Taxation

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 ERC is a game-changer for businesses, it is important to understand it completely to seek maximum benefits and avoid potential scams. 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: Claiming ERTC: Is It Still Applicable? While ERTC was introduced during the pandemic, it remains available for eligible businesses to claim retroactively. The IRS is still accepting Employee Retention Tax Credit claims. Though there was a moratorium on processing new claims filed after September 14, 2023, it was lifted as of August 8, 2023. Claims filed between September 14, 2023, and January 31, 2024, are now being processed. Although the U.S. House of Representatives passed a bill proposing January 31, 2024, as the new deadline for filing ERTC claims, the Senate did not consider it, leaving the original end date to amend 2021 tax returns at April 15, 2025. While you can submit a new claim, be prepared for potential delays in processing as the IRS works through a backlog. Employee Retention Credit Eligibility A company is eligible for the ERC if it satisfies at least one of the following requirements: What Are the Limitations of the ERC? Some limitations to keep in mind when applying for ERC include: 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. 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: 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: Common FAQs on the Employee Retention Credit (ERC) 1. How Much is the ERC Per Employee? For 2020: The maximum Employee Retention Credit per employee is $5,000. This credit covers up to 50% of qualifying wages, including health plan expenses, up to a maximum of $10,000 per employee annually. For 2021: The ERC provides a higher benefit. For the first three quarters of the year, businesses can claim up to $7,000 per employee, per quarter, which totals up to $21,000 per employee for the year. This is calculated as 70% of qualified wages per quarter, with a cap of $10,000 in wages per employee, per quarter. In total, businesses can potentially claim up to $26,000 per employee when combining both years. 2. Can You Claim Both Employee Retention Credit and PPP? Yes, businesses can claim both the ERC and PPP loan forgiveness. Initially, this wasn’t allowed, but the Consolidated Appropriations Act (CAA) of December 2020 changed the rules, allowing businesses to benefit from both programs. When applying for PPP loan forgiveness, businesses must ensure they don’t double-dip by counting the same payroll expenses for both the ERC and PPP loan forgiveness. This is a critical compliance requirement, and failure to adhere to it could result in penalties. 3. Is being subject to a government order enough to make me eligible for ERC? (added July 28, 2023)? No. You need to demonstrate that the government order was related to COVID-19 and that it resulted in your trade or business being fully or partially suspended.  4. Was my business or organization fully or partially suspended if I had a supply chain issue? A supply chain issue by itself does not qualify you for the ERC. The IRS provided a narrow, limited exception if an employer was not fully or partially suspended but their supplier was. The exception, however, only applied when the employer absolutely could not operate without the supplier’s product and the supplier was fully or partially suspended. In addition to having the supplier’s governmental order, you will need to show that: Partner with Professional Tax Consultants to Maximize ERC Without the Risks The Employee Retention Credit can provide substantial relief for businesses that were hit hard by the COVID-19 pandemic. However, understanding the qualifications and avoiding scams is essential. By leveraging professional tax planning and return preparation services, you can file your claim correctly and stay on the right side of the law. Need help with your ERC claim? Reach out to our team today to ensure you’re getting the right guidance and avoiding any potential pitfalls.

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.

