When calculating your deduction for car expenses used for business purposes on your 2024 tax return, the IRS provides two main options: the standard mileage rate and the actual expense method.
Both options have their respective benefits and factors to consider, and selecting the appropriate one can significantly affect your tax savings.
Let us break down each method to help you make the best choice for your situation.
Standard Mileage Rate Method
The IRS annually determines the standard mileage rate, which is a set rate per mile. This rate encompasses all expenses related to your vehicle, such as depreciation, fuel, lubricants, insurance, and upkeep.
The standard mileage rate for 2024 is 67 cents per mile.
To use this method, you must:
Opt for the standard mileage rate in the first year the car is available for business use.
Record all mileage accrued for business purposes over the year.
This method’s most significant advantage is its simplicity. You don’t need to keep receipts for gas, repairs, or insurance—just a detailed log of your business miles.
Actual Expense Method
The actual expense method involves deducting the actual costs of operating the car for business purposes. This includes:
Gas and oil
Repairs and maintenance
Tires
Insurance
License and registration fees
Depreciation (or lease payments)
To use this method, you must:
Keep careful records and receipts for all of your car-related costs.
This method requires more meticulous record-keeping but can result in a larger deduction if your expenses are high and the car is primarily used for business.
Comparing the Two Methods
To figure out which method is better, you should think about a few things:
Total Miles Driven: High mileage with low operating costs may favor the standard mileage rate.
Car Operating Costs: If repairs or insurance are expensive, the actual expense method might be better.
Vehicle Type: More expensive vehicles might yield higher depreciation deductions under the actual expense method.
Record-Keeping: The standard mileage rate is more straightforward if you prefer minimal paperwork.
Example Scenario
Imagine you drove 15,000 miles for business in 2024. Using the standard mileage rate of 67 cents, your deduction would be $10,050 (15,000 miles x $0.67).
If your expenses totaled $12,000 and 75% of the vehicle’s use was for business, your deduction would be $9,000 ($12,000 x 75%).
Making the Choice
It is essential to compare the two ways to find the one that gives you the most significant deduction.
However, once you decide on a method for a particular vehicle, you usually have to stick with it for as long as the car lasts.
Conclusion
Choosing between the standard mileage rate and the actual expense method for your 2024 car expense deduction depends on your circumstances. Consider how much your car costs, how often you use it, and how willing you are to keep detailed records.
Navigating the world of retirement accounts can be complex when maximizing your contributions across multiple plans. Employees who are lucky enough to have a 401(k) plan through their company may be wondering if they can also put money into a Traditional IRA and still get the tax benefits.
The good news is that you can, but you need to be aware of some IRS rules. For example, your modified adjusted gross income (MAGI) for 2023 will affect how much of your Traditional IRA contributions can be deducted.
Understanding Your 401(k) and Traditional IRA Options
In 2023, the maximum contribution limit was $22,500, and individuals aged 50 and above are eligible for an additional catch-up contribution of $7,500.
Traditional IRAs:
These are personal retirement savings accounts with tax advantages. Contributions may be tax-deductible, and the money in the account grows tax-deferred.
The contribution limit 2023 is $6,500, with an additional $1,000 catch-up contribution for those 50 and older.
The Interplay Between 401(k) and Traditional IRA Contributions
Contributing to a 401(k) and a Traditional IRA can maximize your retirement savings. However, if you’re covered by a workplace retirement plan like a 401(k).
In that case, the IRS sets income limits to determine whether your Traditional IRA contributions are tax-deductible.
2023 MAGI Limits for Traditional IRA Deductibility
For the tax year 2023, here’s how your ability to deduct Traditional IRA contributions is affected based on your MAGI:
Single filers or heads of household:
If your MAGI is $73,000 or less, you can fully deduct your Traditional IRA contributions. There are partial deductions that can be claimed for MAGI within the range of $73,000 to $83,000. Above $83,000, you cannot deduct your contributions.
