Taxes are complicated for many taxpayers. It doesn’t help that new laws are being written on a regular basis, and that the tax code is constantly changing and evolving. You want to be in compliance to avoid unnecessary issues with the IRS, which means naturally you will probably have a lot of questions about taxes. Here are the answers to some of the most frequently asked tax questions.
#1 Do I Need To Hire A Tax Professional?
The decision to hire a tax professional is going to depend on your individual wants and needs. The more complicated your tax situation is, the better off you will be hiring a tax professional. For example, if you conduct business in multiple states, you may owe taxes in each of the states you have a presence. This can be a complicated tax scenario to navigate by yourself. In this instance, it would be in your best interest to work with a tax advisor who specializes in state and local taxes. Remember a tax advisor can be a lot more than just a tax preparer, seeking tax guidance throughout the year can help keep you in compliance, plan for taxes, and meet your financial goals.
If you find yourself in any of the following tax scenarios, then it may be time to hire a tax professional:
- You own your own business or are self employed
- If you have multiple streams of income
- You have to track depreciation for business assets
- You have a business partner
- If you have a lot of investment accounts
- You had a major change, for example: you got married
- If you bought or sold property
- You are very generous and give to a lot of charities
- If you itemize deductions
- You conduct business in multiple states
- If you find yourself asking a lot of tax questions
#2 Should I Itemize Or Take The Standard Deduction?
This is one of the most frequently asked tax questions that is really important to ask, especially as the standard deduction just went up. The choice to itemize or take the standard deduction will depend on which scenario works more in your favor. Do you stand to save more by itemizing or is the standard deduction greater than your total itemizations? The standard deduction just went up: for single filers it is now $12,000 for single filers, $24,000 for married filers filing jointly, and $18,000 for head of household filers.
With the increase in the standard deduction and the limits imposed on the state tax deduction, it may not be as advantageous for you to itemize. This is where talking to a tax advisor comes in handy.
#3 How Can I Reduce The Amount I Owe In Taxes?
This is another frequently asked tax question we get all the time, and with good reason. It is only natural to want to hold onto your hard earned money. Why pay more of it to the IRS if you don’t have to. The best thing we can suggest is to start planning early. Taxes don’t begin and end with tax day, think of it as an annual process. This could involve planning for deductions, timing purchase just right, creating a save savings account, calculating and paying estimated taxes, and more. How you chose to strategize your tax year is important and can make a huge difference in savings come tax day.
#4 Tax Deductions and Tax Credits, What Is the Difference?
One of the most common tax questions we get is what is the difference between tax deductions and tax credits? Tax deductions and tax credits are both useful in reducing the amount you owe in taxes. However, how they do that varies. Tax deductions work to lower your taxable income, while tax credits reduce the amount you owe in taxes dollar for dollar. Deductions are based off of qualified business expenses that are deemed ordinary and necessary. Some examples of common business tax deductions include:
- Office Expenses – including rent, insurance, utilities
- Office Supplies – stationary, paper clips, pens, etc…
- Marketing Expenses – digital marketing, printed media, radio ads, etc..
- Travel Expenses – airfare, hotel accommodations, car rental fees
- Continued Education – the cost of attending a seminar, or attending a class to advance your career
Tax credits are designed to incentivize taxpayers. For example, there is the R&D tax credit designed to incentivize businesses to invest in researching and developing new products and procedures. There is also the savers tax credit, designed to incentivize people to save for their retirement. Some other common tax credits include:
- Child Tax Credit
- Mortgage Interest Tax Credit
- Opportunity Zones Tax Credit
Tax deductions and tax credits are both great and reducing the amount of taxes you may owe. Half the battle is knowing which tax deductions and credits are available to you.
#5 How Can I Reduce My Risk Of An Audit?
An IRS audit is a scary thing, that most taxpayers would like to avoid. When it comes to being at risk for an IRS audit, higher income earners (those making more than $1 million per year) and low income earners are most at risk. High income earners are at risk because they take more deductions and contribute more to charity. In addition, those that file a schedule C are more likely to be audited. On the other side of the spectrum, low income earners are more likely to take the earned income tax credit, which can warrant some extra scrutiny from the IRS.
To reduce your risk of an IRS audit, focus filing accurate tax returns in a timely manner. Report all income you receive. In addition, be honest when it comes to claiming deductions and credits. Taking too many liberties with either can land you in the hot-seat with the IRS. As a safeguard, maintain accurate and detailed financial records. Keep track of all income and expenses for 5-7 years.
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