Taxes can be confusing, but knowing them is essential for managing your finances effectively and staying compliant with government regulations. In this article, we explore the two most common tax categories so that you can understand your taxes better. Two of the most common types of taxes that individuals and businesses encounter are payroll taxes and income taxes. Although both are essential to government funding, they serve different purposes and have unique implications for individuals and businesses alike.  Let’s break down the key differences between payroll and income taxes, understand how they impact your financial situation, and gain insights into why efficient tax planning and preparation is so important. What is Income Tax? Income tax is the total tax you owe to the government and is calculated on your income. It is assessed at the federal, state, and local levels. Income tax is typically levied on various forms of income, including wages, salaries, bonuses, dividends, interest, and other earnings. The amount of income tax you owe depends on your taxable income, which is your gross income minus any tax deductions, exemptions, or tax credits that you are eligible to claim. Income tax rates can vary significantly depending on your income level and the tax bracket you fall into. The federal government uses a progressive tax system in the United States, meaning that higher income levels are taxed at higher rates. On the other hand, state and local income taxes can either be progressive or flat, where everyone pays the same rate regardless of income. As of 2023, only 9 US states do not impose any state-level income tax. These are Alaska, Florida, Nevada, South Dakota, Texas, Tennessee, Washington, Wyoming, and New Hampshire (excluding dividends and interest). Also, as an employer, you are required to withhold a portion of your employee’s wages as income tax and pay it to the tax authorities. However, individuals are still responsible for filing their income tax returns and paying any additional taxes owed or receiving a refund if they have overpaid. What is a Payroll Tax? Payroll taxes are taxes that employers are required to withhold from employees’ wages and pay on their behalf to the government. These taxes are used to fund social insurance programs, including Social Security and Medicare in the United States. Additionally, employers pay taxes such as FUTA (Federal Unemployment Tax Act) without any employee contribution. Below are some key components of payroll tax: Social Security Taxes: Whether you are an individual or a business, you must pay a certain percentage of the wages as social security tax. This tax is part of the Federal Insurance Contributions Act (FICA). In 2024, both employers and employees will each contribute 6.2% of taxable wages toward Social Security, up to a limit of $168,600, compared to $160,200 in 2023, totaling 12.4% of the total taxable wages. The wage base limit may be adjusted annually by the government. Medicare Taxes: Medicare taxes fund the Medicare program, which provides health insurance for individuals aged 65 and older and younger people with disabilities. Each employee and employer must pay 1.45% of total taxable wages, with no wage limit. An additional 0.9% Medicare tax applies to high-income earners. For further details on the Medicare taxes, visit https://www.irs.gov/taxtopics/tc751 Federal Unemployment Tax Act (FUTA): Employers pay this tax to provide unemployment compensation to workers who have lost their jobs. The FUTA tax is paid solely by the employer and is not deducted from an employee’s wages. The federal rate is currently at 6% on the first $7,000 paid to the employee. Employers can receive a credit of up to 5.4% if they pay state unemployment taxes, reducing the effective FUTA rate to 0.6%. State Unemployment Taxes (SUTA): Similar to FUTA, state unemployment taxes are paid by solely by employers to fund state unemployment benefits. Each state sets its own tax rates and wage base limits. Additional Withholdings: In some cases, there may be other payroll taxes or withholdings, such as those for state disability insurance or local taxes. However, they depend on the location and specific requirements. Payroll taxes are mandatory taxes that play a crucial role in funding social safety nets. Employers are responsible for calculating, withholding, and remitting these taxes to the government, and failure to do so can result in tax penalties and interest charges. Understanding payroll taxes is essential for both employers and employees to ensure compliance and proper financial planning. Income Tax vs Payroll Tax: The Key Difference The table summarizes the key differences between these two tax categories: Components Payroll tax Income tax Purpose of the Tax Primarily used to fund social insurance programs like Social Security and Medicare. Used to fund a wide range of government services, including national defense, infrastructure, and public education. Who pays the tax? Shared between employers and employees. The employer withholds the employee’s share from their paycheck and matches it with an equal contribution. Paid entirely by the individual or business. Employers may withhold estimated income taxes from employee paychecks, but the final responsibility for payment lies with the taxpayer. On what is it calculated? On employee wages and salary On all income types including income from business and other sources Tax Caps and Exemptions Only the first $168,600 of income is subject to Social Security tax (as of 2024). Medicare taxes apply to all wages with no limit on wages. No cap on taxable income. All earned and unearned income is subject to taxation. Why Understanding the Difference Matters? Payroll taxes and income taxes are both integral to the functioning of government programs and services, but they serve different purposes and affect taxpayers in distinct ways. By understanding the key differences between these two types of taxes, individuals and businesses can better manage their financial obligations and take advantage of any available tax benefits. For employees, knowing payroll taxes is important as it affects the take-home pay and can help in retirement planning and other long-term financial decisions. For employers, understanding these taxes is essential for

