Summer Activities that will Impact your Upcoming Tax Year
It’s summertime again! It’s the most relaxing time of the year when you go on vacation, to camps, family events, weddings, and whatnot? As you enjoy your break, it’s equally vital that you take note of your summer activities. You might be wondering why that is so. Certain activities can substantially impact your taxes in the upcoming tax year. Here are some of the most prominent summer activities that will affect your taxes next year.
Marriage
Summer is a great time to get married. You can have options for beautiful outdoor wedding venues, lively weather, and variations in clothing design. According to our 2021 Real Weddings Study, 80% of people get married from May to October. If you and your partner are planning to tie the knot this summer, remember that it will impact your taxes. Tax codes result in paying more as a married couple than a single filer. For instance, the federal income tax rate is 37% which amounts to $523,601 for single filers, whereas for married couples, the amount is $628,300 or above.
As newlywed couples, report any name change to the Social Security Administration. Apart from that, the change in address needs to be updated. These updates are a must when you file your taxes.
Sending Kids to Summer Camp
Summer camps are fun and memorable experiences for kids to learn and grow. Sending your kids to summer camp allows you some time to work on your projects. However, summer camp indeed accounts for a significant amount of expenses. Hence, your summer camp expense qualifies for the child and dependent care credit. For the 2022 child care tax credit, you may be eligible for up to 35%. The credit can qualify for up to $3,000 of qualifying expenses for one child for a maximum credit of $1,050 for 1 dependent. In the case of two or more children or dependents, the qualifying expenses can amount to $6,000 for a maximum credit of $2,100..
Part-time work
Have you taken up a side hustle or part-time job? Well, chances are you are being considered a contractor rather than an employee. However, your employer determines whether or not you are deemed an employee or a contractor. As an independent contractor, you will receive Form 1099-NEC. On the other hand, as an employee, you will receive a W-2 Form. You will need to file early next year to get a tax refund withheld from your checks this year.
Side-Gigs
Working on side gigs, such as ride-sharing apps like-DoorDash or Uber, is a great way to earn extra money in summer! Nevertheless, it would be best if you remember that you’re covering your taxes for it. As a gig worker, you can make estimated payments every three months to cover the tax liability as you do not have an employer.
Renting Out Homes
Summer is when most people go out for vacation and look for places for a temporary stay. So, this is a great time to earn some extra money by renting out your extra space. You can generate taxable income by formally renting your place to another person. This rental income must be reported however if it is less than 14 days out of the year it can be tax free income.
These are some major summer activities that can impact your taxes in the upcoming tax year. Now that you know all about them, I hope you will work accordingly to simplify your tax filing process. Besides, Ahad&Co, the best CPA firm in NYC, is always by your side to help and guide you with your taxes.
Tax season is over. You must have filed your previous year’s taxes within the 18th of April 2022. Being done with that pile of tax stress was a great relief.
Although thinking about the tax is the last thing you want, now is a great time to have a head start for next year’s taxes. If you begin organizing and planning from now, you will have a much easier tax season next year!
With that, Ahad&Co brings you some helpful tips to prepare for the next year. These tips will make your upcoming tax filing more organized and less stressful.
1. Open a bank account to separate your business and personal expenses.
One of the most common confusions we face in tax season is distinguishing personal expense from business expense. The best way to avoid this problem is to open a separate bank account for your business. Make transactions separately on these individual accounts.
The separated bank account will save time during your tax season because you won’t have to struggle to figure out the expense.
2. Systematize your Documenting Process:
Whenever we receive expense receipts, we usually throw them inside a drawer. This haphazard practice jumbles your records. Even on our computers, many of us are pretty nonchalant when sorting our documents. When this mixing occurs, many forms get lost. Often it becomes difficult to find them, making the process time-consuming.
So start implementing a systematic process to document your records. Make sure to have both hardcopy and softcopy versions of your documents. Keep your documents scanned.
Have a backup of your documents in multiple drives such as Flash Drive, Cloud Drive, Phone, etc.
Use email tags for important electronic documents relevant to your taxes. It will save your time on searching through email history during tax time.
3. Understand Your Deductible Expenses
You might owe tax this season because you don’t make quarterly estimated tax payments. There may be income from other sources from which tax isn’t withheld. Interest, dividends, and any income earned from your business consulting or contracting work include it as part of your total income.
