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Hi everyone.

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This is the how to lower your tax bill podcast.

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I'm your host, Terrence Hutchins.

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I'm a financial and tax advisor in the Dallas forward area.

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And the goal of this podcast is to help you listeners get educated with different tax

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strategies that you can implement to improve your tax situation immediately.

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Each episode will break down useful tax tips you can use to save money, no matter what

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your personal or business income situation.

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Because our motto is, keep more of what you earn.

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So let's get into today's episode.

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So let's dive into today's episode.

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Today we're going to be talking about basic tax strategies for employees, meaning you

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have a salary or an hourly rate that you get.

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Your employer is in charge of reporting how much you make to the IRS.

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So off the top, you're going to just be more limited on the options you have.

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But that doesn't mean you don't have any options.

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And we're going to talk about a few of those today.

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One area that most people don't think about before you would get to your tax return, if

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you're an employee, you have payroll taxes that you pay.

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So you have social security and then you have Medicare.

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That equals 7.65% of your income up to $168,000.

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So if you think about your actual tax return, you're going to get your salary.

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They're going to subtract out the payroll taxes before you even see it.

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What gets reported in your tax return is going to be all your income from every source.

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So interest, capital gains, business, that salary that you get on the W-2.

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Then you're going to subtract out what are called above the line deductions.

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We're going to go through what those are, or the most popular ones, and then that's

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going to give you your adjusted gross income.

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Now your adjusted gross income or your AGI for short, is going to be the biggest factor

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in determining are you eligible for certain tax deductions or certain tax credits.

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Early in my career, I worked with a lot of resident physicians and when they were in

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residency or training, they were normally making between $50,000 to $70,000.

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Taxes weren't a big part of their lives, but once they got out, started actually becoming

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an attending and they were getting jobs, making $200,000 or more in salary, then they started

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realizing all the tax benefits that they were now losing out on.

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And normally that's what happens.

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When you start paying more taxes, you start getting annoyed with all the taxes you're

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paying and now you want to get more educated on what you could do in order to lower that

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bill overall.

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And so that's why we have this podcast to help give you some strategies or at least

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some options that are available to you.

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So first you have those above the line deductions.

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So I'm going to go over a few of these that are most popular.

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So number one, if you're an educator, like a principal, a counselor, or a teacher, you

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and your spouse can individually take up to $300 per year in a deduction.

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Now you might spend more than that, I'm aware, but the government only gives you $300 each.

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So you might as well at least take what they give you.

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You also have student loans.

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If your income is below a certain threshold, which if you're married is about $185,000,

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if you're single is about $90,000, you could take up to $2,500 of student loan interest.

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So going back to those physicians, they were normally used to getting that student loan

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deduction.

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Once they got out, they could be paying $8,000 to $10,000 easily a year in interest and they

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were not able to deduct any of it.

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That obviously is not great news to those people that were affected.

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You also have alimony, which only applies if you had a divorce decree prior to 2019.

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Not sure why they made this tax change, but if you get alimony, it's not taxable.

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If you pay alimony, you can no longer deduct it unless it was prior to 2019 when your divorce

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decree was finalized.

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You also have moving expenses.

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However, this is only for military personnel.

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So if you have to move because you're in the military, you can deduct the cost of your

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moving expenses.

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That's actually another tax change that happened after 2018.

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If you have a CD and you fooled the money out early, normally you're going to pay a

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penalty.

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That penalty is actually deductible.

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So that's probably one that most people don't really know about, but they at least would

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take advantage of it here if it applies.

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And then jury duty.

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Now ironically, most people don't want to do jury duty, but jury duty is actually taxable

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if you have to pay it to your employer.

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But if you do pay it to your employer, then you can actually deduct the money they gave

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you if they didn't pay you for being there.

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If your employer doesn't pay you for being a jury duty, then you don't actually have

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to report it as income.

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But if they do pay you and you kind of quote unquote double dip, you have to report as

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income.

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If you give it to your employer, you could deduct that off your taxes.

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Then there's a few things if you're actually self-employed that are also considered above

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the line deductions.

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So you have self-employment taxes.

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We'll get into that in future episodes more.

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But if you are self-employed and you have a profit from your sole proprietorship business,

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you actually are going to pay up to 15% tax on that profit.

