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Tax Relief for Those Affected by Natural Disasters
Recovery efforts after natural disasters can be costly. With floods, tornadoes, hurricanes, earthquakes, and other natural disasters affecting so many people throughout the U.S. this year, many have been left wondering how they're going to pay for the cleanup or when their businesses will be able to reopen. The good news is that there is relief for taxpayers - but only if you meet certain conditions. Let's take a look:
Tax Relief for Homeowners
Fortunately, personal casualty losses are deductible on your tax return as long as the property is located in a Presidentially-declared disaster area as long as:
1. The loss was caused by a sudden, unexplained, or unusual event.
2. The damages were not covered by insurance.
3. Your losses were sufficient to overcome any reductions required by the IRS.
Second, you must reduce the amount by 10 percent of your adjusted gross income (AGI) or adjusted gross income from the total casualty losses for the year. For example, if your AGI is $25,000 and your insurance company paid for all of the losses you incurred due to flooding except $3,100, you would first subtract $100 and then reduce that amount by $2500. The amount you could deduct as a loss would be $500.
Taxpayers claiming the disaster loss on a prior year's return should put the Disaster Designation in red ink at the top of the form. Doing so ensures the IRS can expedite the refund processing, waive the usual fees, and expedite requests for copies of previously filed tax returns for affected taxpayers who need them to apply for benefits or to file amended returns claiming casualty losses.
Tax Relief for Homeowners and Businesses
The IRS often provides tax relief for those affected by natural disasters, such as the individuals and businesses impacted by Hurricane Ida in Louisiana, Mississippi, New York, Pennsylvania, and New Jersey. Tax relief for victims of Hurricane Ida includes postponing various tax filing and payment deadline that occurred starting in August of 2021.
For example, affected individuals and businesses will have until January 3, 2022, to file returns and pay any taxes that were originally due during this period. Individuals who had a valid extension to file their 2020 return due to run out on October 15, 2021, will now have until January 3, 2022, to file. However, taxpayers should be aware that because tax payments related to these 2020 returns were due on May 17, 2021, those payments are not eligible for this relief.
Claiming Disaster-related Casualty Losses
Affected taxpayers in a Presidential Disaster Area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original (2021) or amended return for last year (2020) will get the taxpayer an earlier refund, but waiting to claim the loss on this year's return could result in a greater tax saving, depending on other income factors. If you choose to deduct losses on your 2020 tax return, you have one year from the due date of the tax return to file.
Help is Just a Phone Call Away
If you're confused about whether you qualify for tax relief after a recent natural disaster, please contact the office for assistance in figuring out the best way to handle casualty losses related to hurricanes and other natural disasters.
What Is a Designated Roth Account?
Many 401(k) plans allow taxpayers to make Roth contributions as long as the plan has a designated Roth account. Your plan may also allow you to transfer amounts to the designated Roth account in the plan or borrow money.
Check with your employer to find out if your 401(k), 403(b) or 457 governmental plan has a designated Roth account and whether it allows in-plan Roth rollovers or loans.
A designated Roth account allows you to:
Pre-tax Deferrals vs. After-tax Contributions
Unlike pre-tax salary deferrals, which are not taxed when you contribute them to the plan, you have to pay taxes on any contribution you make to a designated Roth account. Any pre-tax salary deferrals and related earnings are taxable when you withdraw them from the plan.
Your gross income for the year in which you make designated Roth contributions will be higher than if you had made only pre-tax salary deferrals.
Roth contributions, however, are not taxed when you withdraw them from the plan. Earnings on Roth contributions are also not taxed when they are withdrawn from the plan if your withdrawal is a qualified distribution. A qualified distribution is a distribution that is made:
Maximum Contribution Amounts
Roth IRA. In 2021, the maximum contribution to a regular Roth IRA account is $6,000 ($7,000 if age 50 or older). Furthermore, contributions are limited by tax filing status and adjusted gross income.
Designated Roth Account. In contrast, in 2021, the maximum contribution to a designated Roth account is $19,500 ($26,000 if age 50 or older), and contribution limits are not impacted by filing status or adjusted gross income.
Depending on your particular tax situation, contributing to a designated Roth account could be a smart move. To learn more about whether you should take advantage of a designated Roth account, please call.
