Category: Accounting

Everything You Need To Know About Tax Planning

Tax planning is an exercise performed to meet your tax obligations in a systematic manner keeping in mind your current financial status. Further, it includes your larger financial plan after calculating your age, financial goals, risk appetite, and investment horizon.

Tax as you would know is a fee charged by the government on a product, service, or income.

It is an obligatory payment made by citizens to the government.

For this reason, you can aim to reduce your tax liability and protect their hard-earned money.

You can lower your total tax outflow by accounting for all payables, permissible exemptions, deductions, and reliefs available to you under the Tax Act. Hence, tax saving activity is part of the whole tax planning exercise, whereby you as a tax payer can reduce your total tax liability.

But many a times, tax payers in order to save tax make investments without being aware about the financial product. And end up investing in inefficient tax saving instruments.

Therefore, tax planning exercise is as crucial as you plan for your other financial goals. And remember to commence your “tax planning” exercise well in advance and complement this with your overall investment planning exercise.

By adapting to this method of “tax planning”, you not only ensure long-term wealth creation, but also protect your capital. It will enable you to save more through tax planning and fulfil many of your dreams in life.

Know the rules for claiming dependents.

Claiming a dependent on your tax return can make a huge difference to your taxes.

The IRS allows you to take a $4,000 exemption for each dependent. In addition, you can claim certain expenses for dependents, such as childcare costs, medical expenses and tuition payments.

It’s clear that your children who live with you all year are your dependents.

However, the rules can be a bit complex if you share custody of a child with someone, help support an elderly parent, or if a relative or nonrelative lives with you.

Sometimes, planning how much you spend in one year or how many days the dependent lives with you can make a significant difference in the tax benefit you receive.

Estimate your tax impact before you sell major assets.

Some of the best opportunities for saving taxes come when you expect to sell an asset.

For example, say you are thinking about selling the home you’ve lived in for 18 months. Its value has increased over the years, and if you live in and own the home just six more months – until the two-year mark – you may qualify to exclude all of the gain from your taxable income. (If you meet certain exceptions, such as a job transfer, you may be able to exclude the gain even if you don’t live in the home for the full two years.)

Get Private Health Insurance

Having Private Health Insurance (hospital cover) means that you do not have to pay the ‘Medicare Levy Surcharge’.

There’s often confusion when clients have hospital cover, but they still pay Medicare Levy.  That’s because there’s two types of Medicare payments on your tax:

Medicare Levy (all individuals pay this, and it is calculated at 2% of your taxable income if you’re earning more than ~$27k)

Medicare Levy Surcharge (additional 1% to 1.5% depending on your income)

You need to pay the Surcharge component if you’re single and earn over $90k, or have a spouse and together your income combined is more than $180k – and you don’t have private health insurance (hospital cover).

Of course if you, or you and your spouse do hold the hospital cover, you do not have to pay the surcharge component.

If you earn $300k, you’d be up for $4,500 in Medicare Levy Surcharge alone.

And Hospital Cover may only cost you $2,000 to take out!

On that maths, you’d be up $2,500.

So if you’re over the income threshold ($90k if you’re single, or $180k if you have a spouse, incomes combined), or are creeping toward it, it may be worth taking out cover.

And just as an FYI – Private Health Insurance (extras cover) does not remove the surcharge.

Step Tax Planning Process

• Educate clients – This involves using the TaxFitness newsletter (and other tools) to educate clients on their personal tax situation, tax planning in general and their opportunity to save tax.

• Sell service to client – This is the process used to sell tax planning services to clients.

• Information gathering – For effective tax planning essential client information is collected:

• The group members (i.e. all the individuals and entities that make up the client’s overall structure),
  • Group members’ current year income and expenses,
  • Group members’ assets and liabilities.

• Tax strategies database – This explains how the 250 different tax strategies actually work:

• What the tax strategy is,
• How the tax strategy works,
• When to use the tax strategy,
• Average tax deductions created by the strategy,
• The strategy implementation process.

• Selecting tax strategies – This is a two-part process. Firstly, your unique circumstances (identified through step 1) are considered in conjunction with the unique attributes of each available tax strategy. We use a tax strategies database with over 250 strategies. Then secondly, we use tax planning software and our expertise to select up to 10 optimal tax strategies for you.

• Tax savings report – Special tax planning software is then used to produce a report that details the tax savings generated from implementing the selected tax strategies, and the step-by-step process to legally and effectively implement each strategy (including the cost).

