Is Your CPA Helping You With These?
First thing first - what is the financial difference between a tax deduction and a tax credit?
A tax deduction would probably be better understood if it were retitled an income reduction. Essentially, when you claim a deduction you are reducing your amount of taxable income. The impact you feel can be found using the equation (standard deduction)*(highest tax bracket) = reduction in tax burden.
Example: In 2019 you file “married filing jointly” and take the standard deduction of $24,400. If your combined income was $200,000, then your actual taxable income was $175,600 and you fall in a 24% tax bracket. Plugging in our equation: $24,400*(24%) = $5,856. You reduced your tax liability by $5,856.
Had you made a combined income of $75,000 then you’d fall in the 12% tax bracket. Using our equation from before, we find the tax burden reduced by: $24,400*(12%) = $2,928.
The point of the above examples is that, with a deduction, your actual tax savings is not always the same. It depends on your bracket!
Tax credits, on the other hand, are a dollar for dollar reduction. 1 to 1. Tit for tat. If you claim $5,000 in tax credits, it does not matter where you fall on the bracketed scale. You reduce your burden by $5,000. Thank you, IRS, for making ONE thing easy to calculate!
Crazy side note, if you think you’ve missed credits in the past, you can file amendments for up to 3 years and RECAPTURE these opportunities! We have one client who received a SEVEN FIGURE CHECK BACK FROM UNCLE SAM!
Here are two credits and a deduction we have seen under-utilized:
R&D Tax Credits – The Research and Development Tax Credit is an incentive to bring something new into the marketplace. If companies are working on an innovation or new strategies, they should really think about consulting with a CPA on if the qualify for this credit. Here is a helpful article on misconceptions about the R&D Tax Credit.
FICA Tip Tax Credit – For employers who hire tipped positions, there is a credit (remember – credit is more powerful than deduction) for certain taxes paid on tips. According to our episode, “Live From Inside A Belgian Brewery (Part 1),” this is missed by roughly half the new clients Lou brings on! HALF!!! You should ABSOLUTELY check if this applies to you! If you need to get brushed up on this topic, reach out to us, Lou, your local tax professional. You can also find plenty of online resources (like this one) to get started.
199A Deduction, or the Qualified Business Income Deduction – The corporate tax rate dropped tremendously, but this doesn’t help traditional entity structures that are commonly used by small to mid-sized business owners. So how did the IRS make sure the tax cuts weren’t realized only by the wealthy? By giving these structures an immediate 20% deduction on any flow through income. Make sure your CPA is deducting 1/5th of your flow through income if this applies! For more education, read this article.
This is just scratching the surface of the tax deductions and credits that you may be missing. We strongly advocate you take a long, hard look at your taxes and ask yourself the question, “Could I be doing better?”
If you think the answer is yes, speak to your CPA, find a referral, or contact Lou Catalano from our podcast and see if he would be the right fit.
Lou Catalano – LPC@muncps.com (be sure to reference the podcast when introducing yourself)
Kingsview Wealth Management does not provide tax, legal or accounting advice. The information was prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors.