Put some SALT on Your Return – The State & Local Tax (SALT) Deduction

Put some SALT on Your Return – The State & Local Tax (SALT) Deduction

by | Dec 19, 2019 | Individual Tax

Did you know taxes that you pay to a state or county may be deductible for your federal income tax? The “State and Local Tax Deduction”, commonly known as the SALT Deduction, is an itemized deduction that taxpayers may claim when filing their income tax.

A Tax Towards a Tax

Each state has its own set of tax regulations and accompanying agencies to collect those taxes. For example, the California Franchise Tax Board (FTB) collects income tax from California residents. The income tax paid to the FTB can be claimed for the SALT deduction. Property taxes may also be claimed towards the SALT deduction.

Itemized Deduction

Just like other itemized deductions like medical expense and charitable deductions, the SALT deduction is tallied up into your total itemized deductions. Your total itemized deductions must exceed your standard deduction in order to be able to see the benefits of itemizing your deductions. Check out our article on itemized deductions for more information.

Push it to the Limit

Prior to the Tax Cuts & Jobs Act (TCJA) of 2017, there was no limit on how much state & local taxes could be claimed as an itemized deduction. TCJA implemented limits to the SALT deduction to $10,000 (Married, filing jointly). While the long term results of it remain to be seen, many tax professionals and cable news pundits have weighed in on the SALT limit of $10,000, how it affects taxpayers, and its benefits/disadvantages.

 

The SALT deduction is one of several itemized deductions available to taxpayers. With some planning and strategy, individuals can utilize itemized deductions to reduce their taxes. MiklosCPA has helped numerous individual and small business clients with their tax needs such as itemizing their deductions. We support our clients, wherever they may be in the world at the time, through our virtual office services and regular feedback. Give us a call and learn more how we can help you and your small business take off! Also follow our social media for articles like this one and other interesting tidbits in tax.

“Going Exempt” (a.k.a., Not Having a Withholding) for your Income Tax

“Going Exempt” (a.k.a., Not Having a Withholding) for your Income Tax

by | Nov 23, 2019 | Individual Tax

A friend recently texted an off-the-record tax question that he had about his paycheck. He said his co-workers like to “go exempt” and “not pay taxes” for the last 3 months of the year. Paraphrased, his question essentially was:

“If I choose to go exempt, should it only be for those months?”

 After some clarification, I laid out my answer to him like this:

  • By “going exempt”, he was referring to employees not having a withholding. Using, Form W-4, he may elect to adjust his withholding and therefore how much is withheld from his paycheck for federal income tax. It doesn’t stop other taxes like social security, unemployment, and other state taxes. He can request to adjust withholding as needed throughout the year, but the processing time may depend on the company’s policy. He may not see it take effect until after a few paychecks are processed.
  • People commonly opting for the last 3 months of the year may have to do with the holidays. By “going exempt” for the last 3 months, they can squeeze out some extra dollars to help pay for gifts and other things for the year’s end.
  • Of course, “going exempt” means that it will affect his tax filing and what he may or may not owe. He stated he usually has a refund, but depending on his tax situation, he may end up having to pay when he files by next April if he goes exempt.

 Withhold on no withholding?

While it may be tempting to not have a withholding and get that extra money right away, you are still on the hook for whatever income tax you owe when you file the following year.

For example, assuming income remains the same, instead of having a withholding of $200 from each paycheck for a year, you opt to go “exempt from withholding” for the year. The tax you owe at the end of the year will remain the same at $3000, but rather than having that $200 withholding taken out each paycheck to help pay that tax ($200 x 12 = $2400 already paid for taxes), you are now on the hook for that entire $3000 when you file rather than just $600 if you had a withholding. Depending on your spending habits, having to pay $3000 in its entirety to avoid any penalties & interest may not be a very appealing situation. Ideally, the best withholding is one that takes “just enough” of your income that it pays your tax obligation.

Finding the right withholdings for employees is another part in the engine of an emerging business. Employers can boost their business engine with the right accounting support to provide insight and keep their books in proper order. Look no further than us here at MiklosCPA. We help many emerging businesses in assorted industries with their accounting and tax needs through our “virtual office” services. If you wish to learn more how we can help your business, reach out to us. Also, follow our social media sites for future “good to know” articles and other accounting tidbits.

The Estate Tax – A Wealthy Farewell Gift to Uncle Sam

The Estate Tax – A Wealthy Farewell Gift to Uncle Sam

by | Nov 1, 2019 | Business Tax, Individual Tax

Dying is expensive. Funeral costs, the plot of land your body will occupy, and other expenses to cap off a good life. However, that’s not all. Depending on how vast are the assets you leave behind, wealthy individuals may be liable for the Estate Tax.

 

Estate Tax?

 

The estate tax, or more derisively referred to in public discussions as the “death tax”, is an inheritance tax that behaves similarly to the gift tax. Except in this case, the transferor is deceased and no longer among the living. So who gets the tax? The estate of the deceased person, of course. After tallying up the entirety of that person’s estate (the Gross Estate), the estate tax is calculated and the government takes its cut before it gets transferred to the inheritor of the deceased’s estate. Just like the gift tax though, it does not apply to most taxpayers due to its very high exemption amount, currently set at $11,400,000.

Exclusions & Deductions

 

Just like the gift tax, deductions are available to use to limit the bite of the estate tax by deducting the amount of the gross estate to be taxed. Some deductions include charitable contributions, marital transfers, casualty losses, and admin/funeral expenses.

