Tax Topic 452 for details. The alimony deduction remains in effect through 2021. but disappears for couples divorced in 2021 or after.14. Health Savings Account Deductions: Your 2021 contributions to your Health Savings Account (HSA) are deductible, although employer contributions are not. To qualify, you must be covered by a high deductible health plan (HDHP) and have no other health coverage, except certain permitted coverage.15. Self-Employment Expenses: As a self-employed person, you pay both the employer and employee component of payroll taxes. Fortunately, you get to deduct the 50% considered the employer portion. In some cases, you can also deduct retirement fund and health insurance expenses.16. Home Office Deduction: You may be able to deduct some expenses for the business use of your home if there is a part of it that you use regularly and exclusively for work. To qualify, your home should also be your principal place of business, so even daycare providers may take this deduction. Refer to IRS Publication 587, "Business Use of Your Home" for details on how to calculate your deduction.17. Educator Expenses: K-12 educators can deduct up to $250 in qualified and unreimbursed educational expenses. These can be items used in the classroom or payments for professional development courses taken within your field. The TCJA has not made any changes to this deduction.18. Educational Deductions: You may be able to claim a deduction on student loan interest paid ‡ but first see if you qualify for educational tax credits such as the American Opportunity Tax Credit and the Lifetime Learning Credit. Tax credits subtract directly and fully from your tax bill, compared to deductions that reduce your tax bill proportionally to your tax rate.RE:18 Top Tax Deductions For 2018
What are some tax write offs everyone should do in order to increase their tax return and not trigger any IRS flags?
The best way to reduce your income tax liability is to not incur any. In order to do this you must understand the truth about the income tax laws.The first and most important thing to know is what is "income". The federal income tax is based upon how much "income" you made. The IRS wants you to think that "income" is "all that comes in from whatever source", but that is far from the truth.US federal income tax law is solely based upon your receipt of "income", and "income" is "gains and profits from the use of federal privilege". The income tax is an excise tax, this means that if you don't participate in the use of federal privilege, then you also don't participate in being taxed upon the use of federal privilege.In regards to the 16th Amendment:"The income tax... an excise tax with respect to certain activities and privileges which is measured by reference to the income which they produce. The income is not the subject of the tax; it is the basis for determining the amount of tax.” and, "[T]he amendment made it possible to bring investment income within the scope of the general income-tax law, but did not change the character of the tax. It is still fundamentally an excise or duty..."House Congressional Record, March 27, 1943, p. 2580, testimony of former Treasury Department legislative draftsman F. Morse HubbardThe 16th Amendment says that Congress can tax the "gains and profits from the use of federal privilege" from whatever source derived. Those sources could be a federal job, being in the military, collecting Social Security or disability, or capital gains and dividends from stock in a federal corporation, entity, or municipality such as federal banks or railroads. It could also be from rent that is collected from the use of federal property/land.What this breaks down to in simple terms is this:if you have a private sector job, then your earnings are not "income"if you work for yourself in the private sector, then your earnings are not "income"if you work for the federal government or one of it's many entities, then you do have "income"if you make your living from trading stocks, options, futures, etc., that are not federally connected, then you have no "income" from those sources. If you trade in federal treasury bills and made a gain or profit from them, then you do have "income".Learn the truth about the federal income tax here:Resources - Real Tax Truth