Sanjeev Kumar CPA

Small business owners as well as self-employed individuals are always on the lookout to minimize their tax liability. Whether it is through eligible tax credits, deductions, or strategic financial planning, every opportunity to save matters. One significant provision that has been helping small business owners and self-employed individuals save more on taxes is the Qualified Business Income Deduction (QBID). Also known as the Section 199A deduction, QBID was Introduced as part of the Tax Cuts and Jobs Act (TCJA) of 2017. It allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI) and enhance their financial efficiency. However, the rules surrounding QBID are complex and it is important to carefully understand them. Let’s see what QBID is and how you can use it to maximize your tax savings. What is a Qualified Business Income Deduction? QBID is a federal tax deduction that provides tax benefits to self-employed individuals and certain pass-through businesses that are earning income from qualified businesses. Unlike deductions for operating expenses, QBID is applied at the personal income tax level. It reduces 20% of their qualified business income (QBI) without requiring additional out-of-pocket expenses. Income from a (qualified) trade carried out in the United States is considered qualified business income. It comprises earnings from S-corporations, partnerships, sole proprietorships, and some trusts and estates. However, C corporations and several forms of foreign income are not eligible for QBID. Who Qualifies for QBID? To claim QBID, you must meet the eligibility criteria. This includes: 1. Income Type: The deduction applies to qualified business income (QBI) only. It excludes: 2. Business Structure: Only pass-through entities qualify for QBID. These include: As mentioned above, C corporations and entities taxed as corporations do not qualify for QBID. 3. Taxable Income Thresholds: Taxpayers having taxable income below a certain threshold can claim QBID without limitations. For 2024, the taxable income thresholds are: Taxpayers below these thresholds can claim the full deduction. Those above these amounts face limitations based on: 4. Specified Service Trades or Businesses (SSTBs): SSTBs include professions where the principal asset is the reputation or skill of employees or owners. Examples are: Special Rules and Limitations for SSTBs For SSTBs, QBID is phased out for taxpayers with taxable income above the thresholds. Planning to stay below these limits or re-evaluating the business structure can mitigate these limitations. How to Calculate Qualified Business Income Deduction? The QBID is generally 20% of Qualified Business Income (QBI). However, this straightforward calculation applies if taxable income is below the thresholds. If taxable income exceeds the thresholds, the deduction is limited to the lesser of : For SSTBs, the deduction phases out completely at certain income levels: To calculate QBID: Understanding QBID with Examples Example 1: Basic Qualified Business Income Tax Deduction John owns a sole proprietorship and earns $120,000 in QBI. He is a single filer and his taxable income is below the threshold. Example 2: Income Above the Threshold Mary owns an LLC. She earns $500,000 (married filing jointly). Her business pays $150,000 in W-2 wages and has $500,000 in qualified property. Here’s how her deduction for qualified business income will be calculated: Calculation Component Formula Result Potential QBID deduction 20% x $500,000   W-2 Wage Limit 50% × $150,000 $75,000 Property-Based Limit (25% × $150,000) + (2.5% × $500,000) $62,500 Maximum Deduction Allowed Lesser of (20% × QBI = $100,000) or $75,000 $75,000 Final Deduction Amount   $75,000   0.25 × $150,000 + 0.025 × $500,0000 = 37,500 + $12,500 = $50,000 Hence, Mary’s QBID: $75,000 Example 3: SSTB with High Income David, a lawyer, earns $600,000 (married filing jointly). In this case, David does not qualify for QBID as his income exceeds $514,200. Advantages of QBID Limitations of QBID 1. Complicated Regulations for High Income: Taxpayers who earn more than the thresholds are subject to restrictions and exclusions, particularly for SSTBs.2. Excluded Income: The potential deduction is decreased by non-QBI income, such as dividends and capital gains, which are not eligible.3. Temporary Provision: QBID is a temporary deduction. Unless Congress extends it, the QBID will stop on December 31, 2025. Tips for Maximizing the QBID Here are some the ways to maximize the benefits of the QBID: The Final Words QBID is an excellent tax benefit for small businesses and self-employed individuals. However, its rules and limitations require careful navigation. That’s why it’s better to seek professional tax guidance to maximize this deduction and reduce your tax burden. If you need expert assistance with QBID or other tax matters, consult tax professionals at KnowVisory. We can help you evaluate your individual tax situation to ensure compliance and maximize tax savings.

