5 Elements Of A Successful Financial Audit

Financial Audit

Financial statements provide important information regarding a company’s financial health. It helps all stakeholders, including management, investors, and financial analysts, evaluate and make future financial decisions. For instance, an income statement, which is an essential element of a financial statement, shows how much revenue the company has generated and the amount it has spent on its expenses.

Financial audits review the financial statements to ensure that they are reasonably accurate. Here are five of its important elements:

#Component 1 – Preparation

It is the longest and the most crucial stage of an audit, which means you may need to devote additional time in advance. It may be a few months or a few weeks, depending on the complexity of financial records. To begin with, make sure that electronic records and financial statements are organized and easily accessible at all times. Now, conduct an account reconciliation for all assets, liabilities, and equity accounts. It makes sure that your account balances are correct. If the account reconciliation shows that an account balance is incorrect, adjust the account balance to match the supporting details.

#Component 2 – Stay informed about the latest updates in accounting standards

Every year, accounting procedures and legal and regulatory requirements are updated. Failing to take notice of such developments can cause serious problems during the financial audit. While some updates require minor changes, others may need you to spend considerable time to make changes. For instance, you may need to provide basic training to your financial personnel on new softwares. To stay up to date with the latest policies, visit the Financial Accounting Standards Board website.

#Component 3 – Analyze the company’s tax records

The IRS also requires you to maintain financial records for your business. You should keep tax records and receipts for three years. However, in some cases, you may need to keep it for seven years. To support items of income, deduction, or credit shown on your tax return, always keep receipts, bank statements, invoices, payroll records, and any other documents. The best practice of recordkeeping for small businesses is to keep as many records as possible.

#Component 4 – Learn from past audits

For a successful financial audit, try to learn from past mistakes. If you have struggled with a few things that went wrong during the last year’s audit, it’s time to revisit them and understand the issues. Make a list of issues that highlight the problems you faced and how you’ll address them in the current year. When meeting with the auditors, discuss the areas of improvement and talk about improving effective communication between the company and the auditors.

#Component 5 – Organize your data

Organizing your financial records helps save time and money. A practical approach to securing the audit data for review in subsequent years is to use sub-folders for categories and transaction cycles. On a basic level, classifying the data makes it easier to locate and retrieve. You can also tag data to make it easily searchable and trackable. It also helps maintain regulatory compliance and meet other business or personal objectives.

About Hoshi CPA, LLC

If you want to itemize deductions or avoid penalties, Hoshi CPA, LLC should be your one-stop destination. Udai Hoshi assists individuals, Japanese-speaking communities, and U.S. business owners with tax planning, tax compliance, tax resolution, and CFO professional services. You can talk to him for a tax consultation by booking a quick call, strategy session, consulting, or a CFO strategy session. 


Udai is a professional accountant in Portland, Oregon. You can call us at (503) 388-6580 or drop an email at staff@hoshicpa.com to know more.

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Your Rights as a Taxpayer

Taxpayer

The IRS or Internal Revenue Service has power and control over collecting taxes and enforcing taxation laws. But it must afford every taxpayer full due process in accordance with the tax laws. Every taxpayer has rights that guarantee lawful dealing with the IRS and its inquiries. These rights ensure that taxpayers can reach out to the government for assistance while filing taxes and handling appeals and challenges. 

Every taxpayer in the U.S. has the following ten rights as per Publication 1:

Right to be Informed 

Taxpayers have the right to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices, and correspondence. They also have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes.

Right to Quality Service 

Taxpayers must receive prompt and professional assistance in their dealings with the IRS. They have the right to receive clear communications from the IRS that they can easily understand. They can also speak to a supervisor about receiving unsatisfactory service. 

Right to Pay No More than the Correct Amount of Tax 

Taxpayers should only pay the legally due tax along with interest and penalties. They can file for a refund if they believe that they might have overpaid your taxes. They can also write to the IRS office about an incorrect notice or bill to have the necessary adjustment made to your account. 

Right to Challenge the IRS’s Position and be Heard

Taxpayers can raise objections to formal IRS actions. They can also provide additional documentation and expect that the IRS will consider all documentation promptly and fairly. It also ensures that the IRS will send a timely response if it doesn’t agree with your claims. 

