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Tax Saving Strategies: Frequently Asked Questions

Table of Contents

  • What’s the best way to borrow to make consumer purchases?
  • What special deductions can I get if I’m self-employed?
  • Can I ever save tax by filing a separate return instead of jointly with my spouse?
  • Why should I participate in my employer’s cafeteria plan or FSA?
  • What’s the best way to give to charity?
  • I have a large capital gain this year. What should I do?
  • What other tax-deferred investments should I consider?
  • What tax-deferred investments are possible if I’m self-employed?
  • How can I make tax-deferred investments?
  • What can I do to defer income?
  • Why should I defer income to a later year?

What’s the best way to borrow to make consumer purchases?

For tax years 2018 through 2025 interest on home equity loans is only deductible when the loan is used to buy, build or substantially improve the taxpayer’s home that secures the loan. Prior to 2018, many homeowners took out home equity loans. Unlike other consumer-related interest expenses (e.g., car loans and credit cards) interest on a home equity loan was deductible on your tax return.

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What special deductions can I get if I’m self-employed?

You may be able to take an immediate Section 179 expense deduction of up to $1,040,000 for 2020 ($1,020,000 in 2019), for equipment purchased for use in your business, instead of writing it off over many years. There is a phaseout limit of $2,590,000 in 2020 ($2,550,000 in 2019). Additionally, self-employed individuals can deduct 100 percent of their health insurance premiums. You may also be able to establish a Keogh, SEP or SIMPLE IRA plan and deduct your contributions (investments).

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Can I ever save tax by filing a separate return instead of jointly with my spouse?

You sometimes may benefit from filing separately instead of jointly. Consider filing separately if you meet the following criteria:

  • One spouse has large medical expenses, miscellaneous itemized deductions, or casualty losses.
  • The spouses’ incomes are about equal.

Separate filing may benefit such couples because the adjusted gross income “floors” for taking the listed deductions will be computed separately.

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Why should I participate in my employer’s cafeteria plan or FSA?

In 2020 (as in 2019), medical and dental expenses are deductible to the extent they exceed 10 percent of your adjusted gross income or AGI. If your employer offers a Flexible Spending Account (FSA), Health Savings Account or cafeteria plan, these plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars.

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What’s the best way to give to charity?

If you’re planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity, instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash avoids capital gains tax on the sale, and you can obtain a tax deduction for the full fair-market value of the property.

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I have a large capital gain this year. What should I do?

If you also have an investment on which you have an accumulated loss, it may be advantageous to sell it prior to year-end. Capital gains losses are deductible up to the amount of your capital gains plus $3,00 ($1,500 for married filing separately). If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements).

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What other tax-favored investments should I consider?

For growth stocks you hold for the long term, you pay no tax on the appreciation until you sell them. No capital gains tax is imposed on appreciation at your death.

Interest on state or local bonds (“municipals”) is generally exempt from federal income tax and from tax by the issuing state or locality. For that reason, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality. However, for individuals in higher brackets, the interest from municipals will often be greater than from higher-paying commercial bonds after reduction for taxes.

For high-income taxpayers, who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings. The interest on Treasuries is exempt from state and local income tax.

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What tax-deferred investments are possible if I’m self-employed?

Consider setting up and contributing as much as possible to a retirement plan. These are allowed even for a sideline or moonlighting business. Several types of plan are available: the Keogh plan, the SEP, and the SIMPLE IRA plan.

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How can I make tax-deferred investments?

Through the use of tax-deferred retirement accounts you can invest some of the money you would have otherwise paid in taxes to increase the amount of your retirement fund. Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account. For most companies, these are referred to as 401(k) plans. For many other employers, such as universities, a similar plan called a 403(b) is available.

Some employers match a portion of employee contributions to such plans. If this is available, you should structure your contributions to receive the maximum employer matching contribution.

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What can I do to defer income?

If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the portion withheld) for another year. If you’re self-employed, defer sending invoices or bills to clients or customers until after the new year begins. Here, too, you can defer some of the tax, subject to estimated tax requirements.

You can achieve the same effect of short-term income deferral by accelerating deductions, for example, paying a state estimated tax installment in December instead of at the following January due date.

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Why should I defer income to a later year?

Most individuals are in a higher tax bracket in their working years than during retirement. Deferring income until retirement may result in paying taxes on that income at a lower rate. Deferral can also work in the short term if you expect to be in a lower bracket in the following year or if you can take advantage of lower long-term capital gains rates by holding an asset a little longer.

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frequently asked questions

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    • a. Certified Public Accountants (CPAs) do a lot more than just crunch numbers and prepare taxes. They provide valuable expertise and strategies to help businesses and individuals achieve their business and financial goals. A CPA firm can help small businesses with management financial reporting, tax compliance, strategic business advice, and much more. Firms like Perpetual CPA, that specialize in helping small and medium-sized businesses achieve growth, can also provide Virtual CFO services, that help the business owners have the foresight into the short-term future cashflows and be able to more successfully navigate their business performance.
  • What are the best strategies for small business growth?
    • a. A business growth strategy is, simply, a plan of how a business gets from where it is today to where it wants to be in the future.

      b. Some of the questions to consider when coming up with a growth strategy are:
      i. Where will the business get new customers from?
      ii. How will the business expand into new markets?
      iii. What new products could the business offer?

      c. In reality, what happens with many small businesses, is that they generally achieve a specific level of business activity or sales and then the business growth trend flattens. In those cases, working with a firm like Perpetual CPA, which provides Virtual CFO services, can help small businesses avoid stagnation. Virtual CFO services, aside from providing timely accounting and tax reporting, can also provide valuable insight into the current performance of the business, as well as, foresight into the future cash flows for the business. Perpetual CPA Virtual CFO team helps small businesses interpret their financial information and come up with business strategies to help improve business performance and achieve growth.
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    • a. A risk management plan helps a business develop a detailed strategy to deal with certain risks that are particularly important for the businesses’ success.

      b. For many small and medium-sized businesses, the easiest way to develop and implement a business risk management plan is to work with a reputable CPA firm, such as Perpetual CPA. Large corporations invest a lot of resources and time into managing risk, which is a material factor that allows those large corporations to continue to generate billions of dollars in revenue every year. Small businesses, however, almost never manage any business risks, which is the major reason that over half of all the small businesses do not survive for more than 5 years. Generally, small business owners are not experienced corporate business professionals and lack the needed business knowledge, yet they often have to wear many hats while trying to get their businesses off the ground. In those situations, a CPA firm such as Perpetual CPA, can help small businesses better manage tax compliance risks, cash flow, internal controls, business administration, financial reporting, and much more.
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    • a. When small businesses start spinning wheels, it is a good time to consider hiring a reputable CPA firm, such as Perpetual CPA, which can provide both Strategic Advice and Virtual CFO services.

      b. As a strategic advisor, the CPA firm will work with business management to improve the effectiveness and profitability of the business. They will look holistically at the business and find ways to operate the business more efficiently, increase customers through additional or improved marketing or improve customer touchpoints and service.

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  • How can timely financial visibility and management reporting help with better business decisions and growth?
    • a. A simple way to a successful business is to prioritize the timely financial visibility and management reporting as it means:
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