When saving your tax bill, Tax Credits offer the easy way out. They are the financial rewards that the IRS provides to reward small businesses for their actions that benefit the community, support employees, or drive innovation. Whether you’re hiring veterans, providing health insurance to employees, or investing in eco-friendly practices, there’s a tax credit to reward your efforts. These credits can significantly reduce your tax bill and put more money back into your business. However, understanding which credits apply to your business and how to claim them isn’t always straightforward. You need professional guidance from a certified tax expert and some knowledge to maximize your savings. Here’s our list of various tax credits that your business might be eligible for. Keep it handy to ensure you save more on your tax bill! What are Tax Credits? Tax credits are financial incentives that directly reduce the amount of tax owed to the IRS. Unlike tax deductions that reduce your taxable income, tax credits reduce your tax bill dollar-for-dollar. However, to claim these credits, businesses must meet specific eligibility criteria and follow detailed IRS credits and deductions guidelines set for different tax credits. Tax credits come in two main types: 1. Non-Refundable Tax Credits: These are the credits that reduce your tax liability up to $0 by the corresponding credit amount but will not result in a cash refund. These credits are valid only in the year of reporting and hence, not carried over to future years. For example: 2. Refundable Tax Credits: These credits are subtracted from Income tax liability and may result in a cash refund when credits exceed tax liability even if no tax is withheld. For example: How to Claim Business Tax Credits For businesses claiming multiple credits, IRS Form 3800 needs to be filled. It consolidates all the credits into a general business credit. However, if only one credit is being claimed, it can be reported directly on your Income Tax Return Form 1040. Calculating Your Tax Credit Limit To determine the limit on tax credits, follow these steps: 1. Add the net income tax and alternative minimum tax. 2. Subtract any other allowable tax credits from this total to find the net income tax liability. 3. Deduct the greater of: Unused business credits can be carried back to the previous year or carried forward for up to 20 years, following a first-in, first-out order. The order is as follows: Tax Credits for Small Business Owners Now let’s take a look at all the important income tax credits that can help you reduce your tax outgo, legally! 1. Work Opportunity Tax Credit The Work Opportunity Tax Credit (WOTC) is a non-refundable federal tax credit that encourages businesses to hire individuals from certain underserved groups, including: How it Works: The credit amount depends on several factors, including the eligible employee’s targeted group, wages, and number of hours worked. Generally, You can claim up to 40% of the first $6,000 of wages paid to eligible employees during their first year of employment. For veterans and certain other groups, the maximum credit can be even higher. How to Claim: File Form 5884 along with your tax return to claim the credit. Keep all necessary documentation proving the eligibility of the employees for IRS review. Credit for small business health insurance premiums (Form 8941) is for companies that provide small-business health insurance to their employees through a qualified health plan from the SHOP Marketplace, provided they meet certain qualifying conditions. A credit equal to 50% of employer-paid health insurance premiums during the first two consecutive years. This is a refundable credit, meaning that you may claim a tax refund even if you are tax-exempt or have no taxable income. 2. Employer Credit for Paid Family and Medical Leave This fully refundable tax credit encourages businesses to support their employees by giving paid family and medical leave, subject to certain conditions. This includes offering wages and financial security to employees during critical life events, such as childbirth, accidents, serious health conditions, or other family-related needs. How It Works: You can claim around 12.5% to 25% of wages paid to employees during their family or medical leave period. Eligibility: To qualify, you must have: a. A written policy offering at least two weeks of paid family and medical leave annually to  all qualifying employees andb. Paid at least 50% of the employee’s regular wages during the period. How to Claim: Use Form 8994 to calculate and claim the credit and submit it along with your tax return. The credit is effective for wages paid in taxable years beginning after December 31, 2017, and before January 1, 2026. 