Our tax system would have a pretty hard time being more complex. If you are like most Americans, you hear terms like tax deductions, tax credit, adjusted gross income and you want to know more, but you never really do any research. It is not until you really need to know what a tax term means that you finally pay attention and figure it out. What if you found out that you may be paying more taxes because these terms? Would you want to know more? I thought so.

Let’s start with the basics. A tax deduction is something that lowers your tax liability. In other words, a deduction allows you to take some amount of your income for the year and not have to pay taxes on it. If you paid taxes on 30% of your income, a deduction of $1000 saves you that 30% you would have paid or $300. Tax deductions are often confused with tax credits. A credit comes straight off of the taxes you pay. So rather than saving 30% of your money, you save 100% of that money.

A tax deduction helps you lower your adjusted gross income. To define adjusted gross income, it is simply the amount of income you have after you have subtracted all of your deductions. Why does this matter? Your tax bracket is determined by your adjusted gross income and not your total income. The more deductions you have, the lower your adjusted gross income will be, and the lower tax bracket in which you will be. Tax brackets are important because the higher bracket you are in, the higher percentage of taxes you will pay.

Let’s work through an example. The 2008 federal tax brackets say that taxpayers filing with a status of single will pay 10% on all income between $0 and $8,025. They will pay 15% on all income between $8,025 and $32,550. If they fall into the 15% tax bracket, they will also pay the 10% on the $8,025. For our example, we will say that Mike makes $20,025. Taking no deductions into account, Mike would pay his 10% for the first bracket or $802.50. Mike would also pay 15% on the rest (20,025 - 8,025) * 15% = $1800. Add those together and Mike pays $2602.50 in taxes. Ouch! Deductions would have helped Mike. Here is how.

Mike owns his house. He pays a mortgage. One tax deduction available to homeowners is that all interest paid on the mortgage is tax deductible. You can see that in order for Mike to get into the lower tax bracket completely, he would need $12,000 in deductions. However, every dollar of tax deduction he does have is less he pays at the higher 15%. If Mike paid $6,000 in mortgage interest last year, he can deduct that and bring his adjusted gross income down to $14,025. Now the amount he pays at 15% is (14,025 - 8,025) or $6,000 instead of $12,000. He pays $900 instead of $1800. He saved $900 in taxes! If Mike would have paid that $6,000 in rent instead of to a mortgage, he would have paid Uncle Sam $900 extra dollars.

Some common places to watch out for tax deductions or other items that lower your adjusted gross income are 401K plans at work, charitable contributions, child-care costs, vehicle license tax, interest on first and second mortgages, losses on investments, interest paid on student loans, property taxes and contributions to IRAs.

Using tools such as TurboTax and TaxAct will help you make sure you don’t miss out on any tax deduction to which you are entitled. Click here to file your federal return for FREE.

Don’t forget April 15th is the deadline!

There is nothing worse than preparing Income Taxes and finding that there were many deductions we didn’t keep track of. Not keeping track of deductions can be very costly come tax time. It is very important to keep good records all year round.
For every dollar you don’t deduct, you could be paying up to 35% back to Uncle Sam. If the dollar has been spent, taxes shouldn’t have to be paid on it. Think of the productivity of your business if you could put 35% of your income back into your business rather than in the hands of politicians. What kind of advertising campaign could you do with 35% extra cash flow every month. With a little organization and planning this can be possible.
Most business owners remember to take the big obvious deductions such as cost of goods sold, materials, tools, supplies, and employee expenses. But often times it is the small seemingly insignificant deductions that can make or break a company. Lone Peak Business Solutions has the 10 most commonly missed business deductions.
1. Advertising - Business cards, newspaper ads, information packets you hand out, free samples, flyers, product testing, videos and CD’s.
2. Children - Money paid to children for helping with such things as delivering flyers, product, stuffing envelopes, cleaning office and car, etc.
3. Dues and Subscriptions - Dues to professional organizations and magazines that have to do with your trade or business.
4. Educational Expense - Classes or seminars that you take to improve your business.
5. Gifts - Gifts to clients and associates.
6. Laundry and Cleaning - This includes uniforms and Protective clothing and also your clothing when you are out of town.
7. Travel - Hotels, airfare, cab fare, parking, cleaning while away from home, trip log.
8. Home Office - A home office must be a separate room in your home to do business and accounting. Part of your living room or bedroom will not count. A percentage of utility Bills, home owners insurance, property tax, mortgage interest, refinance fees, repairs and maintenance, cleaning supplies, office decor, etc. are deductible. You find out the percentage by dividing the square footage of the office by the square footage of the entire house.
9. Mileage or Vehicle - There are two ways to take a vehicle expense. One is to take the mileage you use when picking up product, supplies, office supplies, meetings, handing out advertising or business cards, meals and entertaining clients, etc. The other way is to take the expense of using the vehicle: fuel, parts, mechanics, oil changes, etc. Along with taking expenses, you can also depreciate the vehicle.
10. Telephone - Cell phone, long distance calls on home phone, extra phone lines into home for business, fax or Internet.
Items such as paper clips, bank charges, credit card charges and home office expense seem small and unimportant at the time, but multiply those little things over a year or two and then multiply it times 35% and it can add up to quite a bit of money that should be in your pocket rather than in the government’s pocket.
Along with keeping track of expenses it is important to evaluate your income and expenses on at least a quarterly basis. This allows you to determine if too much is being spent any one place. It allows you to determine if all the deductions that can be are being claimed. It allows you to determine how to better increase sales and decrease costs.