Six Things To Know Before You Start a Business
Starting your own business is an exciting prospect, but there is more to it than simply writing a business plan. Understanding the tax responsibilities of starting a business venture can save taxpayers money and help set them up for success. That's where a tax professional can help. Here is what you need to know before you start a new business:
1. Deciding on a Business Entity
The first decision you need to make is determining which business entity you will use because the type of business structure you choose determines what taxes you need to pay and how to pay them, as well as which income tax return you file. The most common types of business entities are:
2. Obtaining an Employer Identification Number (EIN)
Securing an Employer Identification Number (also known as a Federal Tax Identification Number) is the first thing you must do since many other forms require it. The IRS issues EINs to employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates, government agencies, certain individuals, and other business entities for tax filing and reporting purposes.
An EIN is used to identify a business. Most businesses need one of these numbers. A business with an EIN needs to keep the business mailing address, location, and responsible party up to date. IRS regulations require EIN holders to report changes in the responsible party within 60 days. They do this by completing Form 8822-B, Change of Address or Responsible Party, and mailing it to the address on the form.
Even if you already have an EIN as a sole proprietor, for example, if you start a new business with a different business entity, you will need to apply for a new EIN.
The fastest way to apply for an EIN is online through the IRS website or telephone. Applying by fax and mail generally takes one to two weeks, and you can apply for one EIN per day. There is no cost to apply.
3. Choosing a Tax Year
A tax year is defined as an annual accounting period for keeping records and reporting income and expenses. A new business owner must choose either calendar year or fiscal year defined as follows:
Calendar year. 12 consecutive months beginning January 1 and ending December 31.
Fiscal year. 12 consecutive months ending on the last day of any month except December.
4. Understanding State Withholding, Unemployment, Sales, and Other Business Taxes
Once you have your EIN, you need to fill out forms to establish an account with the state for payroll tax withholding, Unemployment Insurance Registration, and sales tax collections (if applicable). Business taxes include income tax, self-employment tax, employment tax, and excise tax. Generally, the type of tax your business pays depends on the type of business structure. Keep in mind that you may also need to make estimated tax payments.
5. Payroll Record Keeping
Payroll reporting and recordkeeping can be time-consuming and costly. Also, keep in mind that almost all employers are required to transmit federal payroll tax deposits electronically. Personnel files should be kept for each employee and include an employee's employment application as well as the following:
6. Employee Healthcare Requirements
As an employer with employees, you may have certain healthcare requirements you need to comply with as well. If so, you should know about the Small Business Health Care Tax Credit, which helps small businesses (fewer than 25 employees who work full-time or a combination of full-time and part-time) pay for health care coverage they offer their employees. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent for small tax-exempt employers, such as charities. It is available to eligible employers for two consecutive taxable years.
If you have any questions or need help setting up a payroll and accounting system for your new business, don't hesitate to call.
Verifying Your Identity When Calling the IRS
Sometimes, taxpayers need to call the IRS about a tax matter. If this is the case, they should know that IRS phone assistors take great care to only discuss personal information with the taxpayer or someone the taxpayer authorizes to speak on their behalf. As such, the IRS will ask taxpayers and tax professionals to verify their identity when they call.
As part of the IRS's ongoing efforts to keep taxpayer data secure from identity thieves and to avoid having to call the IRS back, taxpayers should have the following information ready before calling the IRS:
Taxpayer's Legally Designated Representative
By law, IRS telephone assistors will only speak with the taxpayer or to the taxpayer's legally designated representative. In other words, a taxpayer can grant a third party authorization to help them with federal tax matters. Depending on the authorization, the third-party can be a family member or friend, a tax professional, attorney, or business. The different types of third party authorizations include:
Taxpayers must still meet all of their tax obligations even when authorizing someone to represent them.
Taxpayers Calling on Behalf of Someone Else's Account
If taxpayers or tax professionals are calling about someone else's account, they should be prepared to verify their identities and provide information about the person they are representing. Before calling about a third-party, they should have the following information available:
Questions or Concerns?
If you have any questions or concerns about verifying your identity before calling the IRS, don't hesitate to contact the office for assistance.
Tax Rules for Divorce and Alimony Payments
Divorce is a painful reality for many people, both emotionally and financially. Quite often, the last thing on anyone's mind is the effect a divorce or separation will have on their tax situation. To make matters worse, most court decisions do not consider the effects divorce or separation has on your tax situation, which is why it's always a good idea to speak to an accounting professional before anything is finalized.
