Mesa Money Minute

Charitable contributions can be a great way to give back to your community and also provide some tax benefits. Let’s explore how you can maximize these deductions. First, if you itemize your deductions, you can deduct contributions made to qualified charitable organizations. This includes donations of cash, property, and even mileage driven for charitable activities. Be sure to keep receipts and records of your donations, as the IRS requires documentation for these deductions. For those who don’t itemize, there’s good news if you’re in Colorado. The state offers a Colorado Subtraction for Charitable Contributions. This allows non-itemizers to subtract charitable contributions above the first $500 from their Colorado taxable income. It’s a great way to benefit from your generosity even if you take the standard deduction on your federal return. Remember, to qualify for these deductions, the charity must be a recognized 501(c)(3) organization. Also, if you receive something in return for your donation, like a dinner or event ticket, you can only deduct the amount that exceeds the fair market value of what you received. Consult your CPA to ensure you’re maximizing your charitable contribution deductions and taking advantage of any state-specific benefits like the Colorado Subtraction.

Estate planning is essential for managing your financial future and minimizing tax liabilities for your heirs. Beyond gift giving, there are several strategies you can use to plan for estate taxes effectively. First, consider establishing trusts. Trusts like a Spousal Lifetime Access Trust (SLAT) allow one spouse to transfer assets to a trust for the benefit of the other spouse, providing access to the assets while removing them from the taxable estate. Charitable giving is another powerful tool. Setting up a charitable remainder trust (CRT) or a charitable lead trust (CLT) allows you to donate assets to a charity while still providing income to your beneficiaries or yourself for a period of time. Life insurance can also play a crucial role. Purchasing a policy within an irrevocable life insurance trust (ILIT) can help cover estate taxes, ensuring that your heirs receive the full value of your estate. For those with significant assets, Family Limited Partnerships (FLPs) can be beneficial. An FLP allows you to transfer assets to family members at a discounted value, reducing the overall taxable estate while maintaining control over the assets. Another strategy is upstream gifting, which involves gifting assets to older family members in lower tax brackets who can benefit from a stepped-up basis upon their death, reducing capital gains taxes for your heirs. Lastly, regularly review and update your estate plan with your CPA or estate planning advisor to ensure it aligns with current laws and your financial goals. This includes updating wills, trusts, and beneficiary designations. An important component of estate planning is understanding the Uniform Lifetime Exclusion. This exclusion allows individuals to transfer a certain amount of wealth, either through gifts during their lifetime or bequeathments after death, without incurring federal estate or gift taxes. For 2024, the lifetime exemption is $13.61 million per person, up from $12.92 million in 2023. For married couples, this amount doubles to $27.22 million. However, unless Congress acts, this exclusion is set to drop to approximately $7 million in 2026. By implementing these strategies and understanding the current and future tax laws, you can effectively manage your estate and minimize tax liabilities for your heirs. Always consult with your CPA or estate planning advisor to tailor these strategies to your specific situation.

Welcoming a new baby is an exciting time, and it also brings new tax considerations. Let’s dive into some key tax planning tips for new parents. First, there’s the Child Tax Credit. For 2024, you can claim up to $2,000 per qualifying child under age 17. If your tax liability is less than the credit, you might be eligible for the Additional Child Tax Credit, which can provide a refund of up to $1,500 per child. Next, consider the Dependent Care Credit. If you pay for childcare so you can work or look for work, you may be eligible for a credit of up to 35% of your qualifying expenses, with a maximum of $3,000 for one child or $6,000 for two or more children. Don’t forget about medical expense deductions. You can deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. This includes costs related to childbirth and your child’s medical care. Health Savings Accounts (HSAs) are another great tool. If you have a high-deductible health plan, you can contribute pre-tax dollars to an HSA, which can be used for medical expenses. Contributions, earnings, and withdrawals are all tax-free when used for qualified medical expenses. For your child’s future education, consider a 529 plan or other tuition savings plans. Contributions to a 529 plan may be deductible for state tax purposes, and withdrawals are tax-free when used for qualified education expenses. And here’s a fun fact: a child born at the end of the year “counts” for the whole year. This means you can claim the Child Tax Credit and other benefits for the entire year, even if your baby was born on December 31st. Consult your CPA to ensure you’re taking full advantage of these tax benefits and planning effectively for your family’s future.