Whether you’re paying for preschools, summer day camps, after-school programs, or daycare, childcare expenses can take up a large slice of your income. The good news is, that the IRS enables you to offset some of these expenses through the Child and Dependent Care Tax Credit. Let’s see what it is and how it can help you save up on your childcare expenses as well as your tax bill. When it comes to reducing your tax bill, understanding tax deductions is important. The Child and Dependent Care Tax Credit is one such federal tax benefit that’s designed to provide financial relief to families who pay for the care of a child or dependent while they work, look for work, or attend school. This credit can be applied to a wide range of care expenses, including daycare centers, in-home care, and summer day camps for children under the age of 13. This credit helps in efficient tax planning and helps you reduce the amount of taxes you owe. Eligible taxpayers can claim this credit when they file their year-end returns. The CDCTC can be claimed by both married and single taxpayers. Who Qualifies for the Credit? You qualify for the Child and Dependent Care Tax Credit, if you provide: What is the Eligibility Criteria? How Much is the Child and Dependent Care Tax Credit Worth? Aspect Details for One Qualifying Person (Child/ Dependent) Details for Two or More Qualifying Persons (Children/ Dependents) Maximum Eligible Expense $3,000 $6,000 Percentage of Expenses Covered 20% – 35% 20% – 35% Maximum Credit Value Up to $1,050 (35% of $3,000) Up to $2,100 (35% of $6,000) Income Considerations Higher income = lower percentage (down to 20%) Higher income = lower percentage (down to 20%) The amount of tax credit you can claim varies based on your income and the number of dependents in your care. Here’s a breakdown of how much the credit is worth: How is the Credit Calculated? The amount of the Child and Dependent Care Tax Credit is based on a percentage of the qualifying care expenses. The percentage varies depending on the taxpayer’s income but generally, it is calculated as: What Expenses Qualify? The credit can be applied to a variety of work-related care expenses, including: However, it’s important to note that overnight camps do not qualify for this credit, as they are considered non-work-related expenses. Similarly, care expenses during leisure do not qualify for this credit. For example, the salary paid to a babysitter to watch your kids while you go out for dinner does not qualify for child and dependent care tax credit. That’s because this babysitting fee didn’t help you to work. Is the Child and Dependent Care Tax Credit Deductible? No, the Child and Dependent Care Tax Credit is not deductible. Instead, it is a tax credit and directly reduces the amount of tax you owe, dollar for dollar. Unlike a deduction, which only reduces your taxable income, a tax credit is applied to your actual tax liability, making it more valuable in reducing your overall tax bill. This means if the credit is more than your tax liability, you cannot receive a refund for the difference. For example, if you owe $2,000 in taxes and qualify for a $1,000 Child and Dependent Care Tax Credit, your tax bill would be reduced to $1,000. This credit can provide significant relief for eligible taxpayers, especially those who have substantial child or dependent care expenses. How to Claim the Credit? Claiming the Child and Dependent Care Tax Credit requires some extra paperwork. You need to complete Form 2441 and submit it with your Form 1040. However, claiming this tax credit may affect your ability to claim other tax credits and vice versa. That’s why it is important to consult a Tax Expert before filing to check on the other alternatives and benefits available. Professional tax consultants can help you maximize your credits while staying compliant with all tax regulations. Need help navigating the complexities of tax credits? At Knowvisory Global, we can help you understand your eligibility requirements and guide you on ways to maximize credit and minimize IRS tax penalties. We handle all your paperwork, so you can focus on what matters most! Contact us today and make the most of your tax benefits. We can help you stay sorted and prepared for the upcoming tax season.

Do you think your work ends with filing your tax returns? It may not. In this article, we delve into the types of issues you could face as a taxpayer even after filing your annual returns and how to resolve them. The IRS routinely conducts tax audits to augment its tax collection efforts. If they find any discrepancy in your return, they could send you a notice asking for quick remedial action. That’s why accurately filing your tax return is important! Here are a few reasons why the IRS could send you a notice on your tax return and what you can do to save yourself from hefty fines and penalties. Types of tax problems Tax penalties We already took a deep dive into different types of tax penalties you could face a few days ago. The tax authorities could seek a penalty if you have made a mistake in filing, reporting, or paying taxes. The typical consequences are that you may be asked to pay a fine and rectify the return. As we saw earlier, over 80% of such notices are for failing to pay taxes or for paying an incorrect amount. How to resolve it? Several remedial measures are available, including appealing for a reduction or waiver of penalty with the help of tax experts, if needed. Unpaid taxes If you have forgotten to pay your taxes or paid less than the specified amount, you can be hit with a 0.5% penalty for every month. Any balance to be paid is also subject to interest. If you fail to address the situation, interest and penalty will continue to accumulate. How to resolve it? Some options available include a long-term payment plan that allows you to pay the taxes in monthly installments without the added burden of interest. Alternatively, you can explore an offer in compromise. Math-error notices Filing taxes can be a complex affair, especially if you are doing it by yourself. There is a lot of scope for simple computational errors, missing entries, and incorrect values. In many such cases, the IRS corrects the error and processes the return without you having to do anything. However, in some cases, they may send you a notice requiring action on your part. How to resolve it? Solutions depend on the kind of math error reported. You may need to pay more taxes or receive a refund where applicable. Non-filing of taxes You will receive an IRS notice if you have missed the tax filing deadline. The notice could demand a penalty for non-filing of returns if the tax authorities deem it fit. How to resolve it? Filing returns is essential to resolve this issue, with a full payment of taxes owed where applicable. Underreported income If you have failed to declare any income, this is considered underreported income and the IRS can send you a notice to remedy the situation. This happens when the income reported on your tax return fails to match with income consolidated from third-party sources. How to resolve it? Additional payment of taxes and/or penalties may be needed to remedy this notice. If in doubt, consult a Tax Expert for advice. This is not an exhaustive list of tax problems you could face after filing your return. If you get a tax notice, the best thing to do would be to work with the authorities and/or Tax Experts at KnowVisory and resolve it at the earliest. Whether you need expert advisors to aid decision-making or help in preparing your returns, Knowvisory’s Tax Planning & Return Preparation services are here to help. We can help you understand your tax deductions, and liabilities, and optimize your tax strategy for maximum savings and benefits. Contact us today and get expert help in filing your tax returns.