Full Article: Loveland Lifestyle

The full article submitted to Loveland Lifestyle magazine regarding personal and business tax reductions is below. Unfortunately, the magazine had a word count, and the article was shortened! The shortened article can be found here; the full article can be found below!

From SIMPLE to Substantial – Strategies for Lowering Your Personal and Business Taxes

Taxes

We all know that they need to be paid, but we certainly don’t want to pay more than we have to! How can we be sure that we’re not paying too much? What are things that are commonly missed? Are we deducting everything that we can? What about business expenses?

Sue Burnett, founder and CEO of Monarch Financial Advisors, and Matt Ackermann, owner of Ackermann CPA, provide their answers to these questions, and give some examples of tax reduction strategies for both individuals and business owners, based on their 25+ years of experience in the financial planning and tax areas.

Individuals

The tax code is constantly changing, and staying current on what’s allowed as a deduction and what’s not is certainly a full time job! Knowing the rules, and how to use them to your advantage, is key to maximizing your deductions and minimizing your payments.

One of the easiest ways we’ve helped a client is to simply change their individual tax filing status from married filing jointly to separate individual filings. Due to COVID, one of the clients had lost their job, and was on unemployment. When they filed jointly, they didn’t get a deduction, but separately, they did.

In other cases, it’s not IF you are paying taxes, it’s WHEN. If you have an IRA, all of that money will be taxed at some point when you take it out. There’s no getting around that! But in years when the tax rates are down, or your income is lower, it may make sense to take a part of that IRA and convert it to a Roth IRA. You’d pay taxes now, but that’s it – any investment gains you get down the road are never taxed. With this, it’s a timing issue, and a CPA or financial professional can help you determine whether this would be a good option for you.

Another strategy we’ve been using is with regard to charitable contributions. People are giving more to charities and nonprofits than ever before, but their annual contributions may not be enough to get above the standard deduction. Using a donor advised fund can change that. For example, let’s say that someone donates $3,000 per year to various charities. When this is added to their state and local taxes, and mortgage interest, it totals $23,000 – the standard deduction for someone filing as married is $25,100, so they wouldn’t get any deduction. If you saved your contributions for a few years, and then donated $9,000 to a donor advised fund, this would put you above the standard deduction, and you’d get tax reductions from that. The fund would then distribute your contributions on an annual basis to whatever nonprofits you’d like to support. It’s not that you’re giving less, it’s simply a timing issue, to make sure you’re able to get some tax deductions for your generosity.

Sometimes it’s not that you’d do your taxes wrong, but the information you’ve gotten to complete your taxes isn’t right! We had a client that sold stock one year and received a 1099 for the sale, which was
supposed to report the gains that they had received. The 1099 showed the entire amount of the sale! The advisor didn’t have the original cost of the stock, or the ‘basis’, so it was keyed in as $0, and if taxes were filed using that amount, they would have paid way too much. We helped them calculate the amount of the original purchase, and determine what their gain was. Instead of paying $15,000 on the entire amount, they only owed $5,000. It’s situations like this where it’s great to have someone reviewing the information you’ve received. Another client received two 1099’s for $45,000 each – the business that was paying them had changed names mid-year, and they received forms from each of the companies. We helped them get this straightened out with the IRS (who was looking for taxes on $90,000 instead of $45,000!), and saved them a lot of money simply by verifying the accuracy of their tax information.

Even with accurate information, you may get a letter from the IRS saying that they disagree with your calculations. The wait time to get through to the IRS is long, and you may get cut off, or may not have the time to be on hold for hours – this is when having a CPA or financial professional is really helpful. It may be as simple as adjusting a tax return because there’s supplemental information that wasn’t reported, or there’s identity theft, or the recovery rebate calculation wasn’t right – with all of these issues, it’s good to have someone on your team to contact the IRS, especially if there are interest penalties accumulating. So many people will just assume the IRS is correct and will pay whatever the letter says – we can help make sure that it’s right.