The following conditions can help you determine whether or not you need to pay tax expenses. If you expect to owe less than $ 1,000, you are not required to make estimated tax payments. If your federal tax withholding amounts to at least 90% of the current and 100% of the previous year, you do not have to pay an estimated tax payment. If your adjusted gross income on your tax return is over $150,000 and you expect that your income tax withholding will be at least 110 percent of the total tax you owed for the previous year, then you are not required to pay estimated taxes.
If you do not apply for the above three conditions, you must make estimated payments using Form 1040-ES.
4. Adjust Your Withholdings
If you are an employee working at a company, your employer withholds a certain amount of money. Withholding tax is the amount of money an employer deducts from an employee’s gross wages and pays directly to the government. The amount withheld is a credit against the income taxes the employee must pay during the year. Thus, it would be best if you looked over your tax withholdings. Often many taxpayers have more taxes withheld from their pay than is required. Since it’s an off-season, reviewing your withholdings is a good time. If you are a W-2 employee, federal tax is withheld from each paycheck.
So make sure to adjust your tax withholding by submitting a new Form W-4 to your employer’s payroll or human resources department.
5. Stay Updated
Every year, various updates on tax laws and announcements occur. These tax changes can often favor taxpayers when it reduces their tax price. Keep up with the IRS updates through IRS.gov.
Besides, Ahad&Co is always there to inform you about tax updates through social media handles.
6. Start Taxes Earlier Next Year
Do not procrastinate till April or else you will be digging holes in your own pit. Filing taxes in a haste will result in confusion, errors, and gaps. You might not be able to meet the tax deadline, resulting in penalties.
So start preparing and filing your tax from January. Head towards a CPA’s office as early as possible because the closer the tax deadline gains upon the waiting time gets longer.
7. Consult a Tax Professional
Every year your life may undergo several changes, such as moving to a new city, getting married, or having a baby. These life-changing events can impact your taxes, making you all puzzled. That’s when you may need a tax expert. A tax expert will save a lot of your time by looking into your records and analyzing the changes that can benefit your tax filing process.
In this case, Ahad&Co is just a call away. You focus on your work while we take care of your taxes.
That’s all about the strategies and tips you can incorporate into your tax filing. Starting now, take small steps to organize your tax documents for the year. Hopefully, the above tax tips and strategies will make your upcoming tax season much smoother.
Starting a business is a big step! As a new entrepreneur, you are allowing yourself to have autonomy in your business plan. However, a business involves paying taxes and quarterly tax payments. A single misunderstanding can lead to an increase in IRS audits. That is, an increased IRS audit can cause a significant increase in tax bills.
To start you off on the right track, here are some necessary tax tips for 2022 that can be helpful to you in managing your business.
1. Determine and Register Your Business Structure
As a new business owner, you must figure out Business Structure. Whether or not it’s a sole proprietorship, limited liability company (LLC), S corporation, and C corporation; the size of your business impacts your tax payment.
Most new businesses are registered as sole proprietorships where a single business owner conducts the business. As a sole proprietor, you will use your name for business operations. Besides, as a sole proprietor, your social security number can be used as a tax ID number. To file taxes as a sole proprietor, you will fill up a 1040 form and file a schedule C to claim all your revenue and business deductions on your tax returns.
An LLC is the 2nd most common way to register your business. Single-member LLCs are taxed similarly to sole proprietors. In the case of multiple LLCs, your business can be taxed as a partnership or a C corporation.
C Corporation comprises shareholders, officers, directors, and employees. C corporations are required to pay taxes at the company level. Hence, the shareholders in C Corporation pay personal taxes on any dividend received. Since this taxation happens both for the company and its shareholders; it’s called ‘double taxation.
On the other hand, S Corporations are not required to pay both business and individual levels. Shareholders only report business income, expenses, losses, and deductions on their tax returns.
2. Your Business Operation Should not be Treated as a Hobby:
If you are thinking of running your business as a side gig or hobby, your expenses or losses will not be taken into account by the IRS. In that case, make sure to write up a professional business plan, and document your marketing and management efforts. Your transaction accounts and profit graph will convince the IRS to substantiate tax deductions.
