Tax Return Compliance Archives - Flex Tax and Consulting Group (FTCG)

How to Reduce Your Taxes on Salary Income

Flex Tax and Consulting Group — Sun, 30 May 2021 19:31:26 +0000

This article was authored working with wikiHow, the world’s largest “how to” site, and also featured here on the wikiHow website.

While you may have heard that nothing is certain but death and taxes, it is possible to reduce your US taxes to nearly zero, even when you’re paid a salary. Reduce your taxable income by maximizing the money you invest in retirement and contribute to a healthcare savings account (HSA) or flexible spending account (FSA). These contributions (up to a limit) are non-taxable. Once you have your paycheck down to the minimum you need to cover your expenses, make sure you’re claiming all the tax credits and deductions you qualify for each year.

Method 1: Making a Salary Reduction Contribution

Open a qualified employer-sponsored retirement account. If your employer offers a 401(k) retirement program, you can contribute up to $19,000 of your annual income to the plan before taxes are withheld for the tax year 2019. The maximum amount is adjusted each year to account for rising cost-of-living.^[1]

· Because this money is taken out of your paycheck before taxes are withheld, you effectively reduce your taxable salary. Depending on the amount of your salary, this could potentially drop you into a lower tax bracket. Regardless, you won’t owe taxes on that money.^[2]

· The tax on your retirement contributions is considered to be deferred. You will pay those taxes when you make withdrawals from your account after you retire.

Tip: If you are 50 or older, you can contribute an additional “catch-up” amount of up to $6,000.

Add a 457(b) plan if you work for a qualified employer. If you work for the state or local government, or for a nonprofit organization, you may be able to open a 457(b) plan. Find out from your employer if these plans are offered. If you have access to one, you can contribute up to $19,000 of your annual income to the plan, as of 2019.^[3]

· As with 401(k) contributions, these contributions are tax-deferred. You don’t pay taxes on the money now, so you reduce your taxes on your salary. You will pay taxes on withdrawals after retirement, but presumably, at that point, you’ll have a lower annual income and fall into a lower tax bracket, so you’ll ultimately still pay less in taxes overall.

· The $19,000 contribution limit is completely separate from the contribution limit for other plans. This means if you have a 401(k) and and 457(b) plan, you can defer taxes on up to $38,000 a year.

· For example, suppose you are a public school teacher who earns a salary of $48,000 a year. Your spouse is an attorney who earns $150,000 a year, an amount the two of you can easily live on. You can contribute up to $38,000 a year towards your retirement plans, giving you a taxable income of only $10,000. Your household income would, therefore, be $160,000 a year, rather than $198,000.

Use an IRA if you don’t have an employer-sponsored retirement plan. Contributions to a traditional IRA may be tax-deductible. The amount you can deduct depends on your modified adjusted gross income (MAGI), your filing status, and your contributions to other retirement accounts. This amount is also adjusted each year to account for increases in the cost of living.^[4]^[5]

· Even if you have a 401(k), you may still be able to deduct all or part of your contributions to an IRA. Your total retirement savings, however, cannot exceed $19,000 (as of 2019). For example, if you don’t earn enough money to save the entire $19,000 with your 401(k), you could potentially make up the difference with an IRA contribution.

Tip: You may also be eligible for a saver’s credit on your taxes of up to 50 percent of your IRA contribution. This credit maxes out at $1,000, depending on your adjusted gross income and filing status.

Method 2: Opening an HSA or FSA

Find out if your employer offers insurance plans with HSAs. A HSA is a savings account where you can save money to cover out-of-pocket health expenses. HSAs are typically offered in conjunction with a high-deductible insurance plan. Contributions to your HSA are tax-free, up to a certain amount. For 2019, the limit is $3,350 for individuals or $6,650 if you have family insurance coverage.^[6]

· You can use the money in your HSA tax-free for medically related expenses, including doctor visits, prescriptions, lab tests, hospital care, and certain over-the-counter medications if they are prescribed by your physician.

· Your HSA contributions roll over from one year to the next, so you don’t need to worry about losing any of the money you’ve put in your HSA. It will be there when you need it.

Set up an HSA on your own if necessary. If you purchase your own insurance, either because your employer doesn’t offer insurance or because you’re self-employed, you can still get the benefits of an HSA by choosing a high-deductible insurance plan.^[7]

· During the open enrollment period, search plans on the marketplace at https://www.healthcare.gov/. Look for plans that include an HSA.

· High-deductible plans with HSAs typically have a much lower premium. This type of plan may be a good option for you if you are young, in good health, and seldom go to the doctor.

Contribute the maximum amount to any employer-provided FSA. FSAs are similar to HSAs, but they are not offered in conjunction with any health insurance plan and are solely provided by employers to their employees. FSAs are typically for health-related expenses, but you can also set up an FSA for dependent care, including child care.^[8]

· FSA contributions are pre-tax and reduce your taxable income. Contributions are typically limited to around $5,100 a year, although this amount may vary depending on your income.