Furthermore, tax rules regarding divorce and separation can and do change - as they recently did under tax reform. Divorced and separated individuals should be aware of tax law changes that took effect in 2019.
Who is Impacted
The new rules relate to alimony or separate maintenance payments under a divorce or separation agreement and includes all taxpayers with:
Tax reform did not change the tax treatment of child support payments which are not taxable to the recipient or deductible by the payor.
Timing of Agreements
Agreements executed beginning January 1, 2019 or later. Alimony or separate maintenance payments are not deductible from the income of the payor spouse, nor are they includable in the income of the receiving spouse if made under a divorce or separation agreement executed after December 31, 2018.
Agreements executed on or before December 31, 2018 and then modified. The new law applies if the modification does these two things:
Agreements executed on or before December 31, 2018. Before tax reform, a taxpayer who made payments to a spouse or former spouse could deduct it on their tax return. The taxpayer who receives the payments is required to include it in their income. If an agreement was modified after that date, the agreement still follows the previous law as long as the modifications do not:
Tax reform made an already complicated situation even more so. Don't hesitate to call if you have any questions about the tax rules surrounding divorce and separation.
Extension Deadline Looming for 2020 Tax Returns
Time is running short for taxpayers who requested an extra six months to file their 2020 tax return. As a reminder, Friday, October 15, 2021, is the extension deadline for most taxpayers. Taxpayers who owe tax – even those who did not request an extension - and have yet to file a 2020 tax return can generally avoid additional penalties and interest by filing the return as soon as possible and paying any balance due.
Taxpayers with relatively simple returns should keep the following items in mind regarding the extension deadline and taxes:
1. Taxpayers can still e-file returns. Filing electronically is the easiest, safest, and most accurate way to file taxes.
2. For taxpayers owed a refund, the fastest way to get it is to combine direct deposit and e-file.
3. Taxpayers who owe taxes should consider using IRS Direct Pay, a simple, quick, and free way to pay from a checking or savings account using a computer or mobile device. There are also other online payment options. Please call the office if you need details about other payment options.
4. Members of the military and those serving in a combat zone generally get more time to file. Military members typically have until at least 180 days after leaving a combat zone to both file returns and pay any tax due.
5. Taxpayers should always keep a copy of tax returns for their records. Keeping copies of tax returns can help taxpayers prepare future tax returns or assist with amending a prior year's return.
Taxpayers with complicated tax returns should contact the office immediately for assistance. Many tax preparers and accounting professionals are extremely busy due to the complexity of tax regulations brought about by the COVID-19 pandemic.
Reminder: Protect Yourself From Scammers
Understanding how the IRS communicates can help taxpayers protect themselves from scammers who pretend to be from the IRS with the goal of stealing personal information. For example, the IRS typically does not call a taxpayer, but if the IRS does call, it should not be a surprise because the agency will have sent a notice or letter first to alert the taxpayer of their intent.
As a reminder, taxpayers should always protect themselves from scammers. One of the ways they can do this is by understanding how the IRS communicates with them. With this in mind, let's take a look at some of the other ways the IRS communicates with taxpayers:
Gross Receipts Safe Harbor for Employers Claiming ERC
Safe harbor is now available that allows employers to exclude certain items from their gross receipts solely for determining eligibility for the Employee Retention Credit (ERC). These amounts are:
An employer elects to apply the safe harbor by excluding these amounts solely for determining whether it is an eligible employer for a calendar quarter for purposes of claiming the ERC on its employment tax return.
The safe harbor should be applied consistently to determine eligibility for the ERC. Employers must exclude the amounts from their gross receipts for each calendar quarter in which gross receipts are relevant to determining eligibility to claim the ERC. Furthermore, the employer claiming the credit must also apply the safe harbor to all employers treated as a single employer under the aggregation rules.
Employers claim the ERC on their employment tax return, generally Form 941, Employers Quarterly Federal Tax Return, or adjusted employment tax return, generally Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund.
Please note that an employer is not required to apply this safe harbor, and the safe harbor does not permit the exclusion of these amounts from gross receipts for any other federal tax purpose.
Further changes may be forthcoming pending legislation; however, if you have any questions or would like more information about the latest guidance regarding the ECR, don't hesitate to call the office now.
