Looking forward to new leadership, Treasury Secretary Janet Yellen has named Douglas O’Donnel as the new Interim Commissioner. The update comes ahead of November 12th, the end of the term for Commissioner Charles Rettig. Speaking about Rettig, Yellen stated, “I want to thank Commissioner Rettig for his tireless service to the American people across two administrations.” This change in leadership could affect future federal tax laws and regulations for small and medium-sized businesses. Moreover, it becomes more apparent, now than ever, to use tax planning as a tool for preparation against future problems.
Why Tax Planning Is Important For Small Business Owners
To become prepared for these future changes in federal regulations, tax planning can provide valuable insights for your small business. The goal of any good tax planning strategy is to minimize your tax liability as much as possible. There are several different ways to do this, and the best approach for you will depend on your circumstances.
Tax Planning for Standard Deductions
What’s more, standard deductions for most taxpayers have increased for this upcoming year. As for taxpayers who are married and filing jointly, the new limit is set to $25,900. On the other hand, taxpayers who are married but filing separately can take $12,950. Individuals not filing as married but as head of household, they can receive $19,400. All taxpayers looking to save on this year’s taxes should take advantage of this increase.
Tax Planning Up-To-Date
To get the most out of your tax planning strategy, it is important to stay up-to-date on the latest tax laws and regulations. The IRS is constantly issuing new guidance and making changes to the tax code, so it is important to stay on top of these changes. Tax planning is essential for anyone looking to reduce future tax liabilities while increasing deductions and credits throughout the year.
Discuss Details with Your Accountant
As you discuss your tax needs with your accountant, they will be able to help you through the tax planning process. There are several steps to help you become more prepared for future years’ tax filing. As you will have to work with your accountant, it is important to understand the tax planning process before anything takes place.
Define Your Tax Bracket
First, defining your tax bracket is imperative before making further plans. How much you earn, your overall contributions to retirement accounts, and other deductions all play a role in the bottom line. Make sure you don’t leave anything out that might flag you for fraud. Unfortunately, many individuals have made the mistake of leaving out income that has forced them to pay penalties in back taxes to the IRS. You don’t want to deal with the IRS like that, so honesty and integrity are paramount at this stage. Make sure you specify your bracket before making any more progress.
Review Retirement, Medical, and Charitable Contributions
Next, review all your contributions to 401(k) accounts, investment retirement accounts (IRA), and health savings accounts (HSA). By the same token, you can deduct medical bills paid out of pocket without insurance, interest paid on your mortgage, and all donations to charitable foundations. Be sure to maintain duplicate records for all the contributions and expenses just in case you have trouble finding your information. Don’t forget to go back and thoroughly review all your contributions and interest paid so you don’t miss out on any good opportunities to save on taxes.
One common way to reduce your tax bill is to take advantage of tax deductions and tax credits. There are several deductions and credits available, all you have to do is ask. These tax breaks lower your taxable income, which in turn reduces the amount of tax you owe.
Another effective way to reduce your taxes through tax planning is to use tax-advantaged savings vehicles like 401(k)s and IRAs. These accounts allow you to save money for retirement while enjoying tax breaks on your contributions.
Additionally, contributions to your health savings accounts (HSA) can reduce your adjusted gross income (AGI) at tax time. Instead of having to report your full income on your tax return, you can reduce your reported income thanks to your HSA contributions. To apply for this deduction, you must already have a qualifying high-deductible health plan. If not, then you may not be able to choose this option when you file your taxes.
Tax Credits and Tax Deductions: What’s the Difference?
Following your review of tax planning in retirement accounts, etc, talk to your accountant about any tax credits. Likewise, you should become familiar with the difference between tax deductions and credits. Tax deductions, unlike tax credits, reduce the adjusted gross income (AGI) that you report on your tax return. On the other hand, tax credits help you reduce your tax liability and save you more on taxes.
Examples of Tax Credits
Some tax credits for tax planning purposes include earned income, child & dependent care, lifetime learning, and American opportunity. Concerning your situation, review carefully the requirements for each credit and verify if you qualify for any credits. Don’t forget to discuss the details with your small business advisor and CPA, they will help you through the process.
Deductions For Your Business
For your small business, there are even more tax planning options available. These are deductions that can be written off for your business tax return. As preparation for your tax return, monthly bookkeeping is an essential step to keeping your business records organized. Many deductions in your business will deal with expenses across several categories. Your small business advisor and CPA would recommend that you have updated your books before submitting your documents for your business tax return.
Whenever a business meal takes place, the tax deduction can account for up to 50% of the cost of food and drink. Further, any business insurance expenses incurred are eligible for deduction. Don’t forget depreciation deductions for any sizable assets, including real estate and vehicles. These options are available to all businesses within reason.
Be sure to speak with your accountant about tax planning in preparation for the upcoming tax changes. Even though leadership in the IRS may be subject to change, you can be sure you are ready for any curveballs by taking the time to properly prepare a foundational tax plan. Don’t get caught off guard when changes happen and adversely affect you and your business.