• Client discussion and implementation – We then discuss the tax savings report and implementation process with you so you fully understand the options. We can then also implement the strategies for you if you choose to proceed.

The most popular tax deductions

Deductions aren’t as valuable as tax credits, because they don’t produce dollar-for-dollar reductions in tax.

For every $1 you’re allowed to deduct from taxable income, you’ll save a percentage equal to your marginal tax rate. So if you’re in the 24% tax bracket, then a $1 deduction will save you $0.24 in tax. Yet even though those amounts are smaller than what you get from a tax credit, deductions are nothing to sneeze at.

The below deductions are only available if you itemize deductions. Tax filers who take the larger standard deduction won’t receive any extra benefit from these deductible items, and with the standard deduction continuing to rise for inflation, fewer taxpayers are likely to have enough itemized deductions to go above the standard deduction amount.

These are the most popular deductions :

• The mortgage interest deduction allows homeowners to deduct interest on up to $750,000 of mortgage debt, with higher grandfathered deductions on up to $1 million in debt applying to those who had such mortgages outstanding before the beginning of 2018. Certain home equity loans used to purchase, build, or improve your home also qualify for the interest deduction.

• Donations to qualified charities are eligible for a deduction as well. Cash and check donations are deductible and full, and most gifts of property are also deductible up to their fair market value. The key to claiming charitable deductions is to make sure you get the appropriate acknowledgment from the charity that you made the gift, because you’ll need that documentation in order to support your deduction in case you’re audited.

• The state and local tax (SALT) deduction was limited by tax reform, but it hasn’t disappeared entirely. In 2019, you’ll be allowed to deduct up to $10,000 for money you pay to state and local governments in tax. Property tax is always allowed, and you can elect either income or sales tax depending on which amount is higher.

Bookkeeping Tips for Small Businesses To Keep Clean Business Records

We hate keeping our books. As a business owner, I am sure you agree with me. Your time is precious. You have to worry about how to increase your sales. Or how to keep your customers satisfied. The last thing you want to do is to record your business transactions.

Do it a little. Everyday

Consistency is the most important principle of bookkeeping. Make an effort to record your transactions every day. No exceptions. If you push this task to year-end or month-end, it is going to be more tedious than you thought. When I help my friend look in his 10 months worth of accounting records, it took me 5 days to record everything. Then I can start my analysis.

Define a Chart of Account

Each transaction category has a unique identifier, known as Account Code. This transaction category is also known as the ledger. To get started in bookkeeping, it is better to have a chart of accounts to guide how can you categorise transactions.

Reconcile Your Bank Statements Every Month

Your bank statements are one of the most important documents to keep. They are the only business record you can trust. The bank statements are the basis for everything else. Let say you have started recording your transactions. At the end of the month, you realize that there is a difference between your accounting records and the bank statements.

You need to find out why. This is known as bank reconciliation. Some differences are valid. You might record a cheque receipt on end of the month. But the bank might take 2 days to process them. If there are no valid reasons, then you have to investigate. It might be due to inaccurate accounting records. Or it can be due to fraud.

Bookkeeping

Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business. Transactions include purchases, sales, receipts, and payments by an individual person or an organization/corporation. There are several standard methods of bookkeeping, including the single-entry and double-entry bookkeeping systems. While these may be viewed as “real” bookkeeping, any process for recording financial transactions is a bookkeeping process.

Bookkeeping is the work of a bookkeeper (or book-keeper), who records the day-to-day financial transactions of a business. They usually write the daybooks (which contain records of sales, purchases, receipts, and payments), and document each financial transaction, whether cash or credit, into the correct daybook—that is, petty cash book, suppliers ledger, customer ledger, etc.—and the general ledger. Thereafter, an accountant can create financial reports from the information recorded by the bookkeeper.

Bookkeeping refers mainly to the record-keeping aspects of financial accounting, and involves preparing source documents for all transactions, operations, and other events of a business.

The origin of book-keeping is lost in obscurity, but recent researches indicate that methods of keeping accounts have existed from the remotest times of human life in cities. Babylonian records written with styli on small slabs of clay have been found dating to 2600 BCE. The term “waste book” was used in colonial America, referring to the documenting of daily transactions of receipts and expenditures. Records were made in chronological order, and for temporary use only. Daily records were then transferred to a daybook or account ledger to balance the accounts and to create a permanent journal; then the waste book could be discarded, hence the name

The bookkeeping process primarily records the financial effects of transactions. An important difference between a manual and an electronic accounting system is the former’s latency between the recording of a financial transaction and its posting in the relevant account. This delay, which is absent in electronic accounting systems due to nearly instantaneous posting to relevant accounts, is characteristic of manual systems, and gave rise to the primary books of accounts—cash book, purchase book, sales book, etc.—for immediately documenting a financial transaction.

