Hi everyone.
This is the how to lower your tax bill podcast.
I'm your host, Terrence Hutchins.
I'm a financial and tax advisor in the Dallas forward area.
And the goal of this podcast is to help you listeners get educated with different tax
strategies that you can implement to improve your tax situation immediately.
Each episode will break down useful tax tips you can use to save money, no matter what
your personal or business income situation.
Because our motto is, keep more of what you earn.
So let's get into today's episode.
So let's dive into today's episode.
Today we're going to be talking about basic tax strategies for employees, meaning you
have a salary or an hourly rate that you get.
Your employer is in charge of reporting how much you make to the IRS.
So off the top, you're going to just be more limited on the options you have.
But that doesn't mean you don't have any options.
And we're going to talk about a few of those today.
One area that most people don't think about before you would get to your tax return, if
you're an employee, you have payroll taxes that you pay.
So you have social security and then you have Medicare.
That equals 7.65% of your income up to $168,000.
So if you think about your actual tax return, you're going to get your salary.
They're going to subtract out the payroll taxes before you even see it.
What gets reported in your tax return is going to be all your income from every source.
So interest, capital gains, business, that salary that you get on the W-2.
Then you're going to subtract out what are called above the line deductions.
We're going to go through what those are, or the most popular ones, and then that's
going to give you your adjusted gross income.
Now your adjusted gross income or your AGI for short, is going to be the biggest factor
in determining are you eligible for certain tax deductions or certain tax credits.
Early in my career, I worked with a lot of resident physicians and when they were in
residency or training, they were normally making between $50,000 to $70,000.
Taxes weren't a big part of their lives, but once they got out, started actually becoming
an attending and they were getting jobs, making $200,000 or more in salary, then they started
realizing all the tax benefits that they were now losing out on.
And normally that's what happens.
When you start paying more taxes, you start getting annoyed with all the taxes you're
paying and now you want to get more educated on what you could do in order to lower that
bill overall.
And so that's why we have this podcast to help give you some strategies or at least
some options that are available to you.
So first you have those above the line deductions.
So I'm going to go over a few of these that are most popular.
So number one, if you're an educator, like a principal, a counselor, or a teacher, you
and your spouse can individually take up to $300 per year in a deduction.
Now you might spend more than that, I'm aware, but the government only gives you $300 each.
So you might as well at least take what they give you.
You also have student loans.
If your income is below a certain threshold, which if you're married is about $185,000,
if you're single is about $90,000, you could take up to $2,500 of student loan interest.
So going back to those physicians, they were normally used to getting that student loan
deduction.
Once they got out, they could be paying $8,000 to $10,000 easily a year in interest and they
were not able to deduct any of it.
That obviously is not great news to those people that were affected.
You also have alimony, which only applies if you had a divorce decree prior to 2019.
Not sure why they made this tax change, but if you get alimony, it's not taxable.
If you pay alimony, you can no longer deduct it unless it was prior to 2019 when your divorce
decree was finalized.
You also have moving expenses.
However, this is only for military personnel.
So if you have to move because you're in the military, you can deduct the cost of your
moving expenses.
That's actually another tax change that happened after 2018.
If you have a CD and you fooled the money out early, normally you're going to pay a
penalty.
That penalty is actually deductible.
So that's probably one that most people don't really know about, but they at least would
take advantage of it here if it applies.
And then jury duty.
Now ironically, most people don't want to do jury duty, but jury duty is actually taxable
if you have to pay it to your employer.
But if you do pay it to your employer, then you can actually deduct the money they gave
you if they didn't pay you for being there.
If your employer doesn't pay you for being a jury duty, then you don't actually have
to report it as income.
But if they do pay you and you kind of quote unquote double dip, you have to report as
income.
If you give it to your employer, you could deduct that off your taxes.
Then there's a few things if you're actually self-employed that are also considered above
the line deductions.
So you have self-employment taxes.
We'll get into that in future episodes more.
But if you are self-employed and you have a profit from your sole proprietorship business,
you actually are going to pay up to 15% tax on that profit.
