My job is to help my clients grow their business, increase their finances and be empowered in their own life when it comes to money. I’ve worked with thousands of entrepreneurs in their businesses and personal finances to ensure they are making great choices with money and using incredible resources to work smarter, not harder.
There are several important tax deductions that are often overlooked, confusing, abused or even forgotten. Below is a list of these deductions and tips broken down in their simplest form, so that from now on you are educated, confident and asking the right questions!
1. Home Office: This is one that people are always asking me about. There’s a misconception about the home office deduction because people think that if they take the deduction then they have to pay tax on the home-office when they sell their house. That has not been the case for many, many years. Now you can have a $250,000 gain on your house for free or $500,000 if you are married. You do have to live in the house for two years for it to qualify, but for most people, they are able to take advantage of this free gain. Another thing to know about the home office deduction is that you can only take it if it is your only office.
2. Mileage: If you have a home office, most of your miles are deductible, as long as they are part of your business – trips to the bank, meeting with clients, and networking events are all necessary to your business. Miles IQ is the app I use to track my miles – much easier than manually tracking!
3. Travel: Many people come into my office asking if they can go to Disneyland or Mexico, have a meeting or two and write off the entire trip. Unfortunately, the IRS got rid of that a long, long time ago. There are very strict rules on this issue, and it is not something to mess around with. So, be careful when you’re traveling and be discerning about what is actually business and what is not.
4. Image: You cannot under any circumstance write off clothes unless they are clothes that cannot normally be worn out in public. A classic example is the scrubs that a doctor wears – they are deductible. TV reporters are required to dress a certain way and they are allowed to write off their makeup and their clothes. If you are producing professional videos for your website or for marketing purposes, then you too can write off the makeup and hair, but not the dress you wore for the video AND to work that day.
5. Retirement Plans: Most entrepreneurs are unaware of the many tax-deductible retirement plans available for small and large businesses. Depending on your personal situation, options include SEP Plans, Simple IRA Plans, Pension Plans and Defined Benefit Plans. Consult your CPA and/or your financial advisor for more information.
6. Real Estate: A lot of entrepreneurs love to have some type of real estate, whether it is a rental property or flipping a property for profit. It is very critical if you are a real estate investor to understand if you are an active or passive investor. If you are an active investor that means that you are a real estate agent and that you were putting in 750 hours per year on large property. Otherwise you are passive and if you are passive that means that you are simply not actively involved because you’re overseeing the property and collecting rents but you’re not putting in the hours and you’re not a professional in real estate. If you have a gain on your property, you have to pay tax on it but if you have a loss you are not allowed to take that loss. Instead you have to carry that loss forward to the next tax year, and offset it against future gains. This is something that needs to be put into your tax return in the exact correct place so that you do not lose that deduction, and it’s easy to make a mistake here. If you do have real estate that is considered passive and you have losses that you cannot take, then the good news is that if you have other passive properties that are profitable you can take the ones that are losses against the ones that were gains.
If you have questions or are interested in how I can save you money in your business, schedule a FREE 15-minute consultation with me today by calling 214-693-0918.
-Holly Signorelli, CPA
As the market for real estate has appreciated, the amount of real estate fraud has increased.
Not only is today the tax filing deadline, it’s also the deadline for making 2016 IRA contributions. Roth IRAs, which are funded with after tax dollars, have some significant benefits such as tax-deferred earnings, tax free withdrawals in retirement, and not being subject to required minimum distributions. Perhaps most enticing is that Roth IRAs can be passed down to your heirs outside of probate and the beneficiaries receive the funds tax free, just like you would in retirement.
Many higher earners, however, believe that they are unable to contribute to a Roth IRA because of the income limits set by the IRS. Specifically, current IRS regulations stipulate that single filers with income of $133,000 or more and married filers making more than 196,000 cannot directly fund a Roth IRA.
Enter the “back door” Roth IRA strategy.
Here is how it works:
Step 1 – Open and fund an after-tax traditional IRA (non-deductible) for each filer. Anyone is eligible to do so, even if contributing the maximum to a company 401(k) plan. Be sure to stay under contribution limits which are $5,500 per person in 2016, or $6,500 if over age 50. For example, a married couple with both spouses over the age of 50 can contribute a combined amount of $13,000 for 2016.
Step 2 – After the after-tax traditional IRA has been setup it can be converted to a Roth IRA. Your IRA administrator and/or tax advisor can provide instructions and assist you in accomplishing the conversion. If you already have an existing Roth IRA, the converted balance will likely go right into the existing account. If not, then you’ll need to open one during the conversion process.
Step 3- Pay your taxes upon conversion. Roth IRAs can only receive post-tax dollars. Therefore, if you deducted your traditional IRA contributions and then decide to convert them, you’ll have to refund that deduction. In addition, you’ll need to pay taxes on any investment gains that occur in the traditional IRA account prior to conversion.
As always, there are some caveats to this strategy, so we recommend consulting a tax advisor prior to putting the strategy to work, especially if you have existing IRAs. However, if you are able to take advantage of this strategy, your after-tax contributions will grow tax free and not be subject to taxes upon withdrawal by you or your heirs. After all, who doesn’t like tax free!
Please do not hesitate to contact us if you would like to discuss this strategy, your financial plan, or your estate plan. We would be happy to assist you!
– Daniel Ippolito