What Impact Can a Particular Tax Deduction Have On a Client's Return?

    Authored By


    What Impact Can a Particular Tax Deduction Have On a Client's Return?

    In the intricate world of taxes, the right deduction can be a game-changer for a client's financial health, as a Lead Financial Planner illustrates with their experience on the Section eight Deduction. Alongside industry experts like an Accredited Enrolled Agent and a CEO, we've also gathered additional answers that shed light on the diverse strategies for optimizing tax returns. From leveraging key deductions to lower estimated payments, discover the impactful experiences and insights that can transform a client's tax scenario.

    • Leveraging the Section 179 Deduction
    • Choosing the Right Home-Office Deduction
    • Maximizing Travel Write-Offs
    • Understanding Tax Deduction Impacts
    • Utilizing Deductions for Tax Credits
    • Navigating Tax Brackets with Deductions
    • Enhancing Refunds with Specific Deductions
    • Lowering Quarterly Estimated Tax Payments

    Leveraging the Section 179 Deduction

    One of my small-business clients once overlooked the Section 179 deduction, which allows businesses to deduct the full purchase price of qualifying equipment and software. During our review, I identified that they had made substantial equipment purchases that year. By leveraging this deduction, we significantly reduced their taxable income, resulting in substantial tax savings. This not only improved their immediate cash flow but also allowed them to reinvest in their business. It was a clear example of how a well-identified tax deduction can have a major positive impact on a client's financial health.

    Chad Lively
    Chad LivelyLead Financial Planner, Lively Financial LLC

    Choosing the Right Home-Office Deduction

    One of our clients, who owns a marketing agency, approached us to help maximize her tax deduction for her home office. She had been using a simplified method of $5 per square foot, resulting in a total deduction of $750. This method was convenient for her as she managed her business taxes independently.

    Despite the convenience of the simplified method, using the actual expense method to calculate the home-office deduction was a better choice for her to lower her taxable income. This method entails estimating the expenses associated with the home office, including a percentage of mortgage interest, utilities, home insurance, and repairs.

    The client’s annual home expenses were relatively high—approximately $25,000. With the office occupying 10% of her home, she could deduct $2,500 (10% of $25,000), thus reducing her taxable income by this sum.

    For our client, being in the 24% tax bracket, the actual expense method saved her $600 on her federal taxes, a significant increase from the $180 saved with the simplified method.

    Depending on your specific situation, you may choose between the simplified method, which offers ease but may limit deductions, and the actual expense method, ideal for those with higher expenses. Make sure to consult a tax professional to choose the best option for you.

    Ines Zemelman
    Ines ZemelmanAccredited enrolled agent (EA), founder and President, TFX

    Maximizing Travel Write-Offs

    Travel! Most people don't know this, but if you can balance your travel with both business and personal use, you can maximize your travel write-offs, lower your taxable income, and therefore lower your tax bill. Unlike some of the more aggressive write-offs the internet likes to tout—real estate cost segregation studies, buying cars you don't need, hiring private chefs for your family, etc.—travel is something you're already doing. But when done correctly, it can help lower your taxes if done better. "If a trip is primarily for business, a taxpayer may fully deduct transportation expenses for travel even if that combines business and personal activities" (emphasis added). IRS Reg. 1.162-2(b)(1). See also Habeeb v. Commissioner, T.C. Memo. 1976-259, aff'd, 559 F.2d 435 (5th Cir. 1977). Examples: Attending a conference, meeting, etc., while on an otherwise personal vacation could be great ways to suffice the 4-hour rule and enjoy a few margaritas afterward! Say, for example, you travel on Monday from Florida to California. Tuesday, Wednesday, and Thursday, you attend 2-hour conferences per day and squeeze in another 2 hours per day of SEO work/online meetings. Then Friday, you fly from California back to Florida. Monday and Friday are your 'transportation days,' meaning that they're ordinary/necessary in getting to where you need to be in order to do business Tuesday through Thursday. As long as the business trip satisfies the overnight rule (i.e., you need to stay overnight to perform the business duties), the transportation days are deductible even though you may not have had meetings/worked 4 hours those days. With this example, all 5 days of travel are deductible! (Airfare, lodging, meals, rental cars/Ubers, trains/tolls, etc.) Please note, however, that meals are still only deductible at 50%, and entertainment is no longer deductible. Additionally, if the working hours requirement is not fully met and/or certain expenses are mostly personal, a proration between business and personal expenses may need to be done to properly allocate the write-off.

    Stephanie Heredia
    Stephanie HerediaCEO, Taxes Tampa LLC

    Understanding Tax Deduction Impacts

    A tax deduction decreases a client's taxable income, which directly impacts how much tax is owed to the government. As their taxable income drops, they are responsible for paying less in taxes, saving them money. This reduction in tax liability can prove to be significant depending on the size and nature of the deduction.

    Mind you, tax laws are complex and deductions can vary greatly; so it's essential to understand the specific rules that apply to each. Consider consulting a tax adviser to take full advantage of applicable deductions.

    Utilizing Deductions for Tax Credits

    Through strategic tax planning, a client may secure additional tax credits as a direct consequence of a particular deduction. Tax credits differ from deductions; they reduce tax dollar for dollar, making them highly valuable. When a deduction qualifies a client for these credits, it enhances the overall tax-saving strategy.

    The interplay between deductions and credits can maximize a client's return. It is crucial for taxpayers to regularly review their financial activities with this in mind, potentially unlocking new pathways to save on taxes.

    Navigating Tax Brackets with Deductions

    Deductions can act as a lever, propelling a client into a lower tax bracket, which has a ripple effect on their finances. This shift could translate to a lower percentage of their overall income being taxed, saving money across the board. More than just a lessening of the current tax bill, moving to a lower bracket has long-term advantages, as future income and potential deductions are also taxed at this lower rate.

    The goal is always to preserve as much income as possible while still adhering to tax obligations. Make sure to review tax brackets annually to strategically plan deductions for optimal advantage.

    Enhancing Refunds with Specific Deductions

    When filing a tax return, a client either expects a refund or braces for what they might owe. A specific tax deduction can increase the size of the refund or, alternatively, reduce the amount they are required to pay. The more deductions a client can claim, the better the chances of a favorable outcome when tax season arrives.

    This financial boon can often be redirected toward savings or investment, positively contributing to the client's financial health. Remember to gather all possible deduction documentation to ensure the biggest financial benefit at tax time.

    Lowering Quarterly Estimated Tax Payments

    Deductions have another practical benefit: they can lower estimated tax payments for those who pay taxes on a quarterly basis, like the self-employed. By reducing these payments, individuals can retain more of their income throughout the year, improving their immediate cash flow. This can especially aid in smoothing out fluctuations in income and expenses, which is often a challenge in managing a business or personal finances.

    A steady cash flow is essential for financial stability and planning ahead. Always apply eligible deductions to your estimated payments to preserve your cash flow.