2022 was MDA Taxes’ most successful tax season ever. We, the employees of MDA Taxes, want to extend our sincere gratitude at the opportunity to prepare your income taxes. Now that the tax filing deadline has past and the urgent demands of the deadline have passed, we welcome the chance to sit down with you and review your 2021 income taxes in greater detail and forecast your 2022 income taxes. Before the dust completely settles on your taxes from 2021, come in and allow us to help you translate your income tax return into a snapshot of your financial picture. We can use the tax return to lay out your sources of income and discuss strategies to maximize cash flow.
Again, we thank you for choosing us as your accounting firm and extend our invitation to take even greater value of our expertise and services.
BEFORE YOU PUT THAT TAX RETURN AWAY
Okay, now it is finally over. The revised 1099 statements from your broker. Digging for the closing statement on the refinance, and don’t even get me started about that darn K-1 that took forever to get here. So, before you slam that file drawer shut and focus your attention on summer, I ask you to take one last look at your income tax return. Your form 1040 Individual Income Tax Return has many stories to tell and, all those stories are about your finances, now, and in the future. Here is a quick list of some of the more important statistics your tax return can reveal to you.
- Number of Sources of Income
- Profit from a business or rental
- Do you have future savings plans? – IRA, H.S.A, 401K, Education accounts.
- What type of debt do you have?
- What are the major expenses of your business or rental?
Number of sources of income
Everyone is familiar with a W2 and perhaps, pension statement. Look at the front page of your 1040 and count how many of the first 7 lines have amounts in them. If you have a spouse, is there more than one amount in a line? Write down that number. Look at line 8, Other Income from Schedule 1; is there an amount included in line 8? Schedule 1 is a summary form for reporting a lot of additional sources, (page 1), and additional expenses, (page 2). Count how many lines have amounts on the first page of Schedule 1. Add this number to the total of lines 1 – 7 and you will have a total of the number of income sources you have. For planning purposes, you can discard tax refunds from Schedule 1 and small interest and dividends from lines 2 and 3 on form 1040. The remaining number should be your core sources of income and cash flow. How many of these are controllable?
Profit from Business or Rental
If you have an amount entered on line 3 or 5 of Schedule 1 you probably have a business and/or a rental property. Business income is reported on Schedule C and Rental Income is reported on Schedule E, 1st page. If you have one of these schedules, then you have a controllable source of income. You can increase your business sales or service revenue and you could raise the rent on your rental. Furthermore, if you are in a partnership or Subchapter S corporation, those incomes are reported on Schedule E page 2. For some taxpayers Business Income or Rental Income can represent a major portion of their income. There are specific strategies for running these businesses. Long-term planning will really allow you to transform your business or rental into a future powerhouse.
Do you have future savings?
Look at Page 2 of Schedule 1 Additional Income and Adjustments to Income; how many amounts are there in lines 13, 16, 20, and 23? All of these represent some type of set aside that is earmarked for a specific purpose and the IRS blesses with a tax deduction. If you have the money to save for your future; why would you not do it in a manner that allows you to deduct from your taxes, which increases the value of the investment?
So many taxpayers struggle with tough choices because of chaotic cash flow. If you can mange to save a hundred dollars, that might save you ten dollars through an H.S.A. The money is then spent on medical expenses, and you save what normally would have come out of your pocket. The ability to set aside money so that you can save more in the future is a simple and attainable strategy for struggling taxpayers.
What type of debt do you have?
Specifically, is it debt that is working for you or not? On Page 2 of Schedule 1 Additional Income and Adjustments to Income line, 21 is student loan interest. You can divide by .06 to give you a rough idea of how much debt you owe. Don’t forget to annualize the interest if you made fewer than 12 payments. Schedule A Itemized Deductions Line 8 shows mortgage interest on your residence. If you have an amount in line d Mortgage insurance premiums, then you probably owe closer to market value on your house. If there is no amount on line 8d, then your equity should be more than 20% on your house. You can back into the balance of the mortgage; however, before you go to all that work, your balance is conveniently entered on every statement you receive from the mortgage company. Look at Schedule C Business Income and Schedule E Rental Income, is there an amount on line 16 of Schedule C or Line 12 of Schedule E? These lines are for the interest you paid for a loan that was used in a business or rental.
If you really want to play financial analyst, you could find the balances on the loan used in your business. Calculate the ratio of your net income or net rental income to the loan balance. This will give you an approximate rate of return on your investment. Is it more or less than the interest rate you are paying?
What are the major expenses of your business or rental?
Okay, now that you have become so savvy you are even calculating rates of return on debt invested, let’s take a big picture view of where to focus on your business or rental. Look at Schedule C and Schedule E one last time. Find the biggest expense numbers on the page. List the top 5 for each business or rental. Do not list any expense related to your mortgage payment or depreciation. These are the biggest expenses and the simplest place to find savings leading to future income. This article assumes the reader does not want to go into an extensive search for every detail. Make a note of which expenses you can control. This includes any expenses you are allocating between business and personal.
Savings are savings, regardless of the deductibility. By cutting a few of these expenses and growing revenue a little, you will be able to increase cash flow from both sides of the equation. Just a few moments and one last glance at your income tax return and you can change cash flow projected for next year.
So next time you look at a tax return, take a different perspective because you now know there are things that tax return is just dying to whisper in your ear, like your revenue sources and best use of your savings and debt. Your tax return might even tell you the fastest places to save money if you let it. To think that you use to spurn the object of your stress every April 15. Now you can look at that 1040 as a report card from grade school personal financial success class. If all this tax investigation thrills you give my office a call, we can always use the extra help next tax season.