3. Credit for Increasing Research Activities Like most other Tax credits, this is a non-refundable tax credit. The credit incentivizes businesses and organizations to increase their research and development. The credit is available for expenses incurred on qualified research conducted in the US. How It Works:  Small businesses can apply up to $500,000 of their research credit to reduce their Social Security taxes. Eligibility: R&D activities must be carefully documented with process diagrams, lab results, etc., to be able to claim this credit. How to Claim: File Form 6765 to calculate and claim the R&D credit and attach it to your business tax return. Depending on your business’s size and financial situation, you may also be able to carry the credit forward for up to 20 years or backward to reduce prior tax liabilities. 4. Low-Income Housing Tax Credit This non-refundable tax credit is a federal incentive program designed to encourage real estate developers to invest in affordable housing for low-income families. The amount of tax credit is determined by the number of low-income housing units the qualifying developer plans to build and is applied over a ten-year period after a building is placed in service. How It Works: Eligibility: To qualify, projects must keep a certain percentage of units occupied by low-income tenants at capped rents for at least 15 years. How to

Have you ever wondered why your company’s tax bill doesn’t always match your financial statements? Or why sometimes your business seems to owe taxes even when profits are down? The answer might lie in Deferred Tax Accounting. Deferred tax is an accounting concept that represents the ‘difference’ between the profit reported on financial statements and the taxable profit. This difference arises because income and expenses may be recorded differently in your financial statements compared to how they are treated for tax purposes. Deferred tax accounting is essential for accurate financial reporting. It reflects the current and future tax effects on a company’s income, ensuring net earnings are properly reported within the same period. These differences are categorized as: The temporary differences can lead to the creation of either a deferred tax asset (DTA) or a deferred tax liability (DTL), depending on whether they result in future tax savings or future tax expenses. Let’s see what is a deferred tax asset is what is a deferred tax liability and how they differ from each other. Deferred Tax Asset vs Liability: Understanding the Difference Deferred Tax Assets (DTA) and Deferred Tax Liabilities (DTL) are essential to a company’s financial statements. A Deferred Tax Asset arises when a business has paid more tax than required on its book profit. In such cases, the company can claim the excess tax in the future, thus creating an asset on its balance sheet. A deferred tax asset can arise in various situations, such as when a business incurs a net loss and carries it forward to offset against future profits. This effectively reduces the company’s taxable income in the following year, leading to a lower tax liability. It’s important to note that since the net loss was incurred in a specific year, any future tax benefits resulting from it should be recorded in that same year, thereby recognizing it as a deferred tax asset. Deferred Tax Asset Example: If an entity’s book profit includes bad debts that are not yet allowed for tax purposes, the entity pays more tax now and thus creates a DTA. When this provision is allowed in future years, the business will pay less tax. Deferred Tax Liability, on the other hand, occurs when a business pays less tax at present but expects to pay more in the future. For example – when a company’s tax statement reflects higher depreciation than its income statement, it results in lower tax liability for that year. However, since this difference is temporary, the company will eventually need to pay the taxes owed in future years, and this obligation is recorded as a deferred tax liability.   Financial statement asset Financial statement liability Deferred tax asset  Tax basis > Book carrying value Tax basis < Book carrying value Deferred tax liability  Tax basis < Book carrying value Tax basis > Book carrying value Let’s understand DTA and DTL with an example: Assume that your business has purchased machinery worth $100,000. For tax purposes, you choose to depreciate the equipment over 3 years, but for accounting purposes, you depreciate it over 5 years. This creates a temporary difference. In the first few years, you record higher depreciation for tax purposes, which will reduce your taxable income. However, this creates a deferred income tax liability because the accounting income is higher than the taxable income. The DTL represents the taxes you’ll eventually have to pay when your taxable income catches up. However, if your business incurs a loss in one year, you may carry the loss forward and offset profits in future years. This creates a DTA because it will reduce future taxable income, giving you a tax benefit down the road. When Is a Deferred Tax Recorded? Deferred tax assets and liabilities can arise from various financial events. Some common scenarios include: Conversely, expenses recorded in the books but not yet incurred are not included in tax calculations. This means that if the company’s book profit is lower than the profit shown in the tax statement, it will lead to advance tax payment and will create a deferred tax