Business Tax Receipt

If you’re self-employed (which means you are a sole proprietor and file Schedule C as part of your personal income tax return), are you wondering how much federal income tax you may have to pay? This article will help you sort this out.

1. If you have a loss in your small business, you’ll pay zero federal income tax. By a loss, I mean that your expenses are greater than your income, as reported on Schedule C. In fact, having a loss may reduce your income tax, as it can usually be used to offset other sources of income, if you have any.

2. Let’s take a more positive approach here and assume you have profit from your business. Again, the starting point is Schedule C. If your income (i.e. sales or revenue) is greater than your expenses, you have profit, and that Schedule C profit gets added to any other sources of income you report on Form 1040. So you must realize that the amount of tax you’ll pay on self-employment income depends on whether you have any other income, such as investment income (interest or dividends or capital gains) or wages/salary that you or your spouse receive from an employee job. All your income, including the Schedule C profit, gets added together and is called “Total Income” on Form 1040.

3. You then get to subtract various deductions from your Total Income to arrive at “Adjusted Gross Income.” These deductions are also found on Form 1040, page 1, and include things like IRA contributions, health insurance, moving expenses, and 50% of your self-employment tax.

4. Next, you get to take the Standard Deduction or Itemized Deductions (on Schedule A), as well as Exemptions for yourself, your spouse, and any dependents such as your children. After subtracting these amounts, you finally arrive at the key number that determines how much federal income tax you’ll pay – Taxable Income. You pay federal income tax on this amount based on the tax tables, which operate on the basic principle that the more you make, the more tax you pay on higher levels of income. These tax tables start out at 10% and go up from there – there are also brackets of 15%, 25%, 28%, 33% and 35%.

As you can see, what seems like a simple question (How much income tax will I pay on my self-employment income?) does not have a simple answer. In order to answer this question, you must know how much taxable income you have, and that requires you to go through the same calculations that are done on your personal income tax return. But that’s how our tax system works, and this is the reason why many self-employed people get help from a tax professional not only at tax time, but throughout the year.

Buying and renting property is one of the fastest growing trends that people use to build wealth and those who successfully employ this strategy can create a better lifestyle. But part of being an effective real estate investor is knowing how to reduce taxes on rental income. The goal is to minimize taxes so that there is more money to reinvest at the end of the day. Here are three tips for reporting income from rental real estate on a tax return.

Rental Income

One of the benefits of owning real estate is the income that landlords generate from rent. The payments increase taxable income so owners must keep an accurate record of rents and report the amounts for each property separately. The tax treatment for rental property depends on whether it is passive income, generated by a company that is in the business of renting personal property, and if the owner used the property at any time during the tax year for personal purposes. Each of these factors will impact taxes differently so be sure to have a good knowledge of the rules that apply.

Rental Expenses

The costs of owning the rental property are allowable deductions. Owners can realize significant tax savings with good record-keeping and knowledge of tax guidelines. Three key rental expenses include:

Mortgage Interest. If there is a loan on the property the lender will send a Form 1098 at year-end. This is the statement that shows the amount for mortgage interest, deductible points, and property taxes paid through an escrow account.
Property Taxes. There are instances when property taxes will not be included on a Form 1098. For instance, the cash purchase of an investment property excludes the existence of a mortgage. In those instances, no escrow will be established. Instead, the property taxes will be paid directly by the owner. Refer to the property tax bill and payment receipts for amounts paid during the year. This will be key to reporting the deduction on the tax return. Additionally, investors should be careful to remove from their books any property that they sell or transfer during the year. Exclude those properties from tax returns in future years.
Other Deductions. By claiming property, investors can often lower taxable income with deductions such as depreciation, insurance, and maintenance costs.
These are just a few of the items that owners of rental property should track. To learn more about reporting rental income and expenses visit http://www.tbsusa.com for a free tax organizer that will help maximize allowable deductions for greater tax savings.