How To Get an Identity Protection Pin
An Identity Protection PIN is a six-digit number eligible taxpayers get to help prevent their Social Security number or Individual Taxpayer Identification Number from being used to file fraudulent federal income tax returns. This number helps the IRS verify a taxpayer's identity and accept their tax return. The Get An IP PIN tool enables anyone with an SSN or ITIN to get an IP PIN after verifying their identity through a rigorous authentication process. For security reasons, tax pros cannot get an IP PIN on behalf of clients.
Facts taxpayers should know about the IP PIN:
Currently, taxpayers can get an IP PIN for 2021, which should be used when filing any federal tax returns during the year, including prior year returns. New IP PINs will be available starting in January 2022.
Taxpayers Unable to Validate Identity Online
Taxpayers who are unable to validate their identity online and have income of $72,000 or less, can file Form 15227 (EN-SP), Application for an Identity Protection Personal Identification Number. The IRS will call the phone number the taxpayer provided on Form 15227 to validate the taxpayer's identity. However, for security reasons, the IRS will assign an IP PIN for the next filing season, and the taxpayer cannot use the IP PIN for the current filing season.
Taxpayers who cannot validate their identity online, or by the phone, or who are ineligible to file a Form 15227 can make an appointment at a Taxpayer Assistance Center. Please call the office if you need assistance locating a center. Before arriving at their appointment, taxpayers will need to bring one current government-issued picture ID and another identification document to prove their identity. Once verified, the taxpayer will receive an IP PIN in the mail, usually within three weeks.
Tax Planning: Facts About Credits and Deductions
Tax credits and deductions can mean more money in a taxpayer's pocket. Here are a few facts about credits and deductions that help taxpayers with their year-round tax planning:
To learn more about how you can save money on your 2021 tax return by planning ahead, please call the office today.
How to Track Inventory in Quickbooks
If your company sells physical products, you know how important it is to always be aware of your stock levels. You have to know what's selling and what's not, and you need to get a head start on ordering new inventory when yours is running low.
The tricky part is always having enough available to meet the needs of existing orders as they come in. On the other hand, you don't want to have too much money tied up in products that are selling slowly. It's a delicate balance and one you can't maintain unless you have precise inventory records and reports.
QuickBooks helps with both sides of this equation. It lets you create detailed records for each of your company's products that track your existing stock levels in real-time and alert you when it's time to reorder. Plus, specialized reports provide insight into your inventory as a whole. Here is how it works:
Getting Set Up
Before you start entering item records, you need to make sure that QuickBooks is set up for inventory tracking. Open the Edit menu and select Preferences, then Items & Inventory. If you are the administrator, you can click on the Company Preferences tab to open this window.
Figure 1: Before you start working with inventory, you must make sure that QuickBooks is ready.
Click in the box in front of Inventory and purchase orders are active if it's not already checked. Check the next two boxes if those apply to you, then respond to the final query. Quantity On Hand refers to the number of units you have in stock. Some items may not be available if they're committed to assemblies, for example. So choose one of the two conditions that should trigger a warning about inaccessible inventory. When you're done here, click OK.
Creating Accurate Records
Even if you have a relatively modest catalog of products for sale, we recommend that you use QuickBooks' inventory tracking. It's just too difficult to keep tabs on your item levels manually, especially if you sell in any volume. And errors in this area may mean you come up short when customers order products that you thought were available but weren't. You could easily lose business.
To start creating item records, click the Items & Services icon on the home page or open the Lists menu and select Item List. Right-click anywhere in the window that opens and select New. Under Type in the upper left corner, click the down arrow and select Inventory Part. This just means that you want to be able to track how many of this item that you have in stock.
Figure 2: QuickBooks provides detailed record templates for your item records.
You don't necessarily have to complete every field in these records, but the more thorough you are, the more comprehensive and accurate your inventory tracking will be. Enter an Item Name/Number. If this product will be a subitem of another, check that box and select the parent item. Manufacturer's Part Number is optional.
In the two columns below these fields, you'll provide Purchase Information and Sales Information. In the left column, enter the text that would appear on a purchase order and the Cost the vendor charges for the item. The Cost of Goods Sold account should appear by default. Change it if it doesn't. And if you have a Preferred Vendor, select it from the drop-down list.
The right column should contain information about your sale of the item. The Description on Sales Transactions may be different from the vendor's text. Next, decide what your Sales Price will be. Of course, this should be higher, so you can make a profit. Is the item taxable? Select the correct jurisdiction under Tax Code if so. You'll then need to select your Income Account. You may want to consult with us on this issue because it's important that you make the right choice - or know how to create your own.