asset. How is Deferred Tax Calculated? Deferred tax is calculated based on the difference between the gross profit reported in the Profit & Loss Account and the taxable income in the tax statement. Here’s an example to illustrate it: Consider a company with a 30% tax rate that sells a product worth $10,000, but receives payments from its customer on an installment basis over the next five years – $2,000 annually. For financial accounting purposes, the company recognizes the entire $10,000 revenue at the time of the sale, while it records only $2,000 based on the installment method for tax purposes. This results in an $8,000 temporary difference that the company expects to liquidate within the next five years. The company records $2,400 in deferred tax liability on its financial statements. Particulars Company Books Tax Statement Revenue $10,000 (full amount) $2,000 (installments) Temporary Difference – $8,000 Applicable Tax Rate 30% 30% Deferred Tax Liability Created – $2,400 ($8,000 x 30%) Accounting for Deferred Taxes Derecognition of Deferred Tax Assets Due to the accounting principle of conservatism, businesses must carefully assess their deferred tax assets. In other words, there needs to be virtual certainty about how deferred tax assets will be used in the future. For example, if a carryforward loss is allowed, a deferred tax asset will appear on the company’s financial statements, reflecting past losses. In this case, a deferred tax asset should be recorded only if there is sufficient future taxable earnings to offset the tax loss. However, if the company is not profitable enough, the deferred tax asset value will be reduced. To account for this, the company needs to create a contra-asset account. Also known as a valuation allowance, it reduces the value of the deferred tax asset if the company cannot fully utilize its DTAs. An increase in the valuation allowance leads to higher tax expenses on the company’s financial statements. Impact on Business Finances Deferred Tax

Investing can be exciting, especially when you see your account balance climbing up the ladder. But does all that growth mean more money in your pocket? Not really! While your portfolio might be looking better on paper, you practically have gained nothing – until you decide to sell those assets. These ‘theoretical profits’ that you see on paper are known as “Unrealized Capital Gains”. These gains reflect the increase in the value of your assets, but they aren’t taxable or accessible until you decide to sell. Understanding unrealized gains, how they work, and how recent discussions on the unrealized capital gains tax—including proposals by Kamala Harris—might affect is important for investors to plan their financial growth and avoid hefty surprises later. What Are Unrealized Capital Gains?  Unrealized gains are profits “on paper” from investments that you haven’t sold yet. Let’s understand this with an example. Imagine you bought ten shares of a company for $10 each, and now the price for these shares has increased to $15 each. While the value of your investment has risen from $100 to $150, the gain is unrealized because you haven’t sold those shares yet. The profit is there, but it’s not actual cash in your bank account. When the value of your investments goes up, and you keep holding onto them, the increase is considered an unrealized gain. These gains are not taxed until you sell the asset (realized gain). On the flip side, if the value of your investments drops, the losses that you incur also remain unrealized (unrealized losses) until you sell the asset. When you sell your asset/ investment at a loss, the loss that you’ve incurred (realized losses) can be used to offset any realized gains for tax purposes. GAAP Accounting for Unrealized Gains and Losses on Investments Under Generally Accepted Accounting Principles (GAAP): To ensure clarity and transparency in financial reporting, companies must separately track realized and unrealized gains and losses. This distinction helps stakeholders assess the long-term performance of a company’s investments. How are Unrealized Gains Taxed? Unrealized gains are not taxable under current U.S. tax law. The capital gain taxes are deferred until the investments are sold and actual profits are realized. Realized gain occurs when the asset is sold, and the profit is “realized” or actualized. This tax on Actualized gain is known as capital gains tax. The tax rate depends on how long the asset was held and the taxpayer’s income level. It can either be: To determine the tax implications of your capital gains, it’s important to consider how long you’ve held your assets. If you sell assets after holding them for a year or less, your gains will be classified as short-term and taxed at your regular income tax rate. However, long-term capital gains apply to assets held for more than a year. These are taxed at different rates. The IRS sets these rates based on your income. For 2024, long-term capital gains are taxed at the following rates: Filing Status 0% Tax Rate 15% Tax Rate 20% Tax Rate Single $0 to $47,025 $47,026 and $518,900 $518,901 or more