Have Tax Questions? Ask a Tax Expert for Answers ASAP
Taxable income refers to the foundation which an income tax system imposes taxes. Usually the taxable income is reduced by expenses and other deductions which are called Reducing Taxable Income. The amounts included as income, expenses, and other deductions vary by system or country. Below are some of the most commonly asked questions about Reducing Taxable Income answered by the Experts.
Typically, the only way to legally reduce taxable income is to increase the deductible expenses and/or defer recognition of revenue. The method of accounting used by the company has an effect on this. If the overall method of accounting is the cash method, towards the end of the tax year, the company should consider paying salary bonuses as well as accelerate other expenses that will be incurred in the near future to reduce taxable income. They could also consider accelerating capital equipment purchases that may be eligible for deductions as well as depreciation. Under the cash method, income is recognized as it is received.
Therefore, to defer recognition, they might delay invoicing their customers if their cash flow permits it. This will, no doubt, reduce their taxes but they need to do it every year in order to keep the tax benefit. The accrual method has less flexibility since revenue must be recognized as and when the service is performed and expenses as and when the liability is incurred.
Another option that could be considered is the adoption of a retirement plan, or even a profit sharing type of plan depending upon the company’s willingness to fund the option. However, it is always better to take the help of a skilled CPA with tax planning and choose a strategy that suits the company’s needs best.
Typically, if they only have SS income, they are not required to file a Federal Income Tax Return. This means that they don’t have any taxable income and no way to recoup the property tax or mortgage interest because the property tax and mortgage interest can only be used to reduce the taxable income to zero. However, some states do have homeowner credits that can help get citizens a refund of property tax. Also, some counties offer an additional exemption for low-income seniors who are 65 years and older. You could check with the county appraiser to find out whether this individual qualifies for the exemption.
An example can illustrate this better. Generally, if the individual makes $200,000 and has a $91,000 foreign income exclusion, post this deduction, they would have a taxable income of $109,000. However, if they put $9,000 in their qualifying FSA, their taxable income would reduce and come down to $100,000. Therefore, the FSA would further lower their taxable income.
In most cases, the individual would get an earned income credit of about $370 but would also have to pay self employment tax of about $171. The balance would then amount to a refund of approximately $229 from the earned income credit.
Typically, if the individual’s taxable income is already zero, deducting the interest on the RV would not benefit them since itemized deductions only reduce taxable income and are not a refundable credit. Also, if they do have some taxable income, all their itemized deductions would have to be over their standard deduction amount in order to be of any benefit to them. For example, if they are filing single under 65, their standard deduction would be $5,700. Therefore, any itemized deduction would have to exceed this amount to benefit the individual.
Most systems and jurisdictions allow business taxpayers to reduce taxable income through the cost of goods or other property sold, as well as deductions for business expenses. However, many systems limit some kinds of business deductions, depending on the country and system of taxation. If you have more questions on this topic, direct them to a Tax Professional for insights and information to help with your case.