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Half of that is actually deductible.

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You would actually deduct that on your tax return.

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If you have health insurance, meaning you're self-employed, you have health insurance and

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you do not have the ability to get it through a spouse, then you could deduct it as a self-employed

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health insurance deduction as well.

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You can also do the same if you're a partner in a partnership and your partnership pays

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for the health insurance, you can actually deduct it as well.

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And then if you have a retirement account, like a SEP IRA or a simple IRA, you could

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deduct that as well.

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And I failed to mention, if you're not self-employed and you have an IRA, you can deduct that IRA,

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but there's also an income limit.

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And that limit is very low if you have a 401k plan or a retirement account at your job.

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So chances are if your job offers a retirement plan, you can't deduct an IRA, which is why

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a lot of people would look to do a Roth IRA if their income is too high to actually deduct

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the traditional IRA contribution.

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So you have your paycheck, you subtract out your payroll taxes, that income of your salary

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gets reported in your tax return.

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Then we're going to subtract out these above the line deductions.

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Now we're going to go into your itemized deductions.

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Your itemized deductions get subtracted from your adjusted gross income and that determines

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your taxable income.

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Well, people think about their tax bracket, they have to actually look at their taxable

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income and there are several different tax brackets.

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So we go from 10% up to 37%.

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Where you fall, whether you're married, single, married, falling separate or your head of

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household, meaning you have a dependent, will determine your actual tax bracket based on

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this taxable income.

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So what you can subtract from your taxable income, you're going to actually do a comparison.

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You will compare what the IRS essentially gives you a tax deduction.

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So they don't give you much, but they do give you this and it's called their standard deduction.

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So for 2024, if you're married, you could roughly make $28,000 in wages without paying

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any taxes on it.

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So if you make $30,000 and that was all you made in your household, you'd actually only

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pay taxes on $2,000 depending on your other deductions that were available.

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So they'll subtract that $28,000 off your taxes.

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However, you would want to compare that to these following things.

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We're going to take the $28,000 and say, Hey, I'm going to just take the standard amount

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that the government gives me, or I'm going to take a higher amount if what I have equals

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more than that standard deduction.

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So I'm going to go down the list.

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So you have your medical and dental expenses.

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Now this is only applicable if the expenses that you have for health insurance and out

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of pocket medical costs, if they exceed 7.5% of your adjusted gross income.

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So if your adjusted gross income is $100,000, 7.5% of that is $7,500.

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So in order for you to deduct anything health related, it would have to be more than $7,500.

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So if you had $8,000 of expenses that were health related, you could deduct $500.

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So we're going to say, Hey, I got $500 related to health expenses if I paid the $8,000 and

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my AGL was $100,000.

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Then we'll look at what are called state and local income taxes.

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Normally these are going to be property taxes on your house, sales taxes.

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And then if you're in a state that has an income tax, you're going to look at the total

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state taxes that you pay.

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However, you're going to be capped at $10,000 per return.

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So if you're married, single, you're going to be capped to $10,000.

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Now if you married following separate, they're going to cap each of you at $5,000.

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So if you pay 20 grand in property taxes, unfortunately, you're not going to be able

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to deduct $10,000.

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Now if you do own a business, there is a workaround for this, which we'll get into future episodes

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that will allow you to possibly deduct more than that.

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But if you're just an employee, you're going to be capped at $10,000.

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Then we're going to look at the mortgage interest on your house.

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So if you have a home mortgage that you purchased and it's below $750,000, first $750,000 is

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what you've been deducted.

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So if you have a mortgage that's bigger than that, you can't deduct that interest unless

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you operate a business, then we'll get into that in the future.

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So if you set the theme here, then you realize that tax deductions are more so for those

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who are in business and also in real estate.

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So we have medical expenses, we have state and local taxes, and then we have mortgage

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interest.

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And then the other big one that's normally out there is shareholder deductions.

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So if you give money to a charity, which is a qualified FILE 13C, so not a GoFundMe or

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not, hey, I helped out someone who was in need that wouldn't count.

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If it's a qualified FILE 13C, you can give cash or non-cash to them and you can deduct

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that assuming the totals of your health and medical expenses, your state and local taxes,

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your mortgage interest and your triple deductions, if they equal more than that standard deduction,

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or if you're married, let's say $28,000, then you could deduct those expenses.