Half of that is actually deductible.
You would actually deduct that on your tax return.
If you have health insurance, meaning you're self-employed, you have health insurance and
you do not have the ability to get it through a spouse, then you could deduct it as a self-employed
health insurance deduction as well.
You can also do the same if you're a partner in a partnership and your partnership pays
for the health insurance, you can actually deduct it as well.
And then if you have a retirement account, like a SEP IRA or a simple IRA, you could
deduct that as well.
And I failed to mention, if you're not self-employed and you have an IRA, you can deduct that IRA,
but there's also an income limit.
And that limit is very low if you have a 401k plan or a retirement account at your job.
So chances are if your job offers a retirement plan, you can't deduct an IRA, which is why
a lot of people would look to do a Roth IRA if their income is too high to actually deduct
the traditional IRA contribution.
So you have your paycheck, you subtract out your payroll taxes, that income of your salary
gets reported in your tax return.
Then we're going to subtract out these above the line deductions.
Now we're going to go into your itemized deductions.
Your itemized deductions get subtracted from your adjusted gross income and that determines
your taxable income.
Well, people think about their tax bracket, they have to actually look at their taxable
income and there are several different tax brackets.
So we go from 10% up to 37%.
Where you fall, whether you're married, single, married, falling separate or your head of
household, meaning you have a dependent, will determine your actual tax bracket based on
this taxable income.
So what you can subtract from your taxable income, you're going to actually do a comparison.
You will compare what the IRS essentially gives you a tax deduction.
So they don't give you much, but they do give you this and it's called their standard deduction.
So for 2024, if you're married, you could roughly make $28,000 in wages without paying
any taxes on it.
So if you make $30,000 and that was all you made in your household, you'd actually only
pay taxes on $2,000 depending on your other deductions that were available.
So they'll subtract that $28,000 off your taxes.
However, you would want to compare that to these following things.
We're going to take the $28,000 and say, Hey, I'm going to just take the standard amount
that the government gives me, or I'm going to take a higher amount if what I have equals
more than that standard deduction.
So I'm going to go down the list.
So you have your medical and dental expenses.
Now this is only applicable if the expenses that you have for health insurance and out
of pocket medical costs, if they exceed 7.5% of your adjusted gross income.
So if your adjusted gross income is $100,000, 7.5% of that is $7,500.
So in order for you to deduct anything health related, it would have to be more than $7,500.
So if you had $8,000 of expenses that were health related, you could deduct $500.
So we're going to say, Hey, I got $500 related to health expenses if I paid the $8,000 and
my AGL was $100,000.
Then we'll look at what are called state and local income taxes.
Normally these are going to be property taxes on your house, sales taxes.
And then if you're in a state that has an income tax, you're going to look at the total
state taxes that you pay.
However, you're going to be capped at $10,000 per return.
So if you're married, single, you're going to be capped to $10,000.
Now if you married following separate, they're going to cap each of you at $5,000.
So if you pay 20 grand in property taxes, unfortunately, you're not going to be able
to deduct $10,000.
Now if you do own a business, there is a workaround for this, which we'll get into future episodes
that will allow you to possibly deduct more than that.
But if you're just an employee, you're going to be capped at $10,000.
Then we're going to look at the mortgage interest on your house.
So if you have a home mortgage that you purchased and it's below $750,000, first $750,000 is
what you've been deducted.
So if you have a mortgage that's bigger than that, you can't deduct that interest unless
you operate a business, then we'll get into that in the future.
So if you set the theme here, then you realize that tax deductions are more so for those
who are in business and also in real estate.
So we have medical expenses, we have state and local taxes, and then we have mortgage
interest.
And then the other big one that's normally out there is shareholder deductions.
So if you give money to a charity, which is a qualified FILE 13C, so not a GoFundMe or
not, hey, I helped out someone who was in need that wouldn't count.
If it's a qualified FILE 13C, you can give cash or non-cash to them and you can deduct
that assuming the totals of your health and medical expenses, your state and local taxes,
your mortgage interest and your triple deductions, if they equal more than that standard deduction,
or if you're married, let's say $28,000, then you could deduct those expenses.