It may be as simple as providing the IRS with more information. The real estate market has gone crazy, and many of our clients will receive a 1099-S for the sale of their primary residence. Even if you don’t owe taxes on the gain, you still need to report the transaction! If not, you’re going to get a letter from the IRS saying you didn’t report all of this income, and now you owe tens of thousands in taxes – those are pretty intimidating letters! But with some straightforward communication with the IRS, we can help get it ironed out.

Businesses

Business returns are more complex, but that also results in more opportunities!

Most people know about the basic business deductions – things like mileage, phone, internet, office supplies. But there are other expenses that can be written off too, things like advertising, start-up costs, and talks with a business attorney or CPA or financial advisor about your business. Business-sponsored retirement plans for businesses are a great way to reduce taxes as well. Some plans, such as a SEP or a Profit Sharing plan, provide flexibility with contributions, which is great for businesses with revenue that varies substantially from year to year. Then there are SIMPLE plans or 401(k) plans, that also allow employees to defer some of their income. And finally, there are pension plans that are great for companies with stable or growing income, and that are looking for maximum deductions – depending on the owner’s age and income, these plans could allow contributions (and deductions!) of hundreds of thousands of dollars, per year, per owner! If a business owner is looking to reduce their taxes as well as boost their retirement savings, there are a lot of possibilities here. Read more about pension plans here.

COVID, the Tax Cuts and Jobs Act under President Trump, and President Biden’s bills have resulted in a lot of new opportunities for businesses that owners may not realize. We had one client apply for the first round of PPP loans, but not the second – they were eligible, and when we helped them apply, they received another $50,000! There’s also loans from the state of Ohio for businesses that are interest free for five years for loans up to $45,000, and if you borrow more than that, it’s only 3% interest for minority or woman-owned businesses. Having these funds available at such a low borrowing cost may help a business really get to that next level.

A company’s balance sheet is something that isn’t often understood well, but can play a big role if the assets are over $2,500. Knowing how to capitalize and depreciate assets, or how to account for improvements to rental property like landscaping or new appliances, is extremely valuable when calculating your overall business taxes.

Making sure your business has the correct corporate structure is also important. There are a lot of business owners that simply fill in a Schedule C for their income and expenses because that’s the easiest way to go. If their net revenue is high enough – $40,000 to $50,000 – we can reduce their taxes solely by changing their business structure! Changing from a Schedule C filing to a LLC, and paying yourself a W-2, can decrease your taxes, even with the additional cost of a payroll provider. This is something that we see time and time again – high income business owners that are still filing their business income through a Schedule C, and paying way too much in taxes every year.

Speaking of LLCs … you should consider forming a LLC if there’s the potential for liability against you. You’d need to get an Employer Identification Number (EIN) from the IRS, which is a straightforward filing, and that keeps your business assets separate from your personal assets in case someone were to sue your business. Opening a business checking account and getting a business credit card will definitely help to keep the finances separate as well, regardless of whether you’re a LLC or not.

If you’re considering starting a business in 2022, and are wondering what you should do to keep your finances in order, the most important thing is to keep track of your expenses and revenue. Whether you use excel, a shoe box, a program like quickbooks or mint – whatever you choose, it should be something that can immediately generate a report for you so that you can see where you are.

Conclusion

We hear people say “I’ve always done my own taxes and financial planning, why should I have a CPA or financial planner?” We’ve provided a lot of examples above for how we’ve helped people out, and there are so many more that we could share with you!

What’s the cost? It depends on the complexity of tax return, AND the complexity of the client! There are certainly ways to keep the cost down, such as sending all of the information at once, and providing information earlier rather than later. Sending information electronically is also helpful – paperwork needs to be saved for support of the calculations, and electronic documents would save scanning time. The value that we bring is in the planning – knowing what’s coming, and accounting for life events earlier rather than later, can help make sure that final payment in the spring isn’t as painful as it may have been! Our initial consultation is free of charge, to talk through your personal situation and see how we may be able to help.

Whether it’s as simple as changing your individual taxes to file separately instead of married filing jointly, or as substantial as setting up a $200,000 retirement plan, we can make sure that we put as much money as possible into your pocket, and less into the IRS’s.