Tax Pitfalls and Strategies

Tax Pitfalls and Strategies

May 20, 2024

Tax season can be a whirlwind, and the tax law is always changing. Here are some of the most common pitfalls I see hurting my clients, and some helpful tax strategies:

Tax Pitfalls:

• Deadlines: Mark your calendars! The individual tax filing deadline is typically April 15th. Businesses have an earlier deadline on March 15th. Missing these deadlines can cause penalties and interest charges, so timely filing is crucial. Also, make sure to meet your payroll and sales tax deadlines.

• Estimated Taxes: Don't wait until April to settle your tax bill. If you're self-employed or have significant income outside of your paycheck, you're likely responsible for quarterly estimated tax payments. Failing to make these estimated payments can lead to underpayment penalties.

• Marketplace Insurance: If you receive financial assistance through the Marketplace to purchase health insurance, be mindful of how it affects your taxes. The subsidy you receive is based on your estimated income. If your income significantly increases during the year, you may owe money back when you file your taxes. It’s wise to update your estimated income throughout the year on the Marketplace website to avoid a surprise tax bill.

• Wash Sale Woes: Selling an investment at a loss and then repurchasing the same or a similar investment within 30 days triggers a “wash sale.” In this scenario, the IRS disallows the loss for tax purposes. Be mindful of this rule to avoid accidentally wiping out potential tax deductions.

• Holding Period Hurdles: The length of time you hold an investment before selling it impacts the capital gains tax you pay. Assets held for more than one year qualify for long-term capital gains rates, which are typically lower than short-term capital gains rates applied to assets held for one year or less. Understanding the holding period is key to maximizing your tax benefits when selling investments.

Tax Strategies:

• S-Corp: For eligible businesses, electing S corporation status can offer significant tax advantages. S corporations allow for the distribution of profits to owners as dividends, which are not subject to self-employment taxes. Additionally, reasonable compensation paid to S corporation owners can be deducted as a business expense, further reducing taxable income.

• Cost Segregation Studies: This analysis helps identify and depreciate shorter-lived building components within your commercial property, accelerating tax deductions. These savings could be significant. We have had clients save hundreds of thousands of dollars with Cost Segregation studies.

• Nightly Rental Rules: If you rent out a property for short-term stays (like Airbnb), you can qualify for special tax treatment if you meet certain criteria, including spending over 100 hours managing the property and more time than anyone else.

• IRA & SEP IRA: Don't underestimate the power of retirement savings! Contributions to IRAs and SEP IRAs can significantly reduce your current tax burden while growing your nest egg for the future.

With the whirlwind of the ever changing and complex tax laws, navigating them effectively can be challenging. For a smooth tax season and maximized savings, consider partnering with a qualified CPA firm like Larson CPA. Our team of tax experts can help you develop a personalized tax strategy, ensure you comply with all deadlines and regulations, and identify all the deductions and credits you qualify for.