On the bottom row here, let the first field default to Inventory Asset. If you want to be reminded to reorder when your inventory count hits a specific number, enter a number in the field below Reorder Point (Minimum) . Provide the number you currently have On Hand. QuickBooks will automatically complete the remaining fields. When you've finished here, click OK. Your item will now appear in the Item List and will be available to use in sales and purchase forms.
QuickBooks can quickly show you the status of your items in the form of numerous reports. Open the Reports menu and hover your mouse over Inventory to see the list that is available, including Inventory Stock Status by Item and Inventory Valuation Detail.
Simple or Complex?
QuickBooks Pro and Premier can handle simple inventory tracking and even meet more complex needs in some cases. If you find that it doesn't do everything you need, you have options. There are add-on apps that expand on the software's capabilities and older versions of QuickBooks that offer robust inventory management. Don't hesitate to get in touch if you want to explore one of these or if you need help understanding the basics of inventory tracking in your current version.
Tax Due Dates for September 2021
Employees Who Work for Tips - If you received $20 or more in tips during August, report them to your employer. You can use Form 4070.
Individuals - Make a payment of your 2021 estimated tax if you are not paying your income tax for the year through withholding (or will not pay in enough tax that way). Use Form 1040-ES. This is the third installment date for estimated tax in 2021.
Partnerships - File a 2020 calendar year income tax return (Form 1065). This due date applies only if you were given an additional 6-month extension. Provide each shareholder with a copy of Schedule K-1 (Form 1065) or a substitute Schedule K-1.
S corporations - File a 2020 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you made a timely request for an automatic 6-month extension. Provide each shareholder with a copy of Schedule K-1 (Form 1120S) or a substitute Schedule K-1.
Corporations - Deposit the third installment of estimated income tax for 2021. A worksheet, Form 1120-W, is available to help you make an estimate of your tax for the year.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in August.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in August.
Why You Need Small Business Tax Services
Dealing with complex tax preparations for your small business can be a daunting task. Without the right support, it can be challenging to sift through paperwork, determine the right forms to fill out, and properly document cash flow. Moreover, rushing to meet filing deadlines increases the likelihood of making mistakes that will attract IRS scrutiny. Therefore, seeking the expertise of a professional tax service team is one of the best investments to make as a small business owner. It will take the stress off your shoulders, help you save time and money, and ensure your compliance with the IRS. Below are some additional reasons to consider investing in small business tax services.
Your Time is Money
As a small business owner, your time is already limited. Tax professionals save you time you would otherwise spend on tax planning and preparation, and they tailor these services throughout the year to target your long-term financial objectives. This frees you up to prioritize the aspects of your business that need your attention.
A tax and accounting firm can also advise you on strategies to efficiently managing your accounts and cash flow in a way that minimizes your tax liability. In the case of an audit, tax professionals can also help you prepare the necessary documents and, in some cases, provide representation before the IRS. By enlisting the help of small business tax professionals, you can achieve long-term savings and gains that outweigh your initial investment.
Business Taxes are Complex
The kind of business structure you have in place, the types of investments you hold, and the varying income streams you operate can all contribute to the complexity of your business’ taxes. To manage your own small business taxes, you must understand these factors, as well as the local, state, and federal tax regulations that apply to your business. Not only do you need to successfully navigate through the complexity of tax laws, but you must also keep up with periodic changes to the tax code. This is a time-consuming task that requires resources that most business owners simply do not have. However, hiring a team of tax professionals provides you with the necessary resources and expertise to mitigate these complexities and remain compliant with the IRS.
Errors Can Be Costly
Filling your small business taxes without support can easily result in mistakes, increasing the risk of IRS fines and penalties. Even simple math errors can render your returns inaccurate. Some of the common tax mistakes include:
While these errors are avoidable, failure to prevent them can attract serious legal repercussions and monetary fines from the IRS. A professional tax services team will provide the expertise to ensure a seamless tax filing process and help your business avoid unnecessary penalties and risks.
As a small business owner, the expertise of a tax services firm can give you a significant advantage. Over time, your investment in professional business tax support will pay off in the form of tax savings and ensured regulatory compliance. Additionally, delegating business taxes to a professional can reduce your stress, granting you enough time and peace of mind to focus on your business’ core objectives.The post Why You Need Small Business Tax Services first appeared on www.financialhotspot.com.