3. Understand Your Deductible Expenses
As you start a new business, you will naturally incur a lot of expenses. It’s necessary to understand which expenses can be easily deductible. One of the biggest ways to make deductions is by claiming business-related items as an expense. Such as stationary expenses, machinery expenses, medical and dental expenses, etc.
Apart from that, the general startup costs include- rent, payroll, taxes, professional services, utilities, logo design, website design, down payments, permits, and licenses. All these expenses are eligible for tax reduction. The IRS allows you to deduct up to $5,000 in business startup costs when the total startup cost is less than $50,000. If the cost exceeds $50,000 your allowable deduction will be reduced by the overage.
However, the other deductible tax expenses include- marketing, payroll, utilities, commercial lease, accounting, legal services, insurance, shipping and delivery costs, retail packaging, home office deduction, etc.
4. Keep Proper Records of Transactions
You must keep a proper recording of your business transactions. Maintain invoices and receipts and organize them accordingly. An organized record of transactions makes the tax report process much easier. To avoid errors, you can use accounting software.
5. Pay Estimated Quarterly Taxes
If you as a business owner owe tax more than $1000, you are required to pay quarterly estimated taxes. For a year or two of tax payments, you can use the previous year’s income to estimate your tax payments. Contribute to your year-end accounts by filing Form 1040. The estimated quarterly taxes are paid on April 15, June 15, September 15, and January 15. 90% of the taxes you owe need to be paid throughout the year. Late payments are subject to charge.
6. Hire an Accountant
The bookkeeping of your business transaction can be a time-consuming process that can divert your focus from your business operation. So to reduce the hassle, hire an accountant for your business. A CPA tax consultant can help you by providing tax consultancy and bookkeeping services which will provide you more time to focus on your business.
These are all the tax tips for 2022 that can help you as a new business starter. Hope your new business project turns out great. For any kind of support, contact Ahad&Co, the best CPA in NYC.
If you have not recovered from the horrendous agony of COVID-19, you’re not alone. We have lost so many loved ones with the advent of the novel Coronavirus. You’ll be shocked to know that the virus took away nearly 6.3 Million people who died of COVID around the globe.
We all became confined to the 4 walls of our homes. Each facet of life came to a halt, due to the government imposed strict lockdown to prevent the spread of the novel Coronavirus. Many business owners faced tremendous struggles at the time to keep the business afloat. Expenses were higher in ratio to lesser revenue.
If you’re a business owner, the post-covid circumstance is all the more favorable for you, in terms of tax payments! The Employee Retention Credit (ERC) is just for you! Want to know all about this tax credit? Then stay tuned throughout the write-up!
What is Employee Retention Credit (ERC)?
During the pandemic, all the organizations were compelled to suspend their operations due to government-imposed strict lockdown. Yet, many business owners continued to pay taxes. As compensation, the employee retention credit (ERC) is a fully refundable tax credit available to businesses that were adversely impacted by the COVID-19 pandemic and economic shutdown. This tax credit has been designed to encourage employers to keep employees on their payroll. The businesses can claim the credit on qualified wages. Now you might wonder, “What are qualifying wages?” You will find the answer in the next point.
What are Qualifying Wages?
Qualified wages include the Eligible Employer’s qualified health plan expenses that are properly allocable to the wages. Qualified wages depend on the average number of full-time employees employed during 2020 and 2021. The maximum amount of wages for qualifying is $10, 000. The tax credit is up to 70% of all qualified wages you have paid to your employees from Jan 1, 2021, up to Sept 30, 2021, or Until Dec 31, 2021, for Newly Started businesses. For 2020, the ERC is 50% of all qualified wages paid between Mar 12, 2020, and Dec. 31, 2020.
Who is Eligible for Qualifying Wages?
Due to government-imposed restrictions, all business owners were compelled to suspend their business during COVID-19 pandemic. During this business suspension in lockdown, if you paid your employees on the W-2 Form you are qualified for the Employee Retention Credit (ERC.) Wondering what W-2 form is? It is a document that reports the annual wages and the amount of taxes withheld by an employee. An employer sends this document to each employee and IRS (Internal Revenue Service) at the end of each year. As you paid salary as compensation to your employees during the lockdown, this makes you eligible to claim the Employee Retention Credit.
Besides, if your business incurred a significant decline in gross receipts, then you are eligible for ERC. The decline in the gross receipt is defined as a reduction of 50% in quarterly receipts measured year over year.
How to Claim Employee Retention Credit (ERC)
Now comes the big question. How to claim Employee Retention ERC? Well, first thing first! Calculate your qualified expenses based on the number of employees and calendar year. Sort out the qualifying expenses and claim for each quarter on your quarterly employment tax returns. Carefully fill up form 941X to claim the employee retention credit (ERC). If you want to claim an advance payment of credits, you will be required to fill up Form 7200.
Calculation of Employee Retention Credit (ERC)
There are certain details on percentages that you should keep in mind to calculate your ERC.
For 2021, the Employee Tax Retention (ERC) is 70% of all qualified wages you have paid to your employees from Jan 1, 2021, up to Sept 30, 2021, or until Dec 31, 2021, for Newly Started businesses. For 2020, the ERC is 50% of all qualified wages paid between Mar 12, 2020, and Dec. 31, 2020.
This is a complex tax credit so it must be done accurately so you can maximize the credit. Combined all quarters the maximum credit is $26,000 per employee.
There is no immediate deadline but you have 3 years before the time you paid the wages to claim this refund, so if you’re eligible do not delay!
Important Notes to Keep in Mind:
Government employers and self-employed individuals are not eligible for the ERC. A self-employed individual, however, may claim the credit for eligible wages paid to their employees. Moreover, Business owners that own 50% or more of the business, as well as their family members, are NOT eligible.
According to CARES Act- 2020, business owners, who had more than 100 employees not providing services because of suspension or decline in business, can use ERC. Employers can use this credit on employees who were not working. In this case, any wages paid for vacation, sick, or other off days cannot be included as qualified wages.
That’s all about the insights on Employment Credits. Hopefully, we’ve covered all the major points. Get in touch with Ahad&Co for any support in claiming ERC.
Do you know how often we live through myths? Lack of accurate information leads to misinterpretation of reality and results in various problems and misunderstandings.
For instance, if you have a habit of popping your fingers, many people around with sheer annoyance might say, “Stop that if you don’t wanna get arthritis”. Well, that’s a myth too because cracking fingers has nothing to do with arthritis.
Just as myth involves every aspect of life, tax is no exception in this regard. Especially as tax filing involves so many segments and updates, it’s natural to get influenced by such myths. So here’s to debunking tax myths! This article entails all the necessary tax myths that will keep you alert from any misunderstanding during the tax filing process.
Myth 1: Filing Taxes is Voluntary
Many people misunderstand tax filing as the Form 1040 instruction book uses the term ‘voluntary’ to describe the tax system. By ‘voluntary’ many people misconceive that tax payment is not mandatory. However, the term ‘voluntary’ in the form infers that each individual must be voluntarily responsible for determining the correct amount of tax owed. Hence, it has no connection and is not an optional act.
Myth 2: The IRS is Obligated to File your Return
After filing a tax return, you highly anticipate that the IRS will file a return for you. This is a myth because the IRS is mainly responsible to verify your return. If they find anything untoward in your process, they will get back to you.
Myth 3: Calling/Visiting the IRS will accelerate your Tax Refund
It’s a common misconception that directly contacting the IRS will speed your tax refund process. You will be living in a fool’s paradise if you believe so.
Through the online process, you can easily check your tax refund status with the Where’s My Refund? Tool or IRS2Go mobile app. An alternate means is to call the automated refund hotline at 800-829-1954.
Myth 4: Self-employed or Side-Income is Tax Free
It is true that as a self-employed individual, you are eligible for certain tax credit. However, it’s not entirely tax free. You must report your taxes. Fill up and submit the W-2 form of your self-employed venture as the government needs to be informed. From 2022, income earned over $600 through digital payments will be reported to the IRS for the next year’s tax.
You are eligible for self-employed credits to reduce your tax expenses. However, you must file your taxes accordingly.
A student is not required to pay taxes. However, it is applicable only when a student earns less than $ 12,550 during that tax year.