Married, Filing Separately $0 to $47,025 $47,026 – $291,850 $291,851 or more Married, Filing Jointly $0 to $94,050 $94,051 – $583,750 $583,750 or more Head of Household $0 to $63,000 $63,001 – $551,350 $551,351 or more The idea of a tax on unrealized gains has become a hot topic in recent years, especially with high-profile discussions around potential policy changes. One such discussion involves Kamala Harris’s unrealized gains tax proposal, which suggested taxing wealthy individuals on their unrealized gains to increase government revenue. While Kamala Harris’s unrealized gains tax hasn’t yet been implemented, it’s a concept that could dramatically alter how taxes on investments will be approached in the future. Why Do Unrealized Gains Matter? For investors, understanding unrealized gains is crucial for tax planning and investment strategy. This deferred taxation allows investors to benefit from the time value of money, reinvesting potential gains and compounding their investments without immediate tax liabilities. If investments are increasing in value, but you don’t sell them, your gains remain untaxed. However, this also means that if the market takes a downturn, those gains can quickly disappear. Investors may choose to hold onto their investments longer to avoid triggering the unrealized gains tax. This can be a smart strategy if you anticipate your investment will continue to rise in value or if you want to wait for more favorable long-term capital gains tax rates, which are often lower than short-term rates. Tips for Managing Unrealized Gains Follow these tips to efficiently manage your assets and minimize your unrealized gain tax: The Risks of Holding onto Unrealized Gains While it’s tempting to hold onto assets for further gains, it comes with its own set of risks. Market volatility can cause asset values to fluctuate, and the price of your investments could fall just as quickly as they rise. Additionally, factors like company performance, economic conditions, and industry trends can impact the value of your assets. If you hold onto an asset for too long and its value decreases, you could miss out on the opportunity to lock in a profit. This is why it’s essential to have a well-rounded investment strategy and not rely solely on potential future gains. Partner with Financial Advisors for Tax-Efficient Investing Realized and unrealized gains are complex, and understanding how they impact your taxes can be even more challenging. A financial advisor can help you analyze your investments, determine the best time to sell, and suggest strategies to minimize your unrealized gain tax burden. They can also assist with long-term financial planning to ensure your portfolio grows in a tax-efficient manner. Partner with certified CPAs at KnowVisory Global. We can help you maximize your investment potential while minimizing your tax liability. Contact us today for expert guidance on smart financial planning!  

The Employee Retention Credit (ERC), also known as Employee Retention Tax Credit (ERTC) is an IRS tax credit that was created to help businesses during the COVID-19 pandemic. It was established as a part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and was designed to reward companies that kept employees on their payroll during tough times and offered cash-struck businesses a significant financial boost during testing times. While the Employee Retention Tax Credit is a game-changer for businesses, it is important to understand it completely to maximize available benefits, determine employee retention credit eligibility, and avoid potential scams. With increased IRS scrutiny and changing compliance requirements, businesses should also stay informed about the latest ERC tax credit 2026 developments before filing or amending claims. What is Employee Retention Credit (ERC)? The IRS Employee Retention Credit is a U.S. Federal tax credit scheme for businesses and Tax-Exempt organizations that were negatively impacted by the COVID-19 pandemic. The credit was available for wages paid from March 12, 2020, to December 31, 2021. Eligibility and credit amounts vary depending on when the business impacts occurred. The Employee Retention Tax Credit was designed to offset a portion of employee wages and its federal tax deposits, namely the deposits of federal withholding tax, employee Social Security tax, employee Medicare tax, employer Social Security tax, and employer Medicare tax. For eligible employers, the credit can be a: 2020 – 50% of qualified wages up to $10,000 per employee annually (maximum $5,000 per employee for the year), 2021 – 70% of qualified wages up to $10,000 per employee per quarter (maximum $7,000 per employee per quarter). Claiming ERTC: Is It Still Applicable? While the Employee Retention Tax Credit was introduced during the pandemic, eligible businesses may still be able to claim the credit retroactively by filing amended payroll tax returns within the applicable statute of limitations. The IRS previously implemented an ERC IRS moratorium on processing many new claims submitted after September 14, 2023, to address fraudulent filings and