As we look ahead to 2025, it’s important to be aware of significant tax changes on the horizon. Many provisions of the Tax Cuts and Jobs Act (TCJA), enacted in 2017, are set to expire at the end of 2025. Here’s what you need to know: First, individual income tax rates will revert to their 2017 levels. This means higher tax rates for many taxpayers. Additionally, the standard deduction will be cut roughly in half, and the personal exemption will return. The child tax credit will decrease, impacting families with children. The estate tax exemption will also be reduced, potentially affecting estate planning strategies. For small business owners, the 20% tax deduction for pass-through businesses will be eliminated. Another significant change is the removal of the cap on the state and local tax (SALT) deduction. This could provide some relief for taxpayers in high-tax states. For corporations, several temporary provisions will expire, including limits on deducting research and equipment costs and certain interest expenses. If these provisions are not extended, they will revert to pre-TCJA rules. It’s important to note that there will likely be legislative changes between now and then, which could alter these provisions. Staying informed and consulting with your tax advisor will help you navigate these changes and plan accordingly.

Filing taxes as a small business owner can be complex, but understanding the basics can make the process smoother. Depending on your business structure, you may need to file different types of returns. Sole proprietors and single-member LLCs typically file a Schedule C as part of their personal 1040 tax return. However, if you operate as a partnership, multi-member LLC, or corporation, you’ll need to file a separate business tax return. It’s crucial to report all income and all deductions accurately. This includes revenue from sales, services, and any other business activities. Deductions can cover a wide range of expenses, such as office supplies, travel, and advertising costs. Be mindful of filing deadlines. For most small businesses, the tax return is due by March 15th. If you need more time, you can file for an extension, which typically gives you until September 15th. However, remember that an extension to file is not an extension to pay any taxes owed. Also, keep in mind that income taxes aren’t the only taxes you might be subject to. Depending on your business, you may need to pay self-employment taxes, payroll taxes, sales taxes, and more. Consult with your CPA to ensure you’re meeting all your tax obligations and taking advantage of any deductions or credits available to you.

Understanding the difference between tax deductions and tax credits is essential for effective tax planning. Tax deductions reduce your taxable income, which means their value depends on your tax rate. For example, a $1,000 deduction saves you $240 if you’re in the 24% tax bracket. Tax credits, on the other hand, provide a dollar-for-dollar reduction in your tax liability. So, a $1,000 tax credit reduces your tax bill by $1,000, regardless of your tax rate. This concept applies to both federal and state income taxes. Generally, tax credits are available for more specific categories of expenditures, such as education or energy-efficient home improvements, while deductions often cover broader categories like mortgage interest or charitable donations. Credits usually come with more eligibility requirements and often require additional forms and supporting documentation. Deductions, while still requiring proper documentation, tend to be simpler to claim. Consult your tax advisor to understand which deductions and credits you qualify for and how to maximize your tax savings.

An often-overlooked deduction for self-employed individuals is the home office deduction. This allows you to write off a portion of your home expenses as business expenses. To qualify, you must use a specific area of your home exclusively for business purposes. There are two methods to calculate the home office deduction: the actual expense method and the safe harbor method. The safe harbor method lets you deduct a flat $5 per square foot of your home office, up to 300 square feet or $1,500. You can choose the method that provides the greatest deduction. The actual expense method involves using a percentage of your total home expenses. This percentage is determined by dividing the square footage of your home office by the total square footage of your home. You can then deduct this percentage of all your home expenses, including mortgage interest, rent, insurance, utilities, and repairs and maintenance. Note that expenses specific to areas outside the home office, like lawn maintenance, do not qualify. Consult your CPA to determine if you qualify for the home office deduction and which method is best for you.

What is the best account to use for your retirement savings, a 401(k) or an Individual Retirement Account (IRA)? Each has pros and cons. With a 401(k), you can set aside more each year (up to $23,000 in 2024, or $30,500 if you’re over age 50). It’s easy for an individual to set up, as your employer typically handles deducting your contributions from your paycheck and depositing them into the account. There are no income limits, and often employers offer matching contributions to boost your savings. IRAs are a bit more flexible than 401(k)s. You can make contributions until the filing deadline (usually April 15 of next year), whereas 401(k) contributions generally must be made by December 31 of this year. You can contribute any type of earned income to an IRA, so you don’t have to rely on your employer to offer the plan. However, you are responsible for setting aside and making your contributions. The max contribution to an IRA is lower ($7,000 in 2024, or $8,000 if you’re 50 or older), and there are income limits that apply if you or your spouse are also covered by an employer plan. There are also many other types of retirement plans to consider, especially if you're self-employed, such as SEPs and SIMPLEs. It’s best to confer with your advisers to determine which plans are best for your circumstances.

