Taxgirl: Insights on Taxes, Deductions, and Financial Planning

Taxes affect nearly every financial decision, yet many people find them confusing. From claiming deductions to understanding IRS rules, staying informed can help minimize tax liability and avoid costly mistakes. Whether you’re an individual filer, a business owner, or dealing with international obligations, knowing the basics is essential.

This article explores key aspects of taxation, including how different filing statuses impact your return, available deductions and credits, tax considerations for entrepreneurs, and more.

Filing Status and IRS Categorization

Your filing status determines tax rates, deductions, and eligibility for credits. The IRS recognizes five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Surviving Spouse. Each has different tax brackets and standard deductions.

Married Filing Jointly often results in lower tax rates and a higher standard deduction—$29,200 in 2024—compared to $14,600 for Single filers. Married Filing Separately can be beneficial if one spouse has significant medical expenses or student loan payments under income-driven repayment plans. Head of Household status, available to unmarried individuals supporting a dependent, offers a more favorable tax bracket and a standard deduction of $21,900 in 2024.

Filing status also affects eligibility for credits and deductions. Married Filing Separately disqualifies taxpayers from claiming the Earned Income Tax Credit and other benefits. Head of Household filers must meet strict residency and support requirements. The IRS closely monitors changes in filing status, particularly in cases of divorce or separation, to prevent improper claims.

Deductions and Credits

Reducing tax liability depends on understanding which deductions and credits apply. Deductions lower taxable income, while credits reduce the final tax bill dollar for dollar.

Itemized deductions are only beneficial if they exceed the standard deduction. Common deductions include mortgage interest on loans up to $750,000, state and local taxes (capped at $10,000), and medical expenses exceeding 7.5% of adjusted gross income. Charitable contributions qualify if made to IRS-recognized organizations, with cash donations deductible up to 60% of adjusted gross income.

Tax credits directly reduce the amount owed and can sometimes result in a refund. The Child Tax Credit provides up to $2,000 per child under 17, with $1,600 refundable in 2024. The American Opportunity Credit offers up to $2,500 per eligible student for higher education expenses, with 40% refundable. The Residential Clean Energy Credit allows a 30% credit on qualifying home improvements like solar panels and battery storage systems.

Many credits phase out at higher incomes. The Earned Income Tax Credit begins to phase out at $24,210 for single filers and $54,884 for married couples with three or more children. The Lifetime Learning Credit, which covers tuition and fees, starts to phase out at $80,000 for single filers and $160,000 for joint filers in 2024. Understanding these thresholds helps taxpayers avoid losing valuable benefits.

Tax Aspects of Entrepreneurship

Business owners face different tax obligations than individual filers. They must report income accurately, pay self-employment taxes, make estimated payments, and track business deductions.

Self-employment tax covers Social Security and Medicare and amounts to 15.3% of net earnings. Unlike employees, who split this tax with their employer, self-employed individuals pay the full amount. However, they can deduct half of this tax when calculating adjusted gross income.

Since taxes aren’t withheld from self-employment income, estimated tax payments are required if total tax liability exceeds $1,000 for the year. Payments are due quarterly—April 15, June 17, September 16, and January 15. To avoid underpayment penalties, taxpayers should pay at least 100% of the previous year’s tax liability or 110% for high earners.

Business deductions must be ordinary and necessary. Home office expenses are deductible if the space is used exclusively for business. The simplified method allows a deduction of $5 per square foot, up to 300 square feet, while the actual expense method requires tracking mortgage interest, utilities, and depreciation. Vehicle expenses can also be deducted, with the standard mileage rate set at 67 cents per mile for 2024. Other deductible costs include advertising, professional services, and employee wages.

Entity structure affects taxation. Sole proprietors report income on Schedule C, while LLCs can choose to be taxed as sole proprietorships, partnerships, or S corporations. Electing S corp status can reduce self-employment tax by paying owners a salary and taking additional profits as distributions, which aren’t subject to payroll taxes. However, the IRS scrutinizes unreasonably low salaries, and failure to comply can result in penalties.

International Reporting Obligations

U.S. taxpayers with foreign financial ties must comply with reporting requirements to avoid severe penalties. The Foreign Account Tax Compliance Act (FATCA) and the Report of Foreign Bank and Financial Accounts (FBAR) require disclosure of foreign assets.

FATCA, enacted in 2010, requires U.S. individuals with foreign financial assets exceeding $50,000 ($100,000 for joint filers) to file Form 8938 with their tax return. FBAR, under the Bank Secrecy Act, applies to foreign accounts exceeding $10,000 at any point during the year. Unlike FBAR, FATCA covers a broader range of assets, including foreign stocks and pension accounts.

U.S. persons with ownership in foreign businesses face additional disclosures. Form 5471 is required for those with at least 10% ownership in a foreign corporation, while Form 8865 applies to interests in foreign partnerships. Failure to file these forms results in automatic penalties—$10,000 per missed form, escalating to $50,000 for continued noncompliance. The IRS also scrutinizes passive foreign investment companies (PFICs), such as foreign mutual funds, which have complex tax rules that can trigger interest charges on unrealized gains unless properly reported on Form 8621.

Estate and Gift Liability

Transferring wealth has tax consequences that require planning. The federal estate tax applies to estates exceeding $13.61 million in 2024, with a top rate of 40%. While most estates fall below this threshold, high-net-worth individuals use strategies such as gifting, trusts, and charitable contributions to reduce taxable value.

Assets passed to heirs receive a step-up in basis, eliminating capital gains on unrealized appreciation. However, gifts made during one’s lifetime do not receive this benefit. Gifts exceeding the annual exclusion—$18,000 per recipient in 2024—must be reported on Form 709, though they do not trigger immediate tax liability unless cumulative lifetime gifts surpass the estate tax exemption. Married couples can split gifts, effectively doubling the exclusion. Certain transfers, such as direct payments for tuition or medical expenses, are exempt.

To minimize estate taxes, individuals use irrevocable trusts, such as grantor retained annuity trusts (GRATs) and charitable remainder trusts (CRTs), which allow tax-efficient wealth transfers.

Taxation of Retirement Contributions

Retirement savings offer tax advantages, but contribution and withdrawal rules vary by account type. Traditional IRAs and 401(k)s provide tax-deferred growth, with contributions reducing taxable income in the year made. Withdrawals are taxed as ordinary income, and required minimum distributions (RMDs) begin at age 73. Failing to take RMDs results in a 25% penalty on the shortfall, though this can be reduced to 10% if corrected promptly.

Roth accounts, including Roth IRAs and Roth 401(k)s, operate differently. Contributions are made with after-tax dollars, but qualified withdrawals—including earnings—are tax-free. Unlike traditional accounts, Roth IRAs have no RMDs, making them useful for estate planning. Converting traditional retirement funds to a Roth triggers immediate tax liability but can be beneficial if future tax rates are expected to rise.

Employer-sponsored plans offer additional tax strategies, such as after-tax contributions to a 401(k) and mega backdoor Roth conversions, which allow high earners to move more funds into tax-free growth accounts.