Why Virtual Accounting Is on the Rise
Accounting has been an essential part of every business since time immemorial. Both profit-making and non-profit organizations require accounts management to keep their finances in check. In simpler terms, accounting tracks money that flows in and out of your business and monitors its assets. An accounting expert deals with financial duties like bookkeeping, taxes, investment planning, and forecasting as you focus on your business growth.
What Is Virtual Accounting?
Virtual accounting is a system whereby the accounting professional offers services remotely. Under this arrangement, the service provider assists without using your company’s office space. Virtual accounting is quite affordable and also saves time compared to the traditional way of handling accounting. Here are just a few reasons why virtual accounting is on the rise.
Are you looking for a way to cut costs for your growing business? Then adopt virtual accounting. Outsourcing remote accounting experts can save you up to 50% of the total cost of hiring an in-house accountant. Additionally, having an in-house accounting department requires proper employee resources, which can be expensive to establish and maintain. With virtual accounting, your business will not need to pay for expenses like training, background checks, or annual leave for a full accounting department.
No Lengthy Recruiting Process
You can hire a virtual accounting professional directly from online portals managed by reputable accounting companies. In this way, you can get quality professional services within a short period. Regular recruitment of full-time accounting experts takes time, resources, and energy.
Everything related to virtual accounting happens online. You can access most of your business documents and accounting reports online. Additionally, you can connect with your accounting service provider from your preferred location, which can be particularly convenient if you’re traveling or handling an emergency.
With virtual accounting services, your business can benefit from superior cloud technology without the need to pay for expensive in-house software. Your cloud services will be managed by experts, which can save you the cost and effort of hiring an IT team.
Hiring a virtual accounting firm can save you and your business a significant amount of time, money, and labor. In turn, you and your team will be able to focus on expanding your business rather than dealing with day-to-day accounting and data management tasks. In many cases, this increase in efficiency can have a positive impact on your bottom line.
Virtual Accounting During the Pandemic
The COVID-19 pandemic has made social distancing a norm globally. It is therefore essential for organizations to practice contactless business whenever possible. Many institutions have adopted work-from-home policies to curb the spread of the COVID-19 virus. Virtual accounting also comes in handy during this period. By hiring virtual service providers, you will have reduced the number of people coming into your office and helped to limit the spread of COVID-19.
What Services Do Virtual Accounting Firms Offer?
Virtual accounting firms offer services under three main categories: taxes, bookkeeping, and accounting. You can receive professional support in each of these areas without holding any face-to-face meetings. There are a variety of well-known, reputable virtual accounting firms. You only have to choose the firm that suits your business needs and budget.
Virtual accounting enables businesses to receive quality services and superior technology at an affordable cost. Thanks to advanced technology, every aspect of your accounting can be completed online, from your initial consultation to your day-to-day bookkeeping. Regardless of your business sector, virtual accounting has the potential to drive efficiency as you work toward your long-term goals.The post Why Virtual Accounting Is on the Rise first appeared on www.financialhotspot.com.
5 Facts You Should Know About Compound Interest
If an investment or loan accrues compound interest, its interest is calculated using the sum of its initial principal plus any previously accumulated interest. You can think of this concept t as “interest on interest” that will make your money grow faster than simple interest.
Suppose you deposited $100 one year ago in an account that compounds interest annually at 2%. Your first year’s interest would be $2, and the next year’s interest would be calculated from $102 rather than $100. Although this amount might not seem like much, compound interest can help you gain a considerable amount of money in the long run. The following are some helpful tips to help you make the most of this financial tool:
1. It’s Either Your Best Friend or Your Enemy
Compound interest can either be a beneficial or damaging financial tool; you either earn it or pay it. If you are collecting compound interest on an investment, you will gain more money than you deposit in the long run. However, if your lender charges compound interest, you will pay back more money than you initially borrowed.
Although most creditors use a simple interest formula, credit cards use compound interest. The interest you pay starts to accumulate from the first time you use the credit card to make a purchase. Luckily, some credit card issuers offer a grace period that expires after your due date, beyond which you will pay interest on the unpaid balance.
2. It Recognizes the Value of Time
It’s a financial fact that money invested grows with time, and money not invested loses value over time due to inflation. When you deposit money into a savings account accruing compound interest, it earns a set percentage of interest over a set period of time. Each period, the interest is then added to your initial deposit to make more interest. That’s the power of compound interest.