strengthen compliance reviews. Although processing has resumed for eligible claims, businesses should expect longer review periods and increased scrutiny. Businesses filing amended returns should also be aware of the applicable ERC claim deadline for each qualifying tax period. Missing these deadlines could result in losing the opportunity to claim the credit altogether. If you’ve already submitted a claim, monitoring your ERC status update and responding promptly to any IRS correspondence is essential to avoid unnecessary delays. Employee Retention Credit Eligibility A company is eligible for the ERC if it satisfies at least one of the following requirements: Government-Ordered Shutdowns: You may qualify if government restrictions pertaining to COVID-19 caused your business to close entirely or in part. This covers municipal or state regulations that restricted a business’s activities or resulted in its forced closure. COVID-19 Induced Decline in Revenue: You may potentially be eligible if the COVID-19 epidemic caused a notable decline in revenue for your company. For 2020, to apply for an ERC, a business required a 50% reduction in gross receipts compared to the same quarter in 2019. In 2021, a 20% decline was enough to meet the requirement. Recovery Startup Businesses: If you started a business after February 15, 2020, and had average annual gross receipts of $1 million or less, you may also qualify under this special category. Determining employee retention credit eligibility requires careful analysis of your business operations, payroll records, and revenue during the pandemic. Since the IRS has increased reviews of ERC claims, businesses should maintain complete documentation supporting their eligibility. What Are the Limitations of the ERC? Some limitations to keep in mind when applying for ERC include: Paycheck Protection Program (PPP): You cannot claim the ERC on wages that were also covered by PPP loan forgiveness. In other words, you cannot “double-dip” by using the same wages for both programs. Other COVID-19 Relief Programs: The same rule applies if your business received other pandemic-related relief, such as the Restaurant Revitalization Fund or Shuttered Venue Operators Grant. How to Claim ERC? Claiming the ERC isn’t automatic—you have to file an amended tax return Form 941-X (the Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund) in case you didn’t claim the credit when they filed their original employment tax return Form 941. This form allows you to go back and claim the ERC for any eligible wages paid during the pandemic. Once you’ve submitted the form, you will receive the credit either directly or as a refund – if you’ve already paid your payroll taxes. Before submitting Form 941-X, businesses should verify the applicable ERC claim deadline and ensure all supporting payroll records and documentation are complete. This helps reduce processing delays and minimizes future IRS inquiries. Avoiding ERC Scams While employee retention tax credit is a legitimate tax credit, there are a number of scams around ERTC. The common ones include: Unsolicited Offers: Be wary of unsolicited calls, emails, or messages from people claiming they can get you an ERC refund quickly and easily. Scammers often use high-pressure tactics to get you to act fast without verifying your eligibility. Upfront Fees or Percentages of Refund: Certified tax professionals will typically charge flat fees or by the hour for their services. Be cautious of anyone asking for large upfront payments or a percentage of the ERC refund. Guaranteed Refunds: If someone tells you that “every business qualifies” or guarantees a refund without fully reviewing your financial records, that’s a major warning sign. The employee retention credit is based on specific conditions. Not every business qualifies for it. As IRS enforcement continues to increase, businesses should also consider the growing ERC audit risk 2026. Working with experienced tax professionals helps ensure your claim is properly documented and supported by IRS guidance, reducing the likelihood of future disputes. What to Do If You’ve Filed a Fraudulent ERC Claim If you realize you’ve filed an ineligible employee retention credit claim, it’s important to take corrective action quickly: Withdraw the Claim: If the IRS hasn’t processed the claim yet, you

Cryptocurrency is a digital asset or a virtual currency that’s designed to act as money. It works through a computer network and is not regulated by any bank. The industry started around 2009 and within a decade, it achieved a staggering investment of over USD55 billion. Over the years, the demand for cryptocurrency has risen phenomenally, creating the need for centralized regulations that protect consumers while promoting innovation. For individuals and businesses dealing in crypto, it’s crucial to understand how these digital assets are taxed. Whether you’re trading, mining, or simply holding onto Bitcoin, Ethereum, or other digital currencies, navigating cryptocurrency taxes can seem complex. The reason why most individuals and business owners rely on professional