Introducing Sarah, a 34-year-old small business owner who unexpectedly sent a hefty check of $47,379 to the IRS last year when she should have only owed $9,761. Unfortunately, her accountant simply prepared her tax return without actively seeking ways to reduce her tax liability. Sarah’s situation is not unique, as many business owners across the country are likely to overpay their taxes this year due to insufficient tax planning.
Several common reasons contribute to overpaying taxes, and here are five specific ways it can happen:
#5 Neglecting the Augusta Rule The little-known Augusta Rule could be a valuable tool for many business owners, including Sarah. This strategy permits hosting business events, such as quarterly board meetings, at their homes. By doing so, they can exclude the rental income from their personal tax returns and claim the rental deduction on their business returns. This rule applies to any taxpayer with a home in the United States, but it cannot be the primary place of business. You can learn more about the Augusta Rule in this article.
#4 Underutilizing Retirement Planning A well-thought-out tax plan not only maximizes retirement tax benefits but also ensures the most suitable retirement plan based on individual circumstances. Contributing to retirement funds can lead to significant tax savings, depending on the tax bracket and the amount contributed annually. A tax advisory can help compare different retirement plans and their long-term tax implications.
#3 Overlooking Business Tax-Saving Opportunities Tax planning isn’t limited to individual returns; business owners have various opportunities to save on taxes with their business returns. Strategies like 100% deductible meals, Section 139 Disaster Relief, and entity optimization can lead to substantial tax reductions. Transitioning from a Schedule C structure to an S Corporation, Partnership, LLC, or C Corporation can often result in significant tax savings.
#2 Ignoring the Home Office Deduction The Home Office Deduction, particularly relevant during the work-from-home transition, is often underused. It allows individuals to deduct expenses related to their home office, including a portion of mortgage interest, property taxes, utilities, and homeowners insurance, provided the space is used exclusively and regularly for business purposes.
#1 Mismanaging Investments High-net-worth individuals have numerous opportunities for tax planning. Maximizing investment expenses and minimizing investment income tax can lead to significant savings. Strategies like tax-loss harvesting, 83(b) elections for securities investments, and utilizing Section 1031 exchanges and cost segregations for investment real estate can be advantageous.
In conclusion, overpaying the IRS often results from inadequate tax planning and missed opportunities for deductions and credits. Many businesses and individuals fail to take advantage of various tax-saving strategies. To avoid overpaying, seeking professional assistance and exploring the myriad ways to reduce tax liabilities is crucial. Magnolia Tax Services, for example, offers over 1,600 strategies to help people save on their taxes, and they provide complimentary reviews of tax returns for potential overpayments.