Okay, so you have the bloodline deductions, you have auto-ized deductions, and we're going
to end with tax credits.
So when your tax return, you'll say, hey, here's my taxable income.
Now a tax credit is actually money that the government dollar for dollar will give me
to reduce my actual tax bill.
So they'll calculate based on your taxable income, how much taxes do you owe?
Then we'll look at, hey, what credits do you possibly qualify for that can reduce that
number dollar for dollar?
So tax credit is actually more powerful than a tax deduction.
You have two types of tax credits.
You have refundable and you have non-refundable.
So think about it like this.
If I have a credit, that's like, let's say I go to the store and I return an item and
I don't have a receipt, they give me a store credit.
Now imagine if I didn't have a receipt and they said, hey, sorry, we're going to give
you a store credit, but you would only use it while you're in the store.
If you leave the store, it's going to go away.
So a refundable credit means, hey, you could use this credit this year or you could use
it next year or the following year.
A non-refundable credit means, hey, if you can't use it this year, it's gone forever.
So depending on the type of credit that you're looking at, you want to be strategic with,
is this credit refundable or non-refundable?
If it's refundable and I can't use it this year, I need to keep it and I need to track
it for future years.
Because if you don't track it and your taxpayer doesn't track it, it'll just be gone.
And then you would have to amend your tax return in order to claim it if you had to
come back.
So the most common tax credits are what we would call your earned income credit.
So normally if you're early in your career and you don't really make too much money,
like if you have a kid normally, then you might be able to qualify for this earned income
credit.
So you can actually get it anywhere from $600 up to $7,000.
That's actually a refundable credit.
That's probably the biggest credit that people get if they have multiple kids and they're
not married.
That's probably the biggest credit that you see people getting out there.
You also have child tax credits.
If your income is below $400,000 if you're married or $200,000 if you're single, you
get $2,000 per kid in a credit.
So obviously your kids cost more than that.
If they don't, I need to learn your secrets.
But if you have a kid, you get $2,000 per kid.
If you have a kid that's over 17 or you have a dependent that's over 17, you get $500 per
dependent.
If you have childcare, meaning you have daycare expenses, you can get up to 20 to 35% of that
cost back.
All right.
However that's also depending on your income.
So most people are only able to get up to 20% and it's really $600 per kid.
So if you have 10 grand a year of expenses, unfortunately you're not going to be able
to get $600 per kid with a match of two kids.
So you got four kids, five kids, you're still only getting two kids.
Now if you have college expenses, you have two different credits that might qualify.
If you're in your undergrad, you have four years, you can get what's called the American
Opportunity Tax Credit.
That's up to $2,000 per student.
40% of that is refundable.
So I bring that up because many times if you're a high income earner, which in this context
is if you make over $160,000 or you make over $80,000 if you're single and you have a kid
that's 18, 19, 20, I always have them file separate.
Because if you think about it, your $500 credit for having them is less than the thousand
dollars they can get if they file by themselves.
So if you claim your kid and you make $200,000, you're only going to get a $500 credit for
them.
If they claim themselves, they can get a thousand dollar credit if they're in college.
I say, hey, go ahead and have them claim single.
If your income is above that level, you'll get an extra $500 from the government.
Now if you don't want the extra $500, that's your business.
You also say, hey, if I've used that credit four times, I still have another credit called
a lifetime learning credit.
All right.
And so that is a non-affirmative credit that's up to $2,000.
So if you have that, you can get that credit up to $2,000 after you've done the first credit
four times.
If you other less, I would say popular credits, you have the savers credit.
So if you're a lower income earner, the government will actually give you up to $2,000 to put
away money into a retirement account.
If you have a low income year or you just had something that allowed you to maybe have
low taxable income, you might throw money into a retirement account so that you can
actually get up to a $2,000 credit.
You also have the premium tax credit that is related to if you have health insurance
from the marketplace.
If your income is less than 400% of the poverty line, which if you're single is about $13,000.