tax planning and preparation services is to ensure compliance and optimize their tax outcomes. What are Crypto Taxes? Per Notice 2014-21, tax authorities in the USA consider crypto to be a form of property, similar to traditional assets like stocks and real estate. This means crypto gains and losses are subject to capital gains tax, while income from crypto-related activities may fall under income tax regulations. Every time you sell, trade, or use cryptocurrency to purchase goods or services, it creates a taxable event. A few crypto tax events include: How are Cryptocurrencies Taxed? Cryptocurrencies are taxed when you sell, trade, or exchange them. The tax treatment depends on how long you’ve held the assets. Capital Gains Tax When you sell or trade cryptocurrency for a profit, the transaction is subject to capital gains tax. (Image Credit: Blockpit.io) For example, if you bought Bitcoin for $10,000 and sold it for $15,000 within a year, the $5,000 profit would be taxed as short-term capital gains at your regular income tax rate. If you held it for more than a year, the $5,000 would be taxed at the lower long-term capital gains rate. Here’s a breakdown of tax rates for both short-term and long-term gains: Short-Term Capital Gains Rates (Held Less Than 1 Year) Tax Rate Single Head of Household Married Filing Jointly Married Filing Separately 10% $0 to $11,000 $0 to $15,700 $0 to $22,000 $0 to $11,000 12% $11,001 to $44,725 $15,701 to $59,850 $22,001 to $89,450 $11,001 to $44,725 22% $44,726 to $95,375 $59,851 to $95,350 $89,451 to $190,750 $44,726 to $95,375 24% $95,376 to $182,100 $95,351 to $182,100 $190,751 to $364,200 $95,376 to $182,100 32% $182,101 to $231,250 $182,101 to $231,250 $364,201 to $462,500 $182,101 to $231,250 35% $231,251 to $578,125 $231,251 to $578,100 $462,501 to $693,750 $231,251 to $346,875 37% Over $578,126 Over $578,101 Over $693,751 Over $346,876 Long-Term Capital Gains Rates (Held More Than 1 Year) Tax Rate Single Head of Household Married Filing Jointly Married Filing Separately 0% Up to $44,625 Up to $59,750 Up to $89,250 Up to $44,625 15% $44,626 to $492,300 $59,751 to $523,050 $89,251 to $553,850 $44,626 to $276,900 20% Over $492,301 Over $523,051 Over $553,851 Over $276,901 Income Tax Cryptocurrency earned through mining, staking, airdrops, or as payment for goods and services is taxed as ordinary income. The value of the crypto at the time of receipt is added to your taxable income and taxed according to your income tax bracket (10%-37%). For instance, if you mined Ethereum worth $5,000, that amount would be taxed as income in the year it was mined. Also, it is worth noting that different agencies in the US recognize cryptocurrency differently. This has led to the creation of distinct laws surrounding this digital asset. For example, in Wyoming, you don’t need a license for cryptocurrency. However, you’ll need a Money Transmitter License (MTL) to trade in cryptocurrency in Colorado. Tax Exemptions and Crypto Losses Certain crypto transactions may be exempted from tax. For example, small transactions, like those below a specific threshold, may not trigger taxable events. Similarly, cryptocurrency losses can be used to offset capital gains (or up to $3,000 of ordinary income annually), which helps in reducing your overall tax liability. When offsetting your capital gains with losses, pay attention to the holding period of the assets under consideration. You can only offset long-term capital losses against long-term capital gains and short-term capital losses against short-term capital gains. Excess of losses can be carried forward. Some events that may not trigger a tax obligation include: Non-Traditional Forms of Cryptocurrency Cryptocurrency is not the only form of digital asset that is taxed. Another form of cryptocurrency, Non-Fungible Tokens, or NFTs, are also taxed. NFTs are unique digital assets that use blockchain technology like cryptocurrency to signify digital ownership. They are categorized as property, meaning the sale and trade of cryptocurrencies are taxable. Some NFTs, on the other hand, may be considered collectibles, and are taxed at higher rates than other types of property.  Strategies to Minimize Cryptocurrency Taxes Want to minimize your crypto taxes? Here are some strategies to follow: Recording and Reporting Crypto Taxes Properly recording and reporting your cryptocurrency transactions is crucial to staying compliant with IRS regulations. Failure to do so can lead to penalties, interest, and even potential legal consequences. Here’s how to ensure you’re correctly recording and reporting your cryptocurrency taxes: Maintain Detailed Records: Make sure to record the date of each transaction, the amount of crypto involved, the fair market value at the time of the transaction, and any associated fees. Many crypto investors rely on third-party tools to automate the process of recording transactions. These tools integrate with popular exchanges and wallets, helping you track the cost basis, gains, and losses automatically. Identify Taxable Events: Taxable events in cryptocurrency can be categorized into capital gains and income. Make sure to accurately identify and record them. File Crypto Gains and Losses on Form 8949 and Schedule D:  Report your cryptocurrency capital gains and losses by filling out IRS Form 8949 and Schedule D. While Form 8949 reports the sale, disposals, and exchange of capital assets, including cryptocurrencies. Schedule D summarizes the net gain or loss from all your capital transactions, including cryptocurrency. Report Crypto Income on Form 1040: If you’ve