Right to Appeal an IRS Decision in an Independent Forum

Taxpayers are entitled to an impartial administrative appeal for penalties. They must also receive a written response regarding the Office of Appeals’ decision. Taxpayers can also take your taxation cases to court, where they may dispute the proposed adjustment and other inconsistencies.

Right to Finality

Taxpayers should know the maximum time they have to challenge the IRS’s position before it comes knocking to collect a tax debt. They must always be made aware of the maximum amount of time the IRS has to audit a particular tax year and be informed when it has finished an audit. 

Right to Privacy

Taxpayers have the right to expect that any IRS action will respect all due process rights. It also extends to search and seizure protections. All IRS inquiries, examinations, or enforcement actions must be in strict compliance with the law without being overly intrusive to the taxpayer’s privacy. 

Right to Confidentiality

Any information given to the IRS by the taxpayer will not be disclosed unless authorized by law or the individual. Taxpayers also have the right to expect that appropriate action will be taken against IRS employees and others who wrongfully use or disclose taxpayer return information. 

Right to Retain Representation

Taxpayers can retain a representative of their choice to act for them in their dealings with the IRS. They can also seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation. They have a right to consult with a representative, attorney, CPA, or enrolled agent in the middle of an IRS interview should they choose to do so. 

Right to a Fair and Just Tax System

Taxpayers have the right to expect the tax system will consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. They must receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty. Learn more.

About Hoshi CPA, LLC

Udai Hoshi assists individuals, Japanese-speaking communities, and U.S. business owners with tax planning, tax compliance, tax resolution, and CFO services. You can talk to him for a tax consultation by booking one of the four sessions: a complimentary 45-minute strategy session, a quick call, a cares act economy stimulus package consulting, or a complimentary 45-minute CFO strategy session. You can call us at (503) 388-6580 or drop an email at staff@hoshicpa.com to know more tax-related services by HOSHI CPA in Portland, Oregon.

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6 Reasons to Outsource Your Business Accounting

Business Accounting

As your business grows and your responsibilities increase, you need to focus more on your core activities to maintain the momentum. It’s when keeping the receipts, invoices, and filing taxes begin to feel like too much work. 

Since these tasks are essential for your business’s smooth functioning, you must consider outsourcing accounting to a trusted agency. Here, we share five ways how it can benefit you.

Saves time and money

In business, time is money. Most entrepreneurs don’t have the time to supervise their in-house accountant’s activities. Accounting tasks like tallying books, recording receipts, reviewing invoices, recording payments, and filing taxes are time-consuming. By outsourcing your accounting, you free up your time and use it to focus on core business activities like production and customer satisfaction. 

Professional expertise

According to the Small Business Report Accounting, 60% of small business owners feel they don’t have enough knowledge about finance and accounting. Unless you have extensively studied tax laws and accounting, it is impossible to keep up with the ever-changing regulations, codes, and policies. By outsourcing your business’s accounting to a professional firm, you’re hiring a team of experts that will ensure your books are up-to-date. 

Flexibility

When you outsource accounting, you have the flexibility to scale it up or tone it down according to business requirements. It can be a challenge with an in-house team, as hiring processes have grown dramatically, now taking an average of 22.9 days in the U.S. Besides, if work gets slow, you’ll have extra staff. You will either have to incur additional costs to maintain them or lay them off in such a situation. 

Outsourcing accounting services will provide flexibility and scalability to your businesses without adding people to payroll. Accounting firms have the bandwidth to increase or decrease resource allocation to a client to accommodate their changing needs. 

Minimizes frauds

According to ACFE 2020 Report, businesses lose an average of 5% of their gross revenues to fraud. Small companies are more likely to face billing, payroll, check, and payment tampering fraud than large organizations. 

Outsourcing bookkeeping services reduces the risk of fraud because there is a separation of duties as several experts are working on your account. When no single person is in charge of your company’s finances, and professionals check every transaction for accuracy, it reduces the chances of anyone committing fraud. 

Financial advice

An accounting firm has a team of experts to analyze your finances and give professional advice to reduce costs and improve ROI. They can notice unnecessary expenses, suitable opportunities to invest, and guide you in the right direction for optimal results.