· If you have expenses that fall under an allowed category for an FSA, it makes sense to have the money deducted from your paycheck before taxes and put in the FSA. Then you can pay for that expense with tax-free dollars. For example, if you pay $500 a month for childcare, you could put $500 a month in an FSA, then pay for the childcare directly from the FSA account.

Warning: With FSAs, you typically lose any amount you’ve contributed if you haven’t spent it by the end of the year. While contributing up to the maximum can reduce your taxable salary, this won’t help you much if you end up losing that money.

Method 3: Taking Applicable Credits and Deductions

Compare the standard deduction to itemized deductions. The Tax Cuts and Jobs Act of 2018 increased the standard deduction while eliminating a number of itemized deductions. Even if you’ve always itemized in the past, you might be able to reduce your taxes by taking the standard deduction.^[9]

· For 2018, the standard deduction is $12,000 for individuals, $18,000 for head of household, and $24,000 for married couples filing jointly.

· Generally, you may benefit from itemizing your deductions if you had significant uninsured medical expenses, paid interest or taxes on a home that you owned, or had large losses following a federally declared disaster.^[10]

Tip: If you use tax preparation software, such as TurboTax, the software will determine whether you would benefit the most from itemizing your deductions or taking the standard deduction based on your answers to a few simple questions.

Deduct your student loan interest if you are paying back student loans. Student loan interest is deductible regardless of whether you itemize your deductions or take the standard deduction. This deduction reduces the amount of your income that is taxable.^[11]

· As of 2019, you may deduct the amount of interest you paid over the year on your student loans, up to a maximum of $2,500.^[12]

Tip: You can deduct student loan interest even if someone else, such as a parent or other relative, is paying your student loans on your behalf.

Figure out if you qualify for the Earned Income Tax Credit (EITC). The EITC provides a tax break for working individuals and couples with low to moderate incomes. Generally, you must earn income either from working for someone else or through self-employment, as well as meet other rules. Most taxpayers who qualify for the EITC have at least one child.^[13]

· You can use the IRS’s EITC Assistant, available online at https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/use-the-eitc-assistant, to determine if you qualify for the EITC.

Take the child tax credit if you have children. The child tax credit is a refundable tax credit of $2,000 for each child you have who is under the age of 17. You qualify for this credit if you make less than $200,000 as an individual, or $400,000 if you are married and filing jointly.^[14][15]

· Because this tax credit is refundable, you can get up to $1400 back per child, even if your tax bill was already zero.

Tip: Each child you claim the child tax credit for must have a valid Social Security number.

Get an additional credit for any other dependents. If you have a child over the age of 17 for whom you cover at least half of their living expenses, you can still claim a $500 tax credit for them, even if they’re too old to qualify for the child tax credit.^[16]

· You can also get this credit for others who live with you and are dependent on you for care, such as an older relative or a disabled person.

· You cannot claim either the dependent credit or the child tax credit if someone else claims that person as a dependent.

Claim a credit for installing renewable energy equipment in your home. If you own your home and want to convert some or all of your utilities to renewable energy, you may qualify for a tax credit worth a percentage of the cost of the system you install. Products covered include fuel cells, small wind turbines, geothermal heat pumps, and solar energy systems. While rental homes do not qualify, primary and secondary homes do, as well as new builds. The tax credit is gradually reduced each year until they are phased out in 2021:^[17]

· 30% for systems placed in service by December 31, 2019;

· 26% for systems placed in service after December 31, 2019, but before January 1, 2021; and

· 22% for systems placed in service after December 31, 2020, but before January 1, 2022.

References:

1. ↑https://www.irs.gov/retirement-plans/401k-plans-deferrals-and-matching-when-compensation-exceeds-the-annual-limit
2. ↑Alex Kwan. Certified Public Accountant. Expert Interview. 23 April 2021.
3. ↑https://www.irs.gov/retirement-plans/irc-457b-deferred-compensation-plans
4. ↑https://www.investopedia.com/articles/retirement/05/022105.asp
5. ↑Alex Kwan. Certified Public Accountant. Expert Interview. 23 April 2021.
6. ↑https://www.hrblock.com/tax-center/healthcare/health-savings-flexible-spending-accounts/
7. ↑https://www.hrblock.com/tax-center/healthcare/health-savings-flexible-spending-accounts/
8. ↑https://www.hrblock.com/tax-center/healthcare/health-savings-flexible-spending-accounts/
9. ↑https://www.usa.gov/tax-benefits
10. ↑https://www.irs.gov/taxtopics/tc501
11. ↑https://www.usa.gov/tax-benefits
12. ↑https://www.irs.gov/taxtopics/tc456
13. ↑https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit
14. ↑https://www.usa.gov/tax-benefits
15. ↑Alex Kwan. Certified Public Accountant. Expert Interview. 23 April 2021.
16. ↑https://www.usa.gov/tax-benefits
17. ↑https://www.energystar.gov/about/federal_tax_credits/2017_renewable_energy_tax_credits
18. ↑https://turbotax.intuit.com/tax-tips/fun-facts/the-10-most-overlooked-tax-deductions/L2WjmvZAH

The post How to Reduce Your Taxes on Salary Income appeared first on Flex Tax and Consulting Group (FTCG).