Married filing jointly (when you’re covered by a workplace plan):
Full deduction if your MAGI is $116,000 or less. Partial deductions are allowed for MAGI between $116,000 and $136,000. No deduction is available for MAGI above $136,000.
Married filing jointly (when your spouse is covered by a workplace plan):
Full deduction if your MAGI is $218,000 or less. Partial deductions are available for MAGI between $218,000 and $228,000. Above $228,000, you cannot deduct your contributions.
Married filing separately:
If you file separately and live with your spouse at any time during the year, the phase-out range is minimal: $0 to $10,000.
Strategies for Maximizing Your Contributions
If you find that your MAGI is too high to fully take advantage of Traditional IRA deductions, don’t be discouraged.
You can still contribute to a Traditional IRA without having to worry about taxes being taken out, or you could contribute to a Roth IRA if your income is low enough.
Final Thoughts
Contributing to both a 401(k) and a Traditional IRA can significantly enhance your retirement nest egg. The 2023 MAGI limits might change how much your Traditional IRA contributions you can deduct from your taxes.
However, it is essential to remember that retirement savings is a long-term goal, and every contribution counts. Consult with a financial advisor or tax professional to tailor a retirement savings plan that best suits your needs and maximizes your tax advantages.
This article is designed to inform readers about their options for contributing to both a 401(k) and a Traditional IRA. It focuses on the specific MAGI limits for 2023 that affect the deductibility of Traditional IRA contributions.
It aims to provide a clear understanding while encouraging readers to seek personalized advice for their unique financial situations.
Section 199A, also called the Qualified Business Income (QBI) deduction, is a useful tax deduction that was added by the Tax Cuts and Jobs Act (TCJA) of 2017. It applies to many business owners and investors.
This provision allows eligible taxpayers to deduct up to 20% of their QBI, but it’s not as straightforward as it sounds. Let’s explore who qualifies for this deduction and the limitations that come with it.
Who Qualifies for Section 199A?
The QBI deduction is available to sole proprietors, partnerships, S corporations, trusts, and estates with qualified business income.
It also includes people who own shares in S corporations and are partners in partnerships. The deduction is available to both itemizers and non-itemizers.
Qualified Business Income (QBI)
QBI is the net amount of income, gains, deductions, and losses from any qualified trade or business in the United States.
This excludes capital gains or losses, dividends, interest income (unless it’s allocable to the business), and certain other items.
Limitations of Section 199A
While Section 199A offers a substantial tax break, it comes with several limitations, particularly for high-income earners.
Here’s what you need to know:
1. Specified Service Trades or Businesses (SSTBs)
SSTBs are certain kinds of businesses whose main asset is the skill or reputation of the owners or employees. These include fields like law, health, accounting, consulting, and financial services.
The deduction for SSTBs starts to diminish if your income exceeds the threshold, which is $191,950 for single filers and $383,900 for married filers filing jointly in 2024.
Once taxable income reaches $241,950 for single filers and $483,900 for married couples filing jointly, the deduction is completely eliminated.
2. W-2 Wages and Capital Investment Limitation
People who own non-SSTB businesses and make more than the tax threshold may not be able to deduct as much from their QBI.
This is due to the possibility that the W-2 wages paid by the company and the unadjusted basis immediately after acquisition (UBIA) of qualified property may both have a limit on the QBI deduction.
The deduction cannot exceed the greater of:
50% of the W-2 wages paid with respect to the business, or
25% of the W-2 wages plus 2.5% of the UBIA of qualified property.
This limitation ensures that the deduction benefits businesses that contribute to employment and make substantial capital investments.
3. Carryforward Losses
If your business incurs a loss, it reduces the QBI from other businesses. A net loss is carried forward to the next tax year, potentially reducing that year’s QBI deduction.
This carryforward can limit the deduction in subsequent years until the loss is fully absorbed.
Strategies to Limit the Impact of Section 199A Limitations
Given these limitations, there are strategies that business owners can employ to potentially maximize their QBI deduction:
For SSTBs: Monitor your income levels to stay below the threshold if possible. This may involve timing income and deductions or considering alternative income streams that are not classified as SSTB.