Compliance issues

Many firms face tax fraud and other financial lawsuits simply because they were unaware of compliance regulations or litigation. This can lead to a substantial loss of money and market reputation. Outsourcing your accounting can save you the trouble, as the service provider will meticulously file all the essential documents with the IRS and other government bodies.

About Hoshi CPA LLC

Hire our services if you are seeking professional CPA firms in Oregon. At Hoshi CPA LLC, Udai Hoshi assists individuals, businesses, and Japanese-speaking communities with comprehensive tax consultations such as tax planning, tax resolution, tax compliance, and CFO services. 

You can talk to him by booking one of the four sessions: a complimentary 45-minute strategy session, a cares act economy stimulus package consulting, a quick call, or a complimentary 45-minute CFO strategy session. You can call us at (503) 388-6580 or email at staff@hoshicpa.com to know more.

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6 Monthly Accounting Tips to Balance Your Books

Accounting

Well-managed accounting helps every organization accurately assess its cash flow and operations. As you juggle with day-to-day management, you shouldn’t overlook the importance of monthly accounting. Monthly balance sheets educate you about the financial gaps in your books if any. They will be your savior if push comes to shove. 

We understand that accounting can seem like a tedious task, but it’s essential, irrespective of your organization’s size. Therefore, we give you a low-down on the six accounting tips that every organization should keep in mind for smooth functioning.

Close attention to receivables

Being on top of all transactions and regularly updating books is easier said than done, especially when you’re managing several orders and clients all at once. There is never enough time. It creates discrepancies during tax payments, as your receivables report won’t match with the revenue received. Therefore, to avoid high taxes and debts, make it a point to always check off payment tasks as soon as you receive payment. 

Maintain monthly statements

A monthly profit or loss statement will allow you to track the company’s cash flow and compare your monthly performance. These statements show expenses and revenues every month, which you can then compare with your performance through the previous financial year. 

Review your inventory

You should always do a monthly inventory assessment to determine the products you need to order and the items you can mark for clearance. It will give you clarity on the products you need to restock and help you better understand sales. 

Payroll and tax payment review

Unchecked monthly payroll often leads to errors. A monthly payroll summary will ensure that you avoid expensive mistakes and meet tax requirements. Reviewing all the income tax, medical care, and social security payments is a healthy practice. 

Comparing actual profit/loss

Once done with the monthly inspection of inventory and business records, review a profit/loss statement for each month and compare it with last year. It will help you visualize your quarterly or annual budget. Comparing the numbers will help determine month-wise growth. 

Comparing month-end balance sheets

The last step is to compare your monthly balance sheet with the current month and look for fluctuating factors. This comparison is the key to refining your upcoming business strategy and improving the financial future. 

About Hoshi CPA LLC

We are proud to offer monthly accounting services to business owners, executives, and independent professionals in Tigard, Oregon. Hoshi CPA, LLC is a professional accountant in Portland, Oregon. Our proactive approach, experience, and expertise allow us to provide you with long-term tax plans that lower your tax liabilities. We also provide a range of other financial services, including tax compliance, tax planning, tax resolution, and CFO services. If you have questions or want to know more about tax services, you can call us at (503) 388-6580 or reach out via our online contact form.

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4 Things you Should Know Before Filing Taxes

tax services in Tigard, Oregon

An incorrect tax return can cause penalties in unpaid balance or incur additional taxes. You must use caution when filing taxes or choosing a tax professional because, according to the IRS, the taxpayer is ultimately responsible for their paperwork. Being proactive with your tax obligations can reduce your taxable income and mitigate the chances of being penalized. 

Whether you use a tax professional or file taxes on your own, here are five things you must consider before filing your taxes: 

File a return even if you can’t pay your tax bill

There are penalties, both for failure to file a return and failure to pay your tax. You must file your return even if you can’t pay your entire tax bill by the due date. 