If your income is basically less than $52,000 or less, you might be able to get a tax credit
that could help subsidize the cost of your health insurance if you get it through the
marketplace.
Then a few other ones, you have the adoption credit.
So if you adopt a kid, you can actually get a tax credit for that.
And then you have the residential energy credit, and then you have the electric vehicle tax
credit.
So primarily if you have solar panels, you can generally get up to 30% of the cost of
the solar panels.
That credit is refundable and it carries forward.
You could also qualify to get an electronic vehicle credits.
That credit is up to $10,000 per vehicle, one per person.
Now that credit is not refundable.
So if you can't use it, you will lose it after that tax year.
So if you have an EV, you want to make sure that you can qualify.
Now, when I say refundable, what that means is do have a tax liability at all.
And so that's why I want social media when you see people that say, hey, I took a big
tax deduction and my income was negative.
Well, they don't have any taxable income, so they had zero taxes that they owed.
So if you had, if you bought an EV and you had zero taxable income and you had no taxes,
you actually couldn't claim that credit and you would lose it.
So part of your strategy is figuring out, okay, how do I actually create myself to have
enough taxes that if I do qualify for a tax credit, I can actually use it and I won't
lose it for future reference.
Okay.
So to summarize, you have options.
If you're an employee, you have your itemized deductions.
You have your above the line deductions and you have your tax credits.
So you want to be taking full advantage of those because you don't have a ton of options,
but you at least have those available to you.
And if they are available, you certainly don't want to pay the government more than you should.
Okay.
Now a tax tip, I'll actually give you two.
Number one, if you have an HSA, one, do it through your employer if it's available, because
that will actually allow you to save on payroll taxes.
So if I put a thousand dollars in my HSA, I will save payroll taxes and I get deducted
on my tax return.
Secondly, with the HSA, there is no timeline to reimburse myself, which means that I can
actually invest my HSA dollars and grow them for future purposes.
But if I have a medical expense, I can actually have that medical expense today and then use
the money from my HSA to reimburse myself in the future.
So let me break that down just to give you an example.
So for example, let's say I put the max into my HSA account, which is about $8,000 this
year.
I have a $5,000 medical expense.
So I have the option to say, Hey, let me take that $5,000 out of my HSA.
And because it's for a medical expense, I can do it tax free.
So I don't pay any taxes on that when I take it out.
If I don't take it out for that, I actually pay a 20% penalty.
So don't take it out of your HSA account or make sure that if you do take it out of your
HSA account, you report it properly in your tax return because you will be charged a penalty
if you're not careful.
Now if I take that $5,000 out, I lose the tax benefit.
However, if I leave it in there, I can actually grow that $5,000.
Let's say I decide to take it out in 15 years and my $5,000 is not worth $10,000.
In 15 years, if I take out $5,000, I can take it out tax free at that point and just reference
the fact that 15 years before I had a $5,000 medical expense.
So if you have an HSA, keep all your receipts.
Ideally let the money sit in the account so you can invest it and grow it and essentially
be able to use tax free money for the future.
Now if you're over 65, you can take the money out of the HSA and it's just like any other
retirement account.
So it's going to be taxed if you use it for a non-health reason, but you at least have
money in there.
So the HSA is one of the more powerful tax tools in the whole tax code.
So our strange tax fact for this week actually involves you cat lovers.
All right, I'm not much of a cat lover.
However, if you are, more power to you.
But there was actually a 2011 tax case, Van Dusen versus commissioner, where this guy
who rescued cats, successfully argued that expenses related to fostering the cats, including
cat food were deductible as a charitable contribution.
So he worked for this charity.
He was helping foster these cats and he was buying stuff for them.
And he was able to justify that, hey, these expenses are for the benefit of the charity,
which benefits these cats.
I can actually get a tax deduction.
So if you're a cat lover out there and you're charitably inclined, you might be able to
get a tax deduction for your cat food.
All right.
So that's all for today's episode.
Hopefully you took away a few notes and I look forward to talking with you guys on our
next episode.
We're going to be talking about business owners.