For Carryforward Losses: If you have multiple businesses, consider the impact of losses in one business on the overall QBI. Strategic tax planning can help manage these losses to optimize the QBI deduction.
Conclusion
Section 199A offers a significant tax advantage for many business owners, but it’s essential to understand the qualifications and navigate the limitations. SSTBs, high-income earners, and businesses with low wages or capital investment face particular challenges.
By staying informed and engaging in strategic planning, you can work towards maximizing your QBI deduction. As always, consult with a tax professional to ensure you’re making the most of this complex tax provision.
In the last few years, the number of people who work as consultants on their own has grown quickly. These professionals have embraced the flexibility and independence of running a business single-handedly.
But with this freedom comes the responsibility of figuring out how to handle your taxes well. One effective tax planning strategy for consultant solopreneurs is converting their LLCs to S-Corp tax status with the IRS.
This article will discuss the benefits of this change and how it can make a consultant’s tax burdens much lighter. It will also talk about how important it is to follow the IRS’s rules for reasonable compensation.
Why Choose to be Taxed as an S-Corp?
Self-Employment Tax Savings
Saving on self-employment taxes is one of the main reasons to switch from an LLC to an S-Corp tax status.
As a solopreneur operating under an LLC, your net income is subject to self-employment taxes, including the employer and employee portions of Social Security and Medicare taxes. Unfortunately, this can mean that you have to pay a lot of taxes on your earnings.
By converting to an S-Corp tax status, you can classify a portion of your income as salary and the remaining portion as a distribution. Self-employment taxes will only be taken out of the portion that goes to the salary.
The part that goes to the distribution will not be taxed. This can help you save a lot on self-employment taxes, so you can keep more of the money you’ve worked hard for.
Reasonable Compensation and IRS Compliance
When choosing an S-Corp tax status, it’s important to follow the IRS’s rules about reasonable compensation.
The IRS requires that S-Corp shareholder-employees receive a reasonable salary for their services before taking any distributions. This means you can’t just lower your pay to avoid paying self-employment taxes.
When deciding reasonable pay, the IRS looks at many things, such as the employee’s role, responsibilities, hours worked, and pay rates for similar jobs in the same industry.
If you don’t pay yourself a reasonable salary, you could be audited, fined, or have your distributions reclassified as wages, which could cancel out the tax benefits of being an S-Corp.
Potential Income Tax Savings
In addition to saving money on self-employment taxes, S-Corp tax status may also save money on income taxes.
By splitting your income into a reasonable salary and distribution, you may be able to reduce your overall taxable income, potentially moving you into a lower tax bracket.
Furthermore, as an S-Corp, you can take advantage of certain tax deductions that may not be available to LLCs, such as the 20% qualified business income (QBI) deduction.
Asset Protection
An S-Corp is like an LLC in that it has limited liability. This means your personal assets are generally safe from your business’s debts and liabilities.
Even though this benefit isn’t unique to S-Corps, it’s important to know that you won’t lose it if you change your LLC to an S-Corp for tax purposes.
How to Change the Tax Status of Your LLC to an S-Corp
Changing your LLC’s tax status to that of an S-Corp is a pretty simple process. You’ll have to send the IRS Form 2553, “Election by a Small Business Corporation.”
This form must be sent in within the first two months and 15 days of the tax year for which the choice will take effect.
It is essential to consult with a tax professional or attorney to ensure that you meet all the necessary requirements for the S-Corp tax status and properly navigate the conversion process, including determining and documenting reasonable compensation.
By switching your LLC to an S-Corp tax status, consultant solopreneurs can reduce their tax burden while still getting the benefits of limited liability.
By carefully adhering to IRS guidelines on reasonable compensation and working closely with tax professionals, you can optimize your tax savings and improve your overall financial position.
In the end, switching to an S-Corp tax status can help solopreneurs focus more on growing their consulting business and less on the complicated rules of taxes. This can help them be more successful and give them more financial freedom.