To get an extension to pay your tax bill:

  • Pay it using your credit card
  • Enter into an installment agreement with IRS if you owe $50,000 or less in combined individual income tax, penalties, and interest
  • Re-finance your home
  • Consider an Offer in Compromise (OIC)
  • Make a partial payment

File electronically

IRS urges taxpayers to file their taxes online as it can save trees, time, and money. It’s quick, convenient, and secure. E-filing also speeds up the process of a tax refund if you’re eligible for it. However, you do have to necessarily file a paper return in the following scenarios:

  • You need to file an amended return (Form 1040X).
  • You’re seeking relief as an injured spouse (Form 8379).
  • Your e-filed return keeps getting rejected.
  • If you live or work outside the U.S.

Itemize your deductions to save on taxes

a. Take the standard deduction. If your taxes are simple, you can quickly get the deductions you deserve. You can use the standard deduction, which reduces the income amount on which your tax is calculated. 

b. Itemize your deductions. If the sum of all your deductions is greater than the standard amount, you must itemize your deductions. List out each deduction you qualify for, like large charitable donations, medical expenses, and mortgage interest payments.

Choosing between standard and itemized deductions is a question of money and time. You must take the time to itemize all deductions if you can save hundreds or thousands of dollars in taxes. You can also choose to take standard deductions, which will save your time with no financial benefit.

Request an automatic extension

IRS will penalize you for not filing your tax return by Tax Day. However, you can request an automatic extension in one of the following ways: 

However, you must remember that an extension to file is not an extension of time to pay your tax bill. So, if you can’t pay the total tax before Tax Day, ensure that you file your taxes on time and get a timely extension. 

About Hoshi CPA, LLC

If you want to itemize deductions or avoid penalties, Hoshi CPA, LLC should be your one-stop destination. Udai Hoshi assists individuals, Japanese-speaking communities, and U.S. business owners with tax planning, tax compliance, tax resolution, and CFO professional services. Hire our services if you are seeking professional CPA firms in Oregon. You can talk to him for a tax consultation by booking a quick call, strategy session, consulting, or a CFO strategy session. You can call us at (503) 388-6580 or drop an email at staff@hoshicpa.com to know more.

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5 Questions to Ask Before Hiring a Professional Tax Preparer

Professional Tax Preparer

Let’s face it. 

Taxes are complicated and involve a lot of paperwork, forms, and stress. 

It is crucial to get your books in order, so you know where you stand with your business performance, profitability, and cash flow. It is equally important for tax professionals that your books are reconciled and organized so that preparing tax returns is not as time-consuming as otherwise. 

Good tax professionals can prepare tax returns following the most current federal, state, and local tax laws and keep you out of trouble. Still, great tax professionals can advise you and guide you on how you structure your business to reduce your tax liabilities.  

Don’t blindly trust any tax preparer without checking their credentials and experience first. Here we list five questions you should ask a tax preparer before hiring them.

What industry expertise do you have? 

Your tax professionals should know your business industry and know the most up-to-date GAAP rules and tax laws applicable in your industry. Why is it important? There is a special treatment in each industry when it comes to deduction and credits. 

For example, cannabis clients should be aware of the business deduction limit due to IRC Sec. 280E at the federal level. Software technology companies should understand the ramifications of the R&D credit. Construction industries need to understand the differences between long-term contract and revenue recognition. You would like to know what industry experience and expertise your tax professional possess and what type of value they have provided to their clients. 

If they can answer your questions and provide insights about the industry, you may feel more confident and comfortable in the professional’s ability to execute the tax work.  

What are your qualifications?

Tax preparers have varying credentials and qualifications. There are three major categories we look at:

1. Certified Public Accountants (CPAs): They get a license from the state accounting board after passing the American Institute of Certified Public Accountants exam (AICPA). A rigorous exam tests a candidate’s knowledge in accounting, financial reporting, and taxes. There are also minimum education and work experience requirements to qualify as a CPA. 

2. Enrolled Agents (EA): IRS provides a license for Enrolled Agents after a candidate passes a three-part exam. They have to abide by the IRS’s ethical standards and continue their education to keep their tax knowledge up-to-date. 

3. Tax attorneys: Tax attorneys are licensed by the state bars. They are experts in complicated taxes, and they represent you in a court proceeding. However, they may or may not have had additional education or expertise in tax planning. 

At a minimum, tax preparers should possess PTIN (Preparer Tax Identification Number). You can search the IRS preparer directory to see if they are registered and if their license is current.