Understanding the difference between marginal tax rates and effective tax rates is crucial for accurate tax planning. The marginal tax rate is the rate applied to your last dollar of income, while the effective tax rate is the average rate you pay on all your income. A common misconception about taxes is that a 40% top tax rate means you’ll pay 40% of your taxable income in taxes. In reality, the U.S. uses a graduated income tax system, where your top, or marginal, tax rate only applies to the income within that bracket. For instance, many think a 24% tax rate on $100,000 of taxable income means $24,000 in taxes. However, the 24% rate only applies to the last $5,000 of income. The first $11,000 is taxed at 0%, the next $33,000 at 12%, and the following $50,000 at 22%. This results in approximately $17,000 in taxes. Your effective tax rate, which is the average rate you pay, would be 17%, even though your marginal rate is 24%. Note that these figures are for illustrative purposes only and your rates will vary.

Having a side hustle is another term for being an independent contractor or self-employed. All income from a side hustle is taxable, whether it's part-time, temporary, not reported on traditional tax forms like W-2's or 1099's, or paid in cash, cryptocurrency, or barter. If you have a side hustle, track and report your income and expenses just like any other business. You must file a tax return if your net earnings from your side hustle exceed $400, even if you otherwise aren't required to file a return. As a self-employer person, you'll need to pay both income and self-employment taxes on your earnings. If you don't have an employer to withhold additional taxes, you might need to make quarterly estimated tax payments. The good news is you can deduct work-related expenses such as vehicle mileage, a portion of your cell phone bill, and possibly even home office costs. For more details on saving taxes on your side hustle, consult your CPA.

Many deductions are often overlooked due to the hassle of recordkeeping or simply not knowing they exist. With a bit of organization and education, you can ensure you're maximizing your write-offs and reducing your tax bill. Commonly missed deductions include the home office deduction, vehicle expense deduction, business use of cell phone and internet bills, and the self-employed health insurance deduction. Most of these are primarily available to self-employed individuals, so if you're a W-2 worker, be sure and speak with your CPA about deductions that are available to you, and make sure to keep good records.

If you're a freelancer, you might be curious about potential tax deductions. Generally, any expense that’s ordinary and necessary for your business operations can be deducted, though there are many exceptions in the tax code. One commonly overlooked deduction for sole proprietors is the home office deduction. If you use a space in your home regularly and exclusively for business, you can deduct a portion of your mortgage interest or rent, utilities, insurance, maintenance, and HOA dues. Another useful deduction for small business owners is the business use of your cell phone. If you have multiple lines, break out the portion of the bill for your line and estimate a reasonable business use percentage, like 25% or 30%. Additionally, don’t forget about the mileage deduction for your personal vehicle. Keep a digital or paper log of your business drives, as commuting between your home and place of work is not deductible. Consult your CPA to ensure you’re not missing any valuable business deductions.

Amid the recovery efforts from COVID-19, many businesses took advantage of the Employee Retention Credit (ERC) which allowed a credit for keeping employees on payroll. However, the regulations and requirements of the credit are complex, and many businesses may have discovered after the fact that the claimed the credit in error. IRS has been stepping up enforcement action on incorrect ERC claims in recent months. If a business loses the ERC under audit, they'll be liable to repay the credit plus penalties and interest. However, for businesses who claimed the ERC in error or by mistake, IRS has announced a Voluntary Disclosure program which allows those businesses to return 80% of the credit and not be subject to penalties. There are many requirements for eligibility for this program, so be sure to consult with your CPA to determine if you are eligible. For more information, visit irs.gov and search for ERC voluntary disclosure program.

On December 19, the IRS announced a new program to help taxpayers who have been hit with penalties for 2020 and 2021, but were unaware of the accumulating penalties due to a pandemic-era policy to halt sending penalty notices. IRS had temporarily stopped sending automated reminders to pay past due tax bills in February 2022. Penalties, however, continued to accrue, sometimes without the knowledge of the taxpayer. The IRS will resume its normal process of sending automated reminders this month. However, to ease the transition, it will automatically forgive penalties for certain taxpayers affected by this situation. Eligible taxpayers include individuals, businesses, trusts, estates, and not-for-profit entities with less than $100,000 of taxes for the tax years 2020 and 2021. The IRS will automatically grant the relief and refund the penalty if it has already been paid, or credit it to another outstanding liability. Check your tax transcript at irs.gov to determine if you received penalty relief, and if a refund is pending. You may contact the IRS after March 31 with questions about this program.