Money not invested will lose value in the form of interest it would have earned. In simpler terms, a delayed investment is a great opportunity missed. Start investing on accounts with compound interest now!
3. It Values Consistency
Consistency is essential to financial success. Without it, making progress is a struggle. Let’s consider two scenarios:
When we compare both scenarios, the consistent investor in Scenario 1 made the best financial decision and will have more money after ten years.
4. Shorter Compounding Periods Are Better
Consider shorter compounding periods for your investment if you intend to make more money. For instance, if you invest $1,000, the interest earned will be more when compounded at 5% semiannually than a similar investment compounded at 10% annually.
5. It’s Better Than Simple Interest
When it comes to building wealth, compound interest is much more effective than simple interest. Besides earning interest on your initial investment, you make more money from the compound interest at the end of your compounding period. The period can either be annual, monthly, quarterly, or daily.
When used correctly, compound interest can be the key to your financial freedom. Now that you understand how compound interest works, use the information to your advantage. Start investing today and be consistent for a better tomorrow.The post 5 Facts You Should Know About Compound Interest first appeared on www.financialhotspot.com.
4 Ways to Minimize Your Taxes
Taxes are inevitable! Like most taxpayers, you are probably wondering how you can minimize the amount you owe. Your income is taxed at the local, state, and federal levels, not forgetting additional deductions to cover Medicare and Social Security. While tax situations differ for every individual, there are specific steps that most taxpayers can take advantage of to lower the tax burden. These steps include but are not limited to:
1. Save for Retirement
One of the simplest ways to minimize your taxes is to save towards retirement. If you work in a company that offers an employer-sponsored plan, you can save up to $19,500 in 2021. Individuals aged 50 years and above can contribute an additional $6,500 above the limit. Since retirement money is saved pre-tax, the contribution is a straightforward way to reduce your tax bill.
However, if you cannot use the employer-sponsored plan, you can save in an individual retirement account. The maximum contribution for an individual retirement account is $6,000 in 2021 and an additional $1,000 for taxpayers aged 50 years and above.
Further, you can deduct all or some of your IRA savings from taxable income if you have an employer-sponsored retirement plan. The IRS has set rules on how much you can deduct, depending on your income.
2. Consider Tax Credits
Taking advantage of tax credits is an excellent way to minimize your taxes. In general, tax credits provide more opportunities for tax relief than tax deductions, as they directly reduce your owed taxes rather than lowering your taxable income. Luckily, Congress has been adding new credits over the years—for example, there are tax credits for home energy improvement, purchasing a hybrid car, and education.
3. Increase Your Tax Deductions
Every individual is entitled to some tax relief. Tax deductions reduce the amount of your income subject to taxation, equaling less taxes paid. This opens the door to strategic tax planning opportunities. For instance, tax deductions can help you save for your kid’s college tuition. You can contribute a maximum of $10,000 per year toward a 529 plan. This contribution is not taxable by the federal government.
You can also make charitable contributions to minimize your tax bill. Donations of clothing, household items, cash, and other charitable gifts are all tax deductible. However, the contributions are only tax-deductible if you donate to a non-profit organization.
Contributing to a Health Savings Account is another way to increase your tax deductions. You can contribute up to $3,600 for an individual and $7,200 dollars for your family in 2021.
4. Be Aware of Your Tax Bracket
Federal tax rates vary; the income tax rate can be as low as 10% for individuals in the lowest tax bracket, and it can be as high as 37% for those earning more. If you make money from long-term investments, such as mutual funds, stocks, real estate, and bonds, the IRS uses long-term capital gains rates to determine your tax bill.
The 2021 long-term capital gains tax rate is 20% for taxpayers in the highest tax brackets. Individuals in the 32%, 22%, and 24% tax brackets are subject to a capital gains tax rate of 15%, while those in the 12% and 10% tax bracket pay zero capital gains tax. It is important to be aware of your tax bracket when planning for tax season. By taking advantage of tax credits, tax deductions, and tax-free investment opportunities, you may be able to lower your taxable income and reduce your taxes owed.
Tax season can be a daunting time, particularly for individuals worried about owing the IRS too much money. Start taking advantage of these tax-saving strategies as soon as possible so you can have an easy time during the tax period.The post 4 Ways to Minimize Your Taxes first appeared on www.financialhotspot.com.
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