How will you charge for the services?

Every tax preparer has different fee structures, so it’s vital to know how they will charge you before you hire them. Some prevalent billing processes are: 

● Charge by the hour

● By number of schedules, meetings, and forms in return

● Combination of the above two methods

● A flat rate irrespective of hours and forms

Also, get an estimate of the likely fees and ask for variables that can cause fluctuations, so you have a better idea of how much you end up paying. If you are paying by the hour, organize the paperwork ahead of time or else it will cost you more. 

Will you back me up during an audit?

The likelihood of an audit is slim—from 2010 to 2018, the IRS examined only 0.6% of individual federal income tax returns and 0.97% of all corporation returns. Still, check whether the tax preparer will back you up in the unlikely event of an IRS audit. Paying for tax compliance might not include tax defense. For example, will they:

● Attend an audit with you?

● Respond to IRS/state tax agency for letters of inquiry?

For individuals, the audit rate significantly increases to 1.10% as your income is over $500,000. The IRS can flag a return for several reasons—from random selections to accounts with discrepancies in numbers or suspicious activities. Instead of taking a chance, check your numbers and forms before filing. 

What happens if there is an error?

According to a survey of Americans who used a tax preparer in the past five years, only 45% reviewed the returns. Meanwhile, 16% signed the return without going through it. Leaving complicated tax return filing to professionals brings relief, but ultimately you will be held responsible for its accuracy. You should not expect errors from professionals, but mistakes could happen. It would help if you understood what errors there were in the returns and recourses the professional would have to make them right. 

About Hoshi CPA LLC 

Udai Hoshi assists individuals, U.S. business owners, and Japanese-speaking communities with comprehensive tax consultations such as tax planning, tax resolution, tax compliance, and CFO Professional Services. You can talk to Udai Hoshi by booking one of the four sessions: complimentary 45-minute strategy session, cares act economy stimulus package consulting, a quick call, and complimentary 45-minute CFO strategy session. Contact us today for more information about tax-related services by HOSHI CPA in Portland, Oregon. You can call us at (503) 388-6580 or drop an email at staff@hoshicpa.com. 

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The Guide to Gift Tax Returns

Gift Tax Return

Did you recently fund your children to buy a house? In the U.S., the recipient (donee) of the gift is not required to file the tax return, but the giver (donor) is. Many people miss filing gift tax returns due to a lack of knowledge regarding the gift tax and how it impacts your income tax and estate tax situations. 

A gift tax return or IRS Form 709 must be prepared if you give monetary gifts exceeding a certain threshold.   Gifting can be an excellent strategy to reduce your overall estate and pass your wealth to the next generations if you plan and execute properly. To avoid the untaxed transfer of wealth, you need to file gift tax under certain conditions. 

When to fill gift tax return

You must fill the Form 709 for the gifts more than $15,000 given to any other person other than your spouse for the 2020 tax year.  However, if you made tax-deductible gifts to qualified charitable organizations in the past year, you are not required to file this tax. Moreover, if the gift amount does not exceed the yearly cap for a particular year, you don’t need to file Form 709.

You can file the gift tax without your regular tax documents. You have to report each recipient’s gift amount and not the total amount gifted in a year.

Educational and medical exclusion

Paying tuition fees on behalf of your children or any individual to a qualifying educational institution is not considered a gift. The definition of a qualifying institution is one that has a regular faculty, curriculum, and enrolled pupils. The payment must be made directly to the institution, excluding the stationery, book, and boarding supplies. 

Any amount paid on behalf of an individual for medical care is not considered a gift either, provided the payment goes directly to the care provider and not the individual. However, if the donee’s insurance provider reimburses the amount, it’s not eligible for exclusion.  More details about fulfilling the medical exclusion requirements can be found in IRS Code Section 213(d). 

Difficult to assess the value of gifts?

Have you gifted any assets like a piece of fine art or a share of a family-owned business and was not sure of how much value they are? You would like to hire a qualified appraiser or business valuation specialist to ascertain the assets’ value.  The Internal Revenue Service will require these appraisals to evaluate such investments before confirming the gift tax amount is appropriate.  

Need more advice?