Contrary to popular belief, you don't need to wear a lab coat or discover a new element to be eligible for a research and development (or R&D) tax credit. If your business is creating or improving a product, process, or software, you may qualify. For expenditures to qualify, they must be "incurred in connection with the taxpayer's trade or business" and must "represent research and development costs in the experimental or laboratory sense". According to the regulations, the "experimental or laboratory sense" is "for activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product." If you're a start-up making less than $5 million annually and are under 5 years old, R&D credits can be used to offset up to $250,000 of your payroll taxes per year. If you're an established small business but don't have taxable income this year, you can carry the credit forward for up to 20 years. R&D credits require a lot of documentation so be sure to track your expenses diligently. If you think some of your business activities might be eligible for an R&D credit, contact your CPA to find out more about this complex topic.

What is Section 179D? Sounds intimidating doesn't it? Section 179D is a tax incentive for qualifying energy efficient commercial buildings. It allows for a deduction of up to $5/square foot if all energy efficiency and prevailing wage requirements are met. The deduction is primarily for building owners, but in certain circumstances it can be allocated to the designers, architects, engineers, and contractors of public buildings. The incentive is available for new construction projects as well as upgrades and retrofits of existing buildings. Commercial buildings and residential buildings with four or more stories are eligible. Single family homes or multi-family homes with three or fewer stories are not eligible. A taxpayer cannot prepare the claim on their own. A licensed engineer must complete a certification to validate the deduction. Consult your CPA if you want to explore your eligibility for a Section 179D deduction!

The Colorado Department of Labor and Employment rolled out its new employer platform for paying unemployment premiums, reporting wages, and responding to claims last month. Employers will need to register their accounts on the new platform to report wages and pay premiums. Every employer should have received either an activation email or letter with the information necessary to register a new account. If you haven't received your activation information, you can call the division or visit their website to obtain your activation code. If you use a third party administrator (or TPA), such as a payroll service or accountant, you will still need to activate your new account and authorize your TPA to use the account. Due to some issues with the new system, the deadline for third quarter unemployment insurance premiums and wage reports has been extended from October 31 to November 30. More information is available at myuiemployer.coworkforce.com.

What is Proposition HH? Prop HH would make various changes to state property taxes and changes to state revenue limits, including reducing the residential property tax assessment rate and subtracting a set amount of money from a property's taxable value before applying the assessment rate; creating two new subclasses of residential property effective in 2025; providing funds to local governments to make up for decreased property tax revenues, referred to as backfilling; creating a limit on local government property tax revenue; and creating a new cap on state revenue allowing the state to retain revenue up to the newly created cap that it would otherwise be required to refund to residents under TABOR. If Prop HH passes, the state sales tax refund every taxpayer has received on their Colorado tax return would be a flat amount, increasing for taxpayers of low- and middle-income, and decreasing for higher income individuals. The bottom line is that property taxes would decrease but TABOR refund credits would also decrease for most taxpayers over the next ten years. For more information visit leg.colorado.gov/bluebook. Don't forget to vote by November 7!

Whether you're a sole proprietor, a partnership, or a small corporation, you're probably wondering what you can "write off" or deduct from your taxes. Any expenditure that is ordinary and necessary to the operations of your business can generally be deducted, with many exceptions noted in the code. A commonly overlooked deduction available for your sole proprietorship is the use of a home office. If you use a space in your home regularly and exclusively for your business, you can deduct a portion of your mortgage interest or rent, utilities, insurance, maintenance, and HOA dues. Another useful deduction almost all small business owners can take advantage of is the portion of your cell phone that you use for business. If you have multiple lines on your account, you should break out the portion of the bill that is only for your line, and estimate a reasonable business use portion such as 25 or 30% of that line. Another simple but valuable deduction is mileage on your personal vehicle. You will need to substantiate this deduction should you be audited, so be sure to keep a digital or paper log of your business drives, and remember that commuting between your home and place of work is not deductible. Speak with your CPA about other business deductions you might be overlooking.

The gig economy or sharing economy is a term for the activities in which people earn income by providing services or goods on an on-demand basis, usually connected through digital platforms. Income from the gig economy is taxable even if it is part time, temporary, not reported on any tax form like a W-2 or 1099, or paid in any form including cash, crypto, or with a trade. If you're employed in the gig economy, be prepared to track and report your income and expenses just like any other business. You are required to file a tax return if you have net earnings from gig work or other types of self-employment of $400 or more. As a gig worker who is an independent contractor, you will be required to pay both income and self-employment taxes on your income, and you may need to pay quarterly estimated taxes if you do not have a job where you can have additional withheld from your check to cover your gig work income. The upside is that you can deduct expenses related to your work, such as mileage on your vehicle, the portion of your cell phone you use for work, and possibly even a home office. Consult your CPA for more information on the taxation of your gig!