Basic Bookkeeping and Working With an Accountant

A little basic bookkeeping can go a long way in keeping your business organized and profitable. Learn what you’ll need to know and how to find qualified professionals to help you.

If you want to succeed in business, you need to know about financial management. No matter how skilled you are at creating a product, providing a service, or marketing your wares, the money you earn will slip between your fingers if you don’t know how to efficiently collect it, keep track of it, save it and spend or invest it wisely.

Poor financial management is one of the leading reasons that businesses fail. In many cases, failure could have been avoided if the owners had applied sound financial principles to all their dealings and decisions. Financial management is not something that you can leave to your banker, financial planner or accountant—you need to understand the basic principles yourself and use them on a daily basis, even if you plan to leave the more complicated work to hired professionals

Your Basic Bookkeeping

To succeed in business, one of your most important tools is financial analysis, based on your business records. Accurate financial records will help you answer some very important questions

As a small business owner, you probably rely on an outside accountant to do your taxes and prepare financial statements. However, like many small business owners, you may find that it’s too expensive to pay an accountant to do routine bookkeeping chores. Someone in your organization—probably you—must take on the responsibility of keeping an accurate set of financial records. Fortunately bookkeeping software makes this task easier than you might have thought.

POSSIBILITIES WITH AUTOMATED BOOKKEEPING

have machines to do nearly every awful task that we never wanted to do again…a dishwasher for our dishes, washing machine for smelly clothes, GPS for getting us anywhere, cars that drive and park themselves (also for getting us anywhere). But what about other terrible tasks? We’re talking about things that would not only make our personal lives better, but also improve our professional lives.

there’s new technology that can help handle even the most mundane and annoying accounting tasks through automated bookkeeping. In fact, Botkeeper’s CEO started the company for the sheer fact that accounting is the worst

CONNECT YOUR BOOKS TO YOUR BANK AND CREDIT CARD ACCOUNTS

If you’re already up and running with QuickBooks Online or another accounting software, you’ve likely already done this. However, if necessary, Botkeeper will handle making these connections on your behalf in a secure and efficient way. In fact, security is always top of mind, and Botkeeper provides 256-bit encryption on your financial data, and we don’t store your passwords or login information.

SIMPLIFY AND BEAUTIFY YOUR REPORTING

Once your accounts are connected and your Botkeeper has had a chance to make sense of your data, you’ll be able to run myriad reports at any time of day or night. And yes, we said “beautify” in reference to accounting reports. Analyzing your financial reports is easier when they’re presented in a way that’s pleasing to the eye. In addition to standard reports like your profit & loss, balance sheet, and cash flow statement, you’ll also have a customizable dashboard that will pull in metrics from third-party data sources. We’re talking reports on sales, social media and email marketing, etc.

PAY YOUR BILLS

Never wake up in the middle of the night with the sudden reminder that you forgot to pay one of your bills. Botkeeper organizes your bills and makes sure they’re all paid on time, every time.

Accounting Terminology Guide

401(k) Plan

Employee benefit plan authorized by Internal Revenue Code section 401(k), whereby an employer establishes an account for each participating employee and each participant elects to deposit a portion of his or her salary into the account. The amount deposited is not subject to income tax. This is the most common type of salary reduction plans.

A Misstatement is Inconsequential

If a reasonable person would conclude after considering the possibility of further undetected misstatements that the misstatement either individually or when aggregated with other misstatements would clearly be immaterial to the FINANCIAL STATEMENTS. If a reasonable person could not reach such a conclusion regarding a particular misstatement, that misstatement is more than inconsequential

Abatement

Complete removal of an amount due, (usually referring to a tax ABATEMENT a penalty abatement or an INTEREST abatement within a governing agency).

Absorption Costing

An approach to product costing that assigns a representative portion of all types of manufacturing costs–direct materials, direct labor, variable factory overhead, and fixed factory overhead–to individual products.

Accelerated Depreciation

Method that records greater DEPRECIATION than STRAIGHT-LINE DEPRECIATION in the early years and less depreciation than straight-line in the later years of an ASSET’S HOLDING PERIOD