When it comes to tax planning and return preparation, two concepts often confuse most of us – the marginal tax rate and the effective tax rate. While both are crucial for tax planning, they serve different purposes and affect your finances in different ways.– Read on to understand marginal vs effective tax rate and how it affects the taxes you owe. Effective Tax Rate This is the average percentage of your total annual income that you owe as taxes. The effective tax rate is, therefore, the average rate at which an individual or a corporation is taxed on their earned income. To calculate this, you will need two key pieces of information: It is calculated by dividing your total tax liability by your total taxable income. The effective tax rate gives an accurate picture of your overall tax burden because it accounts for the different rates applied to different portions of your income. For example, if you have a total annual income of $100,000 and your total tax is $20,000, your effective tax rate is 20%. Usually, the effective tax rate is much lower than marginal tax rate, which could be as high as 37% as per the 2024 tax slabs defined by the IRS. Marginal Tax Rate The marginal tax rate is the percentage of tax you pay on your next dollar of income. In other words, it’s the tax rate that applies to the highest portion of your income. The United States adopts a progressive tax structure. This means that for every additional level of income, your tax liability increases proportionately. While calculating taxes in this tax structure, the taxpayer’s taxable income is segregated into tax brackets. Each bracket corresponds to a different income range and tax rate. For example, the marginal tax rates applicable for the year 2024 are as below: Tax Rate For Single Filers For Married Couples Filing Jointly  For Married Couples Filing Separately For Head of Household Filers 10% $11,600 or less  $23,200 or less  $11,600 or less  $16,550 or less 12%  $11,601 to $47,150 $23,201 to $94,300 $11,601 to $47,150 $16,551 to $63,100 22%  $47,151 to $100,525  $94,301 to $201,050  $47,151 to $100,525 $63,101 to $100,500 24%  $100,526 to $191,950  $201,051 to $383,900  $100,526 to $191,950 $100,501 to $191,950 32% $191,951 to $243,725 $383,901 to $487,450 $191,951 to $243,725 $191,951 to $243,700 35%  $243,726 to $609,350 $487,451 to $731,200  $243726 to $365,600 $243,701 to $609,350 37%  Over $609,351 Over $731,201  Over $365,601 Over $609,351 Now that you have the table before you, let’s help you understand how taxes are calculated with an example. Let’s assume that you are a married person filing jointly with a total taxable income of $100,000. This is how your tax will be calculated: Tax Rate Tax bracket Income Total tax owed 10% $23,200 or less  $23,200 $2,320 12%  $23,201 to $94,300 $71,100 $8,532 22%  $94,301 to $201,050  $5,700 $1,254 Total tax owed $100,000 $12,106 In the above case, the marginal tax rate would be 22% since this is the bracket under which your last dollar is taxed. However, as you can see, the effective tax rate is just over 12%, since you only pay a tax of $12,106 on a total income of $100,000. Marginal Tax Rate vs Effective Tax Rate – Why Understanding Both Matters? Understanding both the marginal and effective tax rates is essential for effective tax planning. Knowing your marginal rate helps you make informed decisions about earning additional income, tax deductions, and investments. Meanwhile, your effective tax rate gives you an overall picture of your tax burden. It’s useful for budgeting, comparing tax burdens year-over-year, and understanding your true financial obligation.  For example, if you’re considering taking on additional work or investing in income-generating assets, knowing your marginal tax rate will help you estimate the tax impact on that extra income. At the same time, knowing your effective tax rate can guide you in making decisions about tax-saving strategies, such as contributions to retirement accounts or charitable donations. The Bottom Line Understanding the difference between effective and marginal tax rates can greatly help you understand how much taxes you owe to the authorities and make filing returns easier. However, should you need expert advisors to aid decision-making, Knowvisory’s Tax Consultants are just a click away. Reach out to us to ensure your taxes are managed efficiently and effectively. We can not only help you prepare your returns, but also assist you in minimizing your tax liability, identifying potential savings opportunities, and planning for future tax obligations. Contact us today and navigate your year-end taxes successfully.