Tax Planning, Potential Refunds, and Payments

Join us on March 13^th to learn more about Understanding Your Personal Taxes (as a Business Owner) with Tim Kenny. 

Tax rules are complicated, but taking some time to plan with your accountant will allow you to understand how to use them for your benefit and change how much you end up paying (or receiving) when your taxes are filed. 

1. Understand your tax bracket.
   • The United States has a progressive tax system, meaning that people with higher taxable incomes are subject to higher tax rates, while people with lower taxable incomes are subject to lower tax rates.
     • The seven federal income tax brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%.

2.  Learn how tax credits and deductions work.
   • Tax deductions are specific expenses that you can subtract from your taxable income.
   • Tax credits are even better, giving you a dollar-for-dollar reduction on your tax bill.
3.  Decide between the standard deduction and itemizing.
   • Itemized deductions may add up to more than the standard deduction.
     • Congress sets the standard deduction, typically adjusted for inflation. Your filing status determines your deduction.

4.  Take advantage of popular tax credits and deductions.
   • Hundreds of possible deductions and credits are available, but there are rules about who’s allowed to take them.
5.  Keep good records.
   • The IRS typically has three years to decide whether to audit a return, so keep records for at least that long.
   • Keep records longer if these circumstances apply, as the IRS has a longer audit limit:
     • Six years if income is underreported by more than 25%.
     • Seven years if the loss from a “worthless security” is written off.
     • Indefinitely: If you committed tax fraud or you didn’t file a tax return.

6.  Adjust your withholding if necessary.
   • A W-4 tells your employer how much tax to withhold from your paycheck.
     • If you got a huge tax bill when you filed, you may want to increase your withholding.
     • If you got a huge refund last year, you may want to reduce your withholding.

7.  Leverage tax-advantaged accounts.
   • Put money in a 401(k): In 2024, you can funnel up to $23,000 per year into an account. If you’re 50 or older, you can contribute up to $30,500.
   • Put money in an IRA.
     • Contributions to a traditional IRA may be tax-deductible. You pay taxes when you take distributions or withdrawals.
     • Contributions to a Roth IRA are not tax-deductible because your withdrawals in retirement are not taxed.
   • Open a 529 account: These savings accounts help people save for college.
     • There may be gift-tax consequences if your contributions plus any other gifts to a particular beneficiary exceed $17,000 in 2023 or $18,000 in 2024.
   • Fund your flexible spending account (FSA).
     • IRS lets you funnel tax-free dollars directly from your paycheck into your FSA every year. In 2024, the limit is $3,200.
     • The money must be used during the calendar year for medical and dental expenses, or related items such as bandages, sunscreen and glasses for yourself and your qualified dependents.
   • Use dependent care flexible spending accounts (DCFSAs).
     • The IRS will exclude up to $5,000 of your pay that you have your employer divert to a dependent care FSA account, which means you’ll avoid paying taxes on that money.
     • What’s covered can vary among employers, so check out your plan’s documents.
   • Maximize health savings accounts (HSAs).
     • Contributions to HSAs are tax-deductible, and withdrawals are tax-free if used for qualified medical expenses.
     • Health coverage and age determine contribution limits.

Sources

https://www.irs.gov/credits-and-deductions

https://www.irs.gov/help/tax-law-questions

https://www.nerdwallet.com/article/taxes/tax-planning