4 credits are also available to use towards the estate tax. The Applicable credit amount (ACA), a tax credit for death-related taxes paid to foreign governments, a credit for gift tax paid that is part of the gross estate, and any prior transfers for taxes paid by the deceased within 10 years before or 2 years after the decedent’s death.

A Last Toll

 

Form 706 is used to file the estate tax. A fully prepared Estate Tax return is due 9 months after the death of the taxpayer. Of course, a 6 month extension is also available. The estate tax affects a very small number of taxpayers, but learning about the intricacies and unique pieces of our tax code helps readers gains some useful knowledge on taxes as a whole. As a CPA firm, we firmly believe in sharing relevant and interesting knowledge. Many of our clients would agree and feel more confident in their decision-making knowing they’re properly informed and their accounting and tax needs are kept in proper order by us. If you would like to learn more of our services, contact us!  Also, please follow our social media pages for future articles like this that cover the unique tidbits of our tax system.

A Hidden Price Tag on That Lavish Gift – The Gift Tax

A Hidden Price Tag on That Lavish Gift – The Gift Tax

by | Oct 11, 2019 | Business Tax, Individual Tax

Did you know a special tax exist on the transfer of high-value gifts like luxury vehicles? The Gift Tax applies to these large transactions. While most people may not likely have to encounter them for their personal tax filings, it is worth gaining some insight on what triggers a gift tax and how it operates.

Gift Tax

The Gift Tax applies to transfers of property as a gift unless it is:

  • Valued below the annual exclusion limit of $15,000.
  • A deduction for a qualified charitable gift.
  • A qualified transfer to the donor’s spouse, otherwise known as the marital exclusion.

For example, Tim, a wealthy business owner, gives his nephew a pristine-condition vintage 80s sports car currently valued at $20,000. Surpassing the exclusion limit, Tim will have to file Form 709 and report the transfer of that car and pay the gift tax associated with it.

Exclusions & Deductions

Certain items qualify as exclusions and deductions towards the calculation of the gift tax. In addition to the annual exclusion, any gift amounts paid directly to a medical provider or education organization are excludable. So for example, a rich aunt that pays a university for her niece’s first year of college tuition would be an excludable gift amount. However, any amounts paid for boarding are not excludable. The marital deduction allows spouses to transfer property to each other an unlimited amount. Charitable deductions are calculated based on the FMV of the donation minus the annual exclusion.

Gift Tax Formula

In short, the gift tax is calculated as:

 

Value of gift amount

     – Exclusions (such as the $15,000 exclusion)

    – Deductions (such as charitable deductions)

= Taxable gift for the current year

     + prior year taxable gift amounts

 = Taxable gift amount to date

      x Tax rate

= Tentative gift tax

     – (prior year gifts x current tax rates) – (unified credit)

 = Gift Tax Liability

 

Ok, so maybe it’s not that short. But this formula takes into account any previous taxable gift amounts and liabilities.

Most taxpayers will not have to worry about the gift tax, but business owners who may consider transferring gratuitous amounts of property to families and loved ones should take heed of potentially incurring that gift tax. Having a knowledgeable tax and accounting team to provide guidance on such matters for business owners can prevent a lot of future complications. Just like us here at MiklosCPA. We are a California-based accounting firm that helps many small and emerging businesses with their tax and accounting needs. Schedule a chat with us to learn more about our services, and please subscribe to our social media channels for future useful pieces of accounting and tax knowledge!

Is Your Budding Business Considered A Hobby or A Business? – An Overview

Is Your Budding Business Considered A Hobby or A Business? – An Overview

by | Sep 25, 2019 | Business Tax, Individual Tax

Do you have a hobby you’re so passionate about that you’ve started to build a business around it, such as making arts & crafts and selling it at street fairs? Unless you devote much effort into it and consistently turn a profit, the IRS may determine your venture as a hobby and not a business.

Hobby or Business?

When determining hobby or business operations, the IRS primarily looks at if the business is actively engaged in making a profit. They generally look to see if the business made profit in consecutive years otherwise it may fall under the category of a hobby. Here are some additional factors to consider when determining if your business is a hobby:

  • Is the business carried out in a business-like manner with complete and accurate books & records?
  • How much time and effort is put into the business to make it profitable?
  • Does your livelihood depend on income from this business activity?
  • Is this business activity profitable in some years?

Hobby Deductions

While being considered a hobby activity disallows access to several small business expense deductions you would see on the Schedule C, there are some allowable hobby deductions. For example, Ordinary and necessary expenses related to your hobby venture are still available. However, those deductions are all limited up to the income of your hobby venture. Deductible losses beyond that cannot be claimed. For example:

Deb runs her artisan artichoke dip business on the side. She runs it only on weekends due to her regular job during the week. It doesn’t do too well in its first few years and she decides to close it. It barely earns $1500 in income, but cost her $2500 in expenses to start up and operate. Deb can only claim up to $1500 in allowable hobby deduction losses.

 

Claiming Hobby Losses

Hobby losses are claimed on Schedule A, just like other itemized deductions that you would claim for your individual tax filing. By having enough itemized deductions such as hobby losses, you can potentially lower your taxable income.

While starting up a hobby-based business is often a passion project, elevating it into a full-blown business operation can take time and a proper support team. Good accounting is necessary for any growing business. Look no further for that. MiklosCPA is a California-based CPA firm that supports many small and emerging businesses with their tax and accounting needs. Consider giving us a call, and follow us on our social media for more upcoming “good-to-know” pieces.

 

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