5 Ways You May Be Overpaying the IRS

7 minute read

Meet Jacob, a 37-year-old small business owner who sent a check to the IRS for $37,379 last year when he should have paid $8,761. His accountant was just doing his tax return, not working to reduce his tax liability. Jacob’s accountant wasn’t searching for possible tax credits or deductions — instead, he was doing basic, bare minimum compliance.
This is concerning because like Jacob, many business owners around the country will overpay the IRS again this year. This is because very few people are doing tax planning, and even those who tax plan aren’t using the latest technology to maximize savings. Here are five specific ways you are likely overpaying in taxes:

#5 Not Using the Augusta Rule

Have you ever heard about the Augusta Rule? If not, you are not alone. This obscure tax strategy is available to nearly all business owners. It allows you to host business events, such as quarterly board meetings, at your home.It allows you to exclude the income from the rental on your personal return and take the rental deduction on your business return.

You can do this for up to 14 days a year and ​​the rule applies to any taxpayer who owns a home in the United States. The only stipulation is that your home cannot be your primary place of business. For more information, check out Section 280A of the tax code or get a quick summary from Corvee.

If you are wondering why it’s called the “Augusta Rule,” it is because residents of Augusta, Georgia lobbied for it. As avid golf fans know, each year the Masters golf tournament is held in Augusta, and residents wanted to rent their homes to visiting fans without becoming full-fledged rental businesses.

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#4 Failing to Take Full Advantage of Retirement Planning

A good tax plan makes sure you are taking advantage of retirement tax benefits, but it should also confirm your retirement plan is the best for your situation. Retirement planning can save you a decent amount of money, depending on your tax bracket and how much you allocate toward your retirement fund each year.

For some people, it is best to have a 401(k), for others, an IRA or an SEP. This is where tools such as tax planning software can help because they show how your taxes would change under each plan. You can adjust multiple assumptions in the program and get detailed, multi-year reports that show you each selection's long-term cost and tax outlook.

As long as you are making retirement contributions, you are saving money on your tax bill. For example, if you make a traditional IRA contribution and are in the 32% income tax bracket, a $6,000 contribution would reduce your tax liability by $1,000.

#3 Not Considering Business Tax-Saving Opportunities

Tax planning is not just about your individual return. If you have a business, there are more opportunities to save on taxes with your business return. If you have any kind of business there are many strategies available to you. Here are just a few of the popular business tax planning strategies that you can use:

  • 100% Deductible Meals;
  • Section 139 Disaster Relief;
  • Entity Optimization.

The goal of entity optimization is to figure out if you are organized under the best business structure. Around 75% of small businesses are Schedule C. This business structure rarely makes sense. By transitioning to an S Corporation, Partnership, LLC, or C Corporation, you can often significantly reduce your taxes.

#2 Ignoring the Home Office Deduction

Of the many possible work-from-home deductions the Home Office Deduction is likely the most relevant yet underused. As many people transitioned to working from home they have missed out on maximizing possible deductions the Home Office Deduction. For example, a doctor who uses their home office to work on administrative tasks related to their practice, like bookkeeping, billing, or reviewing patient files can be established as an administrative office. Then, the mileage between the home office/administrative office and the medical office is tax-deductible.

In addition to deducting mileage, you could also potentially deduct portions of your mortgage interest, property taxes, some utilities, and even homeowners insurance. To qualify, you must use your home office regularly and exclusively for business purposes.

#1 Not Properly Managing Investments

If you are a high-net-worth individual, you have more opportunities for tax planning than most average W-2 wage earners. Even if you are not a millionaire, maximizing your investment expenses and minimizing investment income tax is essential.

If you invest heavily in securities, are you taking advantage of tax-loss harvesting and 83(b) elections? To save taxes on investments, you can do things like harvesting gains if tax rates are going to be higher in the future and delay losses to offset taxes once rates rise.
If you own investment real estate, you can use Section 1031 exchanges and cost segregations to help avoid capital gains and increase depreciation. If you have crypto investments, you can reduce taxes by choosing between an LIFO or FIFO.

Overpaying the IRS Happens When You Don’t Tax Plan

If you see a theme in our list above, you are spot on. The biggest mistakes people make in overpaying the IRS stems directly from tax planning incorrectly and it happens in a variety of ways. Restaurants do not use the FICA tip credit, tech companies do not use the research and development credits, and individuals do not use health and dental insurance deductions to the full extent available: there are many more examples.

There are more than just five ways you could be overpaying the IRS. Corvee software has over 1,600 strategies to save people money on taxes. If you think you might have overpaid, ask your accountant if they use Corvee.

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