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Okay, so you have the bloodline deductions, you have auto-ized deductions, and we're going

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to end with tax credits.

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So when your tax return, you'll say, hey, here's my taxable income.

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Now a tax credit is actually money that the government dollar for dollar will give me

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to reduce my actual tax bill.

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So they'll calculate based on your taxable income, how much taxes do you owe?

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Then we'll look at, hey, what credits do you possibly qualify for that can reduce that

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number dollar for dollar?

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So tax credit is actually more powerful than a tax deduction.

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You have two types of tax credits.

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You have refundable and you have non-refundable.

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So think about it like this.

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If I have a credit, that's like, let's say I go to the store and I return an item and

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I don't have a receipt, they give me a store credit.

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Now imagine if I didn't have a receipt and they said, hey, sorry, we're going to give

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you a store credit, but you would only use it while you're in the store.

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If you leave the store, it's going to go away.

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So a refundable credit means, hey, you could use this credit this year or you could use

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it next year or the following year.

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A non-refundable credit means, hey, if you can't use it this year, it's gone forever.

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So depending on the type of credit that you're looking at, you want to be strategic with,

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is this credit refundable or non-refundable?

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If it's refundable and I can't use it this year, I need to keep it and I need to track

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it for future years.

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Because if you don't track it and your taxpayer doesn't track it, it'll just be gone.

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And then you would have to amend your tax return in order to claim it if you had to

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come back.

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So the most common tax credits are what we would call your earned income credit.

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So normally if you're early in your career and you don't really make too much money,

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like if you have a kid normally, then you might be able to qualify for this earned income

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credit.

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So you can actually get it anywhere from $600 up to $7,000.

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That's actually a refundable credit.

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That's probably the biggest credit that people get if they have multiple kids and they're

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not married.

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That's probably the biggest credit that you see people getting out there.

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You also have child tax credits.

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If your income is below $400,000 if you're married or $200,000 if you're single, you

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get $2,000 per kid in a credit.

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So obviously your kids cost more than that.

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If they don't, I need to learn your secrets.

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But if you have a kid, you get $2,000 per kid.

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If you have a kid that's over 17 or you have a dependent that's over 17, you get $500 per

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dependent.

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If you have childcare, meaning you have daycare expenses, you can get up to 20 to 35% of that

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cost back.

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All right.

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However that's also depending on your income.

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So most people are only able to get up to 20% and it's really $600 per kid.

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So if you have 10 grand a year of expenses, unfortunately you're not going to be able

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to get $600 per kid with a match of two kids.

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So you got four kids, five kids, you're still only getting two kids.

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Now if you have college expenses, you have two different credits that might qualify.

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If you're in your undergrad, you have four years, you can get what's called the American

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Opportunity Tax Credit.

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That's up to $2,000 per student.

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40% of that is refundable.

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So I bring that up because many times if you're a high income earner, which in this context

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is if you make over $160,000 or you make over $80,000 if you're single and you have a kid

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that's 18, 19, 20, I always have them file separate.

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Because if you think about it, your $500 credit for having them is less than the thousand

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dollars they can get if they file by themselves.

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So if you claim your kid and you make $200,000, you're only going to get a $500 credit for

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them.

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If they claim themselves, they can get a thousand dollar credit if they're in college.

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I say, hey, go ahead and have them claim single.

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If your income is above that level, you'll get an extra $500 from the government.

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Now if you don't want the extra $500, that's your business.

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You also say, hey, if I've used that credit four times, I still have another credit called

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a lifetime learning credit.

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All right.

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And so that is a non-affirmative credit that's up to $2,000.

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So if you have that, you can get that credit up to $2,000 after you've done the first credit

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four times.

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If you other less, I would say popular credits, you have the savers credit.

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So if you're a lower income earner, the government will actually give you up to $2,000 to put

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away money into a retirement account.

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If you have a low income year or you just had something that allowed you to maybe have

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low taxable income, you might throw money into a retirement account so that you can

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actually get up to a $2,000 credit.

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You also have the premium tax credit that is related to if you have health insurance

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from the marketplace.

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If your income is less than 400% of the poverty line, which if you're single is about $13,000.