If you are confused about filing a gift tax return for assets and other property transfers, consult a tax advisor who can answer all your questions. At Hoshi CPA, LLC, we can evaluate and analyze your tax situation and refine and optimize the plans.  We are the best IRS tax resolution company in Tigard, OR. We offer tax services, planning, compliance, monthly accounting, and virtual CFO professional services. Book a complimentary strategy session with our team on our website today. You can also get in touch by filling out our contact form.

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3 Tips to Reduce Your Tax Liabilities in 2020

Tax Liabilities

This year has thrown all of us curveballs. First, it was this COVID-19 pandemic. Second, wildfire. And thirdly, the election year!! Along the way, we had Cares Act signed into law as of March 27th. Now, you may be planning for 2020 tax impacts considering all these events. I hope the below tips can help you prepare for your 2020 tax situation and potentially reduce overall tax liabilities. 

Increase the beginning date of RMDs

As you probably know, it is beneficial to contribute as much as possible to qualified retirement accounts such as 401(k) and 403(b) to reduce taxable income. If you are older than 70 ½ years old, you may want to change your RMDs (required minimum distributions). The recent SECURE Act of 2019 increased the RMD age to 72 from 70 ½ years old. Cares Act removed RMDs for the 2020 tax year, so if you do not need to withdraw from IRA accounts to sustain your lifestyle, you can stop IRA distribution in 2020 to avoid additional taxes. Under the old law, you could not contribute to your IRA accounts if you were older than 70 ½ years old. However, this age restriction has been removed by SECURE Act, and now you can keep contributing to your IRA account no matter how old you become. 

Now you may be affected by COVID-19 and needed some cash distribution from a qualified retirement account. You can distribute up to $100,000 for qualified reasons without 10% early distribution penalties. You can pay income taxes ratably over three years on those distributions. However, if you repay the distribution, you do not have to pay the taxes. Is your head spinning? Here’s more in-depth IRS guidance: https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers

If you use this provision to your advantage, you may be able to fund some short-term investment to earn handsome ROI. 

Tax-loss harvesting

Do you have a large amount of capital gain this year? It is time to harvest some loss from your brokerage account. When you sell your investments at a declined value compared to the purchase price, these investment losses can offset your investment gains. This strategy is known as tax-loss harvesting. Let’s say you sold your rental properties without 1031 exchange and don’t invest in opportunity zones, and can’t avoid capital gain. You happened to find some airline stocks that significantly declined in value this year due to the pandemic. 

Using this strategy could reduce your capital gain and neutralize some tax impact.  

Charitable contribution planning

Since TCJA increased the standard deduction to $12,000 for a single taxpayer, many people using the standard deduction did not have a write-off on charitable contribution. 2020 tax year will be a little different in this regard. Cares Act changed charitable contribution up to $300 to be deductible as above-the-line item even if you are taking the standard deduction taxpayer.  

Donor-advised accounts are a popular way to plan for a larger charitable contribution in one year and alternate between standard and itemized deductions. Advanced tax strategies are also available involving charitable remainder trust, charitable LLC, or even grantor trust to achieve more significant tax savings for income and estate tax purposes. 

Health saving account and side business claim deductions

If you have opted for a high deductible medical plan, you can contribute to a health savings account. These contributions are tax-deductible and can be withdrawn tax-free for qualified medical expenses. You can invest inside HSA and grow the investment over time. You can carry over the remaining balance at the end of the year to the next year. 

If you have a side hassle, you can deduct business expenses as long as they are ordinary and necessary to run your business per IRC Sec 162(a). It’s possible to maximize your business deductions and create business losses to offset some earned income.  

Maintain good records

When you get audited by tax jurisdictions, you would have to show your support documents such as invoices and payment receipts to substantiate your deduction claim. One taxpayer inquired about our service for IRS audit representation. We discovered the taxpayer mistakenly deducting full bonus depreciation twice on the same vehicle in that particular tax year and also deducted other expenses without support documents. We maximized the deductions to the extent possible but had to witness the IRS brutally disallowing baseless deductions. 

When you claim certain deductions like charitable contributions and other business deductions, you must be ready to provide tax authorities the good substantiation documents.  It may be a pain in the neck but will save you some headache in the long run. 