Myth 5: Online Source of Earning is Tax Free
Income earned online is no different than offline. If your earned income, regardless of any medium, stands more than $400, you are required to declare the income on your taxes. Hence, you will have to fill up W-9 and report your income to the IRS.
Myth 6: Getting Tax Extension means you can File Tax on October
The tax extension for filing taxes for the tax year 2021 is October 17, 2022. However, it is misperceived by many that tax extension means that someone is exempted from paying any taxes until October. In truth, a tax extension means getting an extra six months within which one can complete their tax filing process. Tax extensions are logical for situations such as lost paperwork or any awaited copies.
In short, tax extension refers to you getting an extra 6 months to pay your taxes any time within October 17th, 2022.
So next time you file your taxes, keep these common tax myths in mind to avoid any mistakes or misunderstanding. Hopefully, this article will help you to tactfully file your taxes. Spread out the words to dispel the tax myths. For any tax support, contact Ahad&Co, the best CPA firm in NYC.
Most of us dread the thought of tax filing. Your income tax often reaches an overwhelming amount. This often evokes stress for the taxpayers. However, you cannot avoid paying income taxes as it’s an integral part of your annual expenses. Sounds harsh, doesn’t it? Well much to our relief, there are some great ways through which you can reduce the amount.
Keep reading as we present you with some effective guides to save up on income taxes.
1. Invest in Long Term Capital Gains
If you closely observe, your expense will keep increasing with time; given the economical context and time value of money. To avoid the financial crisis, find means to increase your cash. Thus, investment can be an effective tool to grow your wealth. You can achieve a favorable tax treatment for long-term capital by investing in stocks, mutual funds, bonds, and real estate.
There are great benefits of investing for long term capital gain to save up on income tax. Hence, if an investor holds a capital asset for longer than a year then you can enjoy a preferential tax rate of 0%, 15%, or 20% on the capital gain.
For the year 2022, if your income-tax falls below $83,350 as a married couple and $ $41,675 as a single individual, then will be required to pay 0% on their long-term capital gains.
2. Invest in Municipal Bonds
Investing in Municipal Bonds is an effective means to reduce your expenses. As your bond reaches its maturity, you receive the full amount of the original investment. The interest you receive from municipal bonds is exempt from federal taxes.
3. Put Money in a 401K or IRA
Contribute to a traditional 401K. It will significantly lower your tax expense because 401K contributions are pre-tax. Contributions to a 401K are directly taken out of your paycheck before your income taxes are calculated. Thus, it lowers your total taxable income and subsequently reduces your income tax expenses. Apart from that, putting your money in the IRA is also a good idea as it’s an effective saving tool. It allows you to save up on paying income taxes by putting up to $6000 in your Individual Retirement Account (IRA).
4. Start a Venture
You can have a side-business along with your job. Side-business offers tax advantages to a great extent. As a self-employed individual, you can avail important tax returns through health insurance premium. According to IRS guidelines, you can get tax deduction for using a part of your home daily for your business. Besides as a taxpayer you can also deduct a portion of utilities and internet consumption for business purposes from your income.
5. Charity/ Donation
If you are an individual who supports various social causes through charity or donation then you have scopes to claim tax deductions.
Note that donations made through cash/cheque are eligible for tax reduction. Based on the donations you can avail 50% to 100% deduction.
6. Utilize a Health Savings Account
Sign up yourself for a health savings account. Health Savings Account contributions to the 401 (K) plan with payroll deductions ensures an exclusion of your taxable income. Your contribution to the Health Saving Account is 100% tax deductible from your income.
For the year 2022, the maximum deduction contribution level has amounted to $ 3650 at individual level and $ 7,200 at family level.
7. Claim for EITC (Earned Income Tax Credit)
The EITC is one of the most significant tax credits that can help to reduce your income tax expense. Based on the amount of your income and number of children; you can claim the EITC credit. For the tax year 2021, a taxpayer with three or more children can claim upto $6,728, with two children can claim upto $5,980 and with one can claim up to $3,618 and $543, if none.
Apart from that, the Child and Dependent Care credit can help you save up a substantial amount from your income tax.
These are the 7 methods you can utilize to save up on your income from income tax expenses. Hopefully this email helps you during this tax-season. Besides, for any other tax related consultancy, contact Ahad&Co, the best tax accounting firm near you.