How to Prepare a Tax Return for a Nonprofit

Flex Tax and Consulting Group — Fri, 28 May 2021 22:37:07 +0000

This article was authored working with wikiHow, the world’s largest “how to” site, and also featured here on the wikiHow website.

Even if a nonprofit organization has achieved tax-exempt status, for example under Section 501(c)(3), the organization is likely still required to file a tax return annually. If your nonprofit has employees that are paid, or takes in any income that is unrelated to the exempt activities of the organization, even a tax-exempt organization may still pay taxes on those items.

Steps:

1. Determine if you need to file. Certain tax-exempt corporations (nonprofits) are exempt from filing an annual tax return. Generally, an organization that normally has $25,000 or more in gross receipts is required to file a tax return. Smaller organizations that have less than $25,000 in gross receipts are not required to file a tax return.

2. Determine what form to file. The tax return your nonprofit will file largely depends on the amount of money your organization made in the applicable tax year.

· The general form number that a nonprofit will file is form 990, although there are variations of this form. For example, form 990EZ is a short-form return can be used by nonprofits with total receipts of $100,000 and less than $250,000 in assets. A link to the current version of Form 990 is below.

· Smaller organizations that have less than $25,000 in gross receipts may not be required to file a tax return, but instead file e-postcard form 990-N. Detailed information on the appropriate form to file is available on the IRS website, linked below.

3. Fill out the tax return form. For some smaller nonprofits, filling out the tax form should be a straightforward process that can be done by someone in a management position of the nonprofit. For larger, more complex organizations, it may be in the organization’s best interest to seek the advice of an accountant familiar with the tax issues of tax-exempt corporations.

· A detailed instruction sheet for completing each line of the form accompanies each form. Be sure to print both the form and the instructions and refer to the instruction sheet for each item to ensure you are providing the requested information. A link to the IRS form is below.

4. File your return on time. You can either e-file or mail your tax return to the IRS.

· The address for mailing returns is:
Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0027

· The tax return of a nonprofit tax-exempt corporation is due on the 15th day of the 5th month after the end of the organization’s fiscal year. For example, if the fiscal year ends on June 30th, the return would be due by November 15th.

· The IRS provides a form for an extension of the deadline, which is linked below. The form must be filed with the IRS before the tax return filing deadline in order for it to be effective for that year. If your return is due November 15th, you must submit the extension form no later than November 15th.

· Failure to file tax returns can result in severe penalties. If an organization is required to file a return and fails to do so for three consecutive years, the organization will lose its tax-exempt status and be required to reapply.

The post How to Prepare a Tax Return for a Nonprofit appeared first on Flex Tax and Consulting Group (FTCG).

Nonresident Aliens and The Section 121 Principal Resident Exclusion

Flex Tax and Consulting Group — Thu, 09 Jul 2020 20:35:37 +0000

Internal Revenue Code § 121 provides taxpayers with an income tax exclusion from the gain of taxpayer selling a primary residence. The exclusion amount for a single up to $250,000 and married couples will raise to $500,000. To qualify for the exclusion, the taxpayer-owned and used the property as the taxpayer’s principal residence for periods aggregating two years or more during the 5-year period ending on the date of the property sale or exchange. Determining the primary residence is a matter of fact and circumstances. For example, when a taxpayer rotates between two different residences, only one will be regarded as the primary residence based on a variety of factors, including but not limited to the time spent in the residence, workplace, and residence of other family members, etc. The address listed on the tax return, the address listed on the driver’s license, the mailing address for bills and letters, the location of the bank, and the religious organization’s location.

Non-resident foreigners can also apply this exclusion. However, because non-resident aliens are not eligible to submit a joint return, each person designated as a non-resident alien needs to share its share of the national resident exclusion tax in a separate tax return. In practice, this means that if the sale proceeds exceed $250,000, each filer will need to 1) be eligible to apply for the exemption of the primary residence on their own, and 2) file Form 1040NR U.S. Nonresident Alien Income Tax Return and state the ownership share of the principal residence.

According to the ” Foreign Investment in Real Property Tax Act ” (“FIRPTA”), non-resident foreigners should also pay additional tax other. For primary residences where the realized amount of sale (usually the sale price) is less than $300,000, no withholding is required; for sales between $300,000 and $1,000,000, the withholding tax rate is 10%; if the sales exceed $1,000,000, The withholding rate is 15%. Non-resident foreign taxpayers may find themselves eligible to claim the exclusion of the primary residence stipulated in IRC § 121, so FIRPTA withholding taxes will exceed his/her highest tax liability in the transaction. In this case, the taxpayer can request the US Internal Revenue Service to provide proof of withholding tax to the buyer, indicating that the withholding tax rate they owe is low or not at all. Since the primary residence exclusion in IRC § 121 does not constitute a non-recognition provision within the meaning of FIRPTA (non-recognition provision makes FIRPTA not applicable at all), unless the purchaser obtains a withholding certificate, the buyer must withhold the appropriate tax rate.

Tax treatment for gain from sale of principal residence can be tricky. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

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