Professional Tax Planning Services in Oregon – Hoshi CPA LLC

If you feel that all this is too much work and you need help, don’t look any further. We offer expert tax planning services to business owners, executives, and independent professionals in Oregon and throughout the United States. Hire our services if you are seeking a professional accountant in Portland, Oregon. We are ready to provide you with multi-entity, multi-year, multi-state, highly effective tax plans so you can redeem taxes and reinvest cashback to business and lifestyle.

Do you have more questions about what we can do? Please call us at (503) 388-6580 or reach out via our contact form or schedule a strategy session.  Looking forward to hearing from you.

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Income Tax Planning: 3 Things Every Beginner Taxpayer Should Know

income tax planning services in tigard, oregon

Tax planning is complicated and confusing for many taxpayers. The U.S. tax code is always changing, and new regulations, revenue rulings, and court cases are always popping up.  It’s important to ensure you’re prepared for the upcoming tax season. The small tax planning tips below help you understand your tax liabilities and come up with strategies to reduce your overall taxes and save and invest your resources.

In this post, we highlight some essential tax planning tips for beginners. Whether you are starting your own business or have been in business for a while, following these tips will help you maximize your deductions. 

#1. Tax Bracket Doesn’t Apply to Total Income

Irrespective of the tax bracket you fall in, your total income or salary is never taxed at the same rate. 

The United States currently has seven federal income tax brackets, with rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Even if you fall in the 37% bracket, your entire income is not subjected to a 37% tax. 

Let’s say you are a single status taxpayer with $280,000 taxable income per year. This means you fall in the 32% tax bracket. You will have to pay 10% on the first $9,875, 12% for the next earnings up to $40,125, 22% for the next earnings up to $85,525, 24% for up to $163,300, $32% for up to 207,350, and 35% on the remaining income. 

In this case, you would be paying $56,519 on your total taxable income $280,000.  Therefore, your effective tax rate would be 20.18% (56,519 / 280,000) where as your marginal tax rate would be 37% in this case. 

You may find yourself getting over to the next tax bracket, and it may be prudent to plan increasing expenses or deferring income by contributing to retirement account to avoid extra tax payments.  Knowing which tax bracket you will fall before the year end is the first step to pay less taxes.  

#2. Tax Deductions And Credits Are Not The Same

Some taxpayers are not familiar with the difference between tax deductions and tax credits. While tax deductions reduce your taxable income, tax credits directly offset your tax liability dollar-for-dollar. Tax credits are designed to motivate business owners to reinvest in specific ways such as Premium Tax Credit, Small Employer Health Insurance Premiums Credits, Retirement Plan Startup Costs Tax Credit, Work Opportunity Tax Credit, Rehabilitation Tax Credit, etc. 

Both tax deductions and tax credits reduce your tax bills, but if you have options to choose either credit or deduction, it’s likely you are better off choosing credit. 

#3. Opting for Standard vs. Itemizing Deductions

Standard deductions are fixed deductions, and the amount depends on your filing status, such as single, married, head of household, etc. 

On the other hand, itemized deductions are for those whose allowable expenses such as medical expenses, state and local taxes, mortgage interest, charitable donations are greater than the standard deduction. 

For instance, this 2020 year, the standard deduction for married taxpayers filing jointly is $24,800. If a married couple has allowable itemized deductions greater than $24,800, choosing itemized deductions will lead to smaller taxable income. 

Watch out for charitable contribution for taxpayers choosing standard deduction for 2020.  The congress passed Cares Act that allows up to $300 above-the-line deduction for taxpayers in 2020 (charitable contribution was deductible only through itemized deductions).

Expert Tax Planning Services in Tigard, Oregon – Hoshi CPA LLC

We are proud to offer expert tax planning services to business owners, executives, and independent professionals in the Tigard area. Our proactive approach, combined with our experience and in-depth knowledge, offers you a long-term tax plan that keeps finding opportunities to lower your tax liabilities. 

Have any questions about what we can do? Please call us at (503) 388-6580 or reach out via our contact form. We are the best CPA firms in Tigard, Oregon. We’re always happy to empower people who are looking to take control of their tax situation.

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Why You Need Tax Planning Service From CPA

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