Earned Income Credit Update:
You may use your 2019 earned income to calculate your 2021 earned income credit if your 2019 earned income is more. Remember, the more earned income you have, the higher the credit is up to a breakeven point of around $18,000-$20,000 when the credit starts decreasing a bit. This is based on 2 children. Returns will not start being processed until towards the end of January or early February.
Child Tax Credit:
If you received the child tax credit advance payments, the other half may be claimed on your 2021 return. If you end up owing the IRS money, there are safe harbor rules that protect low and middle class families from having to pay back the credit. If someone such as an ex received the advance payments when he or she does not qualify for them, you may still claim the child tax credit on your return and receive the full benefit, however the IRS will most likely audit to find out who has the right to the child tax credit.
If you qualify, you may contribute up to $6,000 into an IRA by the tax deadline and deduct the amount against your income. An IRA is a retirement vehicle that can be created through brokerages such as Fidelity. You get to choose the stocks you invest into or can just leave the cash in the IRA. If you also have a 401k with your income, there are income limitations. Roth IRA’s are generally considered better for younger people but you will not receive immediate tax benefits.
Maxing out your 401k is one of the best tax strategies obviously not as smart if the entire market crashes such as in 2008, however it all rebounded back eventually. A 401k is a long term retirement plan and even better when your company matches your contributions. The max contribution for 2022 is $20,500 and even higher for people aged 50. You will receive a tax deduction immediately but will pay tax once you withdraw.
If you have a high deductible health insurance plan, you may contribute $3,600 or $7,200 for your family and deduct the amount against your income. HSA’s are also invested in a variety of stocks. Any withdrawals for medical purposes including dental, vision, chiropractor, massages and many other issues that qualify as “medical” are not taxable including the earnings. To summarize, your contributions are tax deductible, earnings are tax free and withdrawals are also tax free. That is what you call a grand slam. You can create and contribute to a HSA through different brokerages such as Fidelity until the tax deadline if you qualify.
If you own rental properties, through depreciation, your rentals should show a loss on paper. Adjusted gross incomes of less than $100,000 can deduct up to $25,000 in rental losses, not 100k in gross income but AGI which means after your IRA, 401k, HSA etc contributions. If your income is above $100,000 but not over $150,000, you may still deduct some losses but not the entire $25,000. If you are considered a “real estate professional” which means you are in the business of real estate and spend more than 750 hours every year in real estate activity such as being an agent, then there are not loss or income limitations because is it then considered similar to owning a business.
Did you know you can deduct business losses against ordinary W2 income? Starting a small businesses may be a great idea just to shift personal expenses into business expenses, however the IRS wants to see that your goal is to generate a profit every year and not just incur losses to offset W2 income. The phrase attempting to generate a profit is however very subjective. This is a perfectly viable and legal strategy to reduce your W2 income and taxes so long as your are running a legitimate business.
Paying Your Children:
If you own a business, you should pay your children up to the standard deduction amount. You are not required to withhold Medicare, Social Security or Income Taxes on them and they are NOT required to file a return. It is a great way to reduce your self employment income. If you would like, you can also create a ROTH IRA for your child but then you must issue them a W2. You must check with the brokerage such as fidelity. A Roth IRA is a great investment tool. All you have to do is transfer money from your business checking account into their account and in the memo write the services that were provided.
Arizona Charity Credit:
You may claim a dollar for dollar AZ charity credit up to $500 for individuals and $1000 for Married filing jointly up until the April tax deadline. You must donate cash to a qualifying charity which are listed on the AZ website. This means if you owed $500 in taxes and donated $500, you would owe zero dollars.
Do you need an LLC to start a business?
No, an LLC is for asset protection in the event of a lawsuit which would be rare. It has no tax implications. If you create an LLC, you must also have a separate business bank account and books either through pen and paper, excel, Quickbooks etc. Common myths are that you have to pay quarterly taxes or have a business license. There is no such thing as a business license, only a TPT license for sales taxes purposes for goods. Read this blog I wrote on how to start a business: https://taxesandrealty.com/how-to-start-a-business-in-arizona
S-corporation Tax Savings:
If you own a business or are a 1099 contractor, you should consider forming an S-corp if your next income is more than 30-50k. An S-corporation instantly saves you 15.3% on taxes due to not having to pay Medicare and Social Security tax. This is before considering the face that the IRS would like you to issue yourself a W2 when owning an S-corp to have you pay some Medicare and Social Security tax rather than nothing at all. The term is referred to as “reasonable salary.” The benefits of an S-corp are that not only do they instantly save you 15.3% as a business owner or 1099-contractor but it allows you to qualify for a mortgage. Typically, you are looking to deduct as many expenses as you can on your Schedule C, however this will hurt you when you go to apply for a mortgage.
Crypto and Stock Losses:
You may deduct your crypto losses against your gains and then deduct anything remaining up to $3,000 against your W2 income until the losses are exhausted in future years.
Gifting Capital Assets to Avoid Capital Gains:
The capital gains tax rate is 0% for single individuals with income up to $40,000 + the standard deduction of $12,550 so a total of $52,550. It goes up to 15% for income between $40,001-$441,450 and 20% for anything above that. If you’re planning on selling stocks, crypto, investment property or any other capital asset and expect to pay capital gains tax, you can transfer the asset as a gift to anyone other than your CHILDREN unless they are above a certain age and not your dependent and avoid paying capital gains tax if their total income is less than $52,550 after including the capital gains. For example, lets say you buy bitcoin for $10,000 and sell it for $40,000, you have a capital gain of $30,000. If you have another job making $100,000, then you would owe 15% on the $30,000 of capital gains. On the other hand if you have a family member or friend who only makes $20,000/year, you can gift them the bitcoin to sell and they would owe 0% on the sale because their total income would be $50,000 which is below the $40,000 + standard deduction amount.
Multiple State Tax Returns:
If you moved from a different state such as California and had income in California, you will be required to file 2 part year state tax returns. A different way which is easier is to file as a nonresident of California and as a resident of Arizona. Any tax you pay to California will be credited and you will owe nothing to Arizona because California’s tax rates are much higher. If you live in Arizona and work from home for a different state such as California, sometimes there are tax reciprocity rules which means if you file a certain paperwork called WEC with your employer, your employer is required to withhold Arizona taxes instead of California taxes which would be more beneficial as AZ tax rates are much lower.
Are you going to die with lots of assets?
Then it is important for you to create a revocable trust so that your heirs do not have to go through the long probate process. Your real estate assets should all be in a revocable trust. Your bank accounts should all have beneficiaries named. You do this to avoid lawyer fees and expenses of going through probate. If you’re the sole provider and have family that rely on your income, you should also look into getting term life insurance so that in the event of your death, your children, wife, husband etc will receive a lump sump amount. If you work a physically demanding job earning a high salary, you should also look into getting long term disability insurance which pays out 66% of your gross income in the event you become disabled which is the case for millions of people.
To schedule an appointment, email me at [email protected] or call me at 480-779-8579. Good luck. S.L Tax & Accounting is the best Laveen, Tolleson and Phoenix Arizona tax preparation and accounting business providing the best service.