Taxation

Applying deductions can help you reduce your tax bill. In this article, we help you understand what type of deductions to choose. Did you know that as a taxpayer, you can reduce your tax bill in some ways? Let’s start with the basics. Your income tax is calculated on your Adjusted Gross Income (AGI). However, the IRS allows you to claim certain deductions from your AGI, to help you reduce your tax burden. You can either claim a standard deduction or choose to itemize the deductions if you believe that your actual expenses may be higher than the standard deduction. Let’s break it down for you. Standard Deduction The standard deduction is a flat reduction in your Adjusted Gross Income stipulated by tax authorities. This amount is fixed by Congress and changes year on year, usually getting bigger. The standard deduction amounts per the IRS for the 2023 tax year are: Single or Married Filing Separately – $13,850 Married Filing Jointly – $27,700 Head of Household – $20,800 Itemized Deductions The IRS allows certain categories of expenses to be deducted from your AGI that decreases your taxable income and therefore, your tax bill. When you choose to itemize your deductions, you can pick from a list of individual deductions instead of opting for a flat reduction. Types of Itemized Deductions The IRS provides a wide range of permissible expenses that can be deducted from your AGI to reduce your tax bill. We list some of the most common itemized deductions. Unreimbursed Medical and Dental Expenses If you have spent any money for medical or dental treatment for yourself or immediate family members, it may qualify as an itemized deduction if the total out-of-pocket spend exceeds 7.5% of your AGI. You can either claim this when the treatment is provided or when the expense is incurred. The amount to be claimed during the year is the amount paid (by cash/check or credit card) less the reimbursed portion by the employer/insurance company, only to the extent it exceeds 7.5% of AGI. Interest Expense 1.    Home Mortgage Interest If you are a homeowner, you can claim deductions for the interest expense incurred either for your main or second home. Loans of up to $750,000 secured by the home and used to buy, build, or substantially improve taxpayers’s homes are deductible only to the extent paid and related to the current period. This is applicable if you are filing taxes jointly with a spouse. In case you are filing as an individual, this cap is reduced to 375,000. 2.    Investment Interest Expense Interest paid or accrued on a loan or part of a loan that is allocable to property held for investment (Property that produces income from interest, dividends, or annuities; provided the income is not derived in the ordinary course of business. It includes interest expense from Schedule K-1 received from S-Corp, Partnerships, estates & trusts. Interest expense to purchase tax-free bonds is not deductible. Unused may be carried forward indefinitely. 3.    State & Local Tax (SALT) Deduction The SALT (State and Local Tax) deduction allows taxpayers in the United States to deduct certain state and local taxes, such as property taxes and either income or sales taxes, from their federal taxable income. However, the Tax Cuts and Jobs Act of 2017 capped this deduction at $10,000 4.    Charitable Donations  Good deeds can fetch you some tax benefits too. If you have donated to a qualified domestic organization, you can claim up to 60% of AGI. Contributions can be paid in the form of cash/check or Property. How to Choose Between Standard and Itemized Deductions? Running tax calculations with both options is a good idea when you are faced with the decision of whether to itemize your deductions. If the total value of itemized deductions is higher than the permitted standard deduction for the tax year in question, then you can choose to itemize. How Does It Help to Itemize Your Deductions? As we said before, itemizing deductions may add up to more than the standard deduction permitted by law. The more you deduct, the less you pay in taxes. If you think your expenses under some of these categories could exceed the standard deduction, itemizing deductions can be advantageous. Are There Any Disadvantages? Like for everything else, itemizing your deductions is more time-consuming and can mean that you spend more time on your tax return. The rules can be confusing and you will need to understand them in depth to be able to maximize your tax savings. Additionally, it is a good idea to keep documentary evidence for all deductions you are claiming as the IRS may choose to audit your return at any time. Make an Informed Decision! Whether you choose to claim standard deductions or itemize them, do your research, understand the tax laws, and run simulations before making a decision. Connect with expert advisors for informed decision-making. By consulting with professionals, you can ensure that you maximize your tax savings and comply with all relevant regulations. Don’t leave money on the table—take the time to evaluate your options and leverage Knowvisory’s Tax Planning & Return Preparation services to make the best decision for your financial future. Contact us today for expert guidance and start optimizing your tax strategy now!  

Who doesn’t find filing tax returns a daunting task? We decode penalty clauses for you and help you avoid or reduce tax penalties. More than half of all penalties imposed are for not paying taxes on time. But hold on. Even if you do pay taxes on time, but have missed a tax filing deadline, you can still receive a penalty notice. Why might I receive a penalty? Here are some reasons why the IRS might send you a penalty notice. There are several reasons why you may be asked to pay a penalty, but these are some of the most common ones. But wait, all is not lost. There are ways in which you can legally avoid or reduce tax penalties. In this article, we simplify complex tax laws and help you understand what you need to do to reduce your tax liabilities. Before we dive into the remedial actions for reducing tax, let’s take a minute to understand the most common reasons why you might be asked to pay a penalty. Failure to Pay The IRS usually requires you to pay the tax by the April deadline. When you fail to meet this deadline, the IRS can levy a penalty. This penalty is usually 0.5% of the tax you owe per month or part of a month, but it also caps at 25% of the tax due. One way to minimize your penalty is to ensure that you pay your tax in full by the April deadline, even if you request an extension. Failure to File The Failure to File penalty applies if you don’t file your tax return by the due date. The Failure to File penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. However, the penalty won’t exceed 25% of unpaid taxes. If both the late filing and late payment penalty apply to a particular month, the late filing penalty is reduced to 4.5%, so the maximum penalty is 5% pm. Failure to pay proper estimated tax The IRS expects that you will pay taxes throughout the year, rather than at the end of the year as a lump sum. To facilitate this, it sets quarterly deadlines (April, June, September, and January). You can calculate tax and adjust the amount deducted from your paycheck as you go to help reduce your penalty. The requirements are that you pay: Dishonored check If you issue a check to the IRS and you do not have enough money in your checking account, the bank will dishonor or “bounce” your check. The IRS charges a penalty Bad Check Amount Penalty Less than $1,250 The payment amount of $25, whichever is less $1,250 or more 2% of the payment amount A simple way to reduce your penalty is to ensure that your checking account is adequately funded when you issue a check to the IRS. How do I avoid or reduce tax penalties? The IRS itself offers some legal ways to reduce your tax penalties. Let’s take a look at three basic scenarios in which the IRS might agree to reduce your penalties. First-time abate or administrative waiver Are you usually on top of your tax filing responsibilities? Even the most meticulous tax filers miss deadlines sometimes. If this sounds like you, you can file a request for first-time abate. To qualify, you must have filed all your returns, paid your taxes on time, and have no prior penalties for the last three years. Reasonable clause Sometimes, you might fail to pay taxes on time or make an incorrect payment due to a wide range of reasons. The IRS allows you to cite some of these as “reasonable clauses” and request a penalty waiver. Some valid reasons for filing an exemption on a reasonable clause basis are: Statutory exceptions In very rare cases, the IRS also provides statutory exceptions under a certain set of circumstances. If you fall under any of these categories, you can request a reduction/removal of penalties. So, here you are! These are some of the common reasons why you might receive a tax notice from the IRS along with the ways to avoid or prevent it. Whether you are an entrepreneur, a small business owner, or an individual taxpayer, staying on top of your taxes is not easy. Seek help from our seasoned tax experts and we can guide you step by step. We can help you calculate and file your taxes as well as provide personalized strategies to minimize your liabilities. Reach out to us today for expert help.