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If your income is basically less than $52,000 or less, you might be able to get a tax credit

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that could help subsidize the cost of your health insurance if you get it through the

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marketplace.

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Then a few other ones, you have the adoption credit.

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So if you adopt a kid, you can actually get a tax credit for that.

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And then you have the residential energy credit, and then you have the electric vehicle tax

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credit.

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So primarily if you have solar panels, you can generally get up to 30% of the cost of

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the solar panels.

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That credit is refundable and it carries forward.

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You could also qualify to get an electronic vehicle credits.

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That credit is up to $10,000 per vehicle, one per person.

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Now that credit is not refundable.

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So if you can't use it, you will lose it after that tax year.

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So if you have an EV, you want to make sure that you can qualify.

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Now, when I say refundable, what that means is do have a tax liability at all.

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And so that's why I want social media when you see people that say, hey, I took a big

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tax deduction and my income was negative.

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Well, they don't have any taxable income, so they had zero taxes that they owed.

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So if you had, if you bought an EV and you had zero taxable income and you had no taxes,

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you actually couldn't claim that credit and you would lose it.

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So part of your strategy is figuring out, okay, how do I actually create myself to have

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enough taxes that if I do qualify for a tax credit, I can actually use it and I won't

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lose it for future reference.

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Okay.

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So to summarize, you have options.

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If you're an employee, you have your itemized deductions.

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You have your above the line deductions and you have your tax credits.

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So you want to be taking full advantage of those because you don't have a ton of options,

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but you at least have those available to you.

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And if they are available, you certainly don't want to pay the government more than you should.

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Okay.

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Now a tax tip, I'll actually give you two.

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Number one, if you have an HSA, one, do it through your employer if it's available, because

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that will actually allow you to save on payroll taxes.

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So if I put a thousand dollars in my HSA, I will save payroll taxes and I get deducted

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on my tax return.

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Secondly, with the HSA, there is no timeline to reimburse myself, which means that I can

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actually invest my HSA dollars and grow them for future purposes.

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But if I have a medical expense, I can actually have that medical expense today and then use

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the money from my HSA to reimburse myself in the future.

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So let me break that down just to give you an example.

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So for example, let's say I put the max into my HSA account, which is about $8,000 this

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year.

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I have a $5,000 medical expense.

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So I have the option to say, Hey, let me take that $5,000 out of my HSA.

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And because it's for a medical expense, I can do it tax free.

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So I don't pay any taxes on that when I take it out.

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If I don't take it out for that, I actually pay a 20% penalty.

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So don't take it out of your HSA account or make sure that if you do take it out of your

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HSA account, you report it properly in your tax return because you will be charged a penalty

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if you're not careful.

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Now if I take that $5,000 out, I lose the tax benefit.

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However, if I leave it in there, I can actually grow that $5,000.

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Let's say I decide to take it out in 15 years and my $5,000 is not worth $10,000.

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In 15 years, if I take out $5,000, I can take it out tax free at that point and just reference

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the fact that 15 years before I had a $5,000 medical expense.

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So if you have an HSA, keep all your receipts.

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Ideally let the money sit in the account so you can invest it and grow it and essentially

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be able to use tax free money for the future.

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Now if you're over 65, you can take the money out of the HSA and it's just like any other

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retirement account.

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So it's going to be taxed if you use it for a non-health reason, but you at least have

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money in there.

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So the HSA is one of the more powerful tax tools in the whole tax code.

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So our strange tax fact for this week actually involves you cat lovers.

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All right, I'm not much of a cat lover.

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However, if you are, more power to you.

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But there was actually a 2011 tax case, Van Dusen versus commissioner, where this guy

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who rescued cats, successfully argued that expenses related to fostering the cats, including

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cat food were deductible as a charitable contribution.

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So he worked for this charity.

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He was helping foster these cats and he was buying stuff for them.

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And he was able to justify that, hey, these expenses are for the benefit of the charity,

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which benefits these cats.

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I can actually get a tax deduction.

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So if you're a cat lover out there and you're charitably inclined, you might be able to

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get a tax deduction for your cat food.

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All right.

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So that's all for today's episode.

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Hopefully you took away a few notes and I look forward to talking with you guys on our

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next episode.

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We're going to be talking about business owners.