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What First Time Investors Should Know About Tax Time


You have your entire future laid out in front of you, and with proper planning for retirement, you’ll be able to settle down without worrying about finances. Investing in your future early on is a great way to set yourself up for success — but it’s never too late to start. If you’re a new investor heading into your first tax season, you might be wondering what you need to know about your taxes and investments.

We know that tax season can be daunting, and with multiple investments, it can seem even scarier — it doesn’t have to be that way! The team at AA Tax & Accounting Services is here to help you navigate the tax process so you can feel confident in your investments. Here are our top tips for first-time investors for tax time.

Understand Realized Gains

If you’re new to investing, you might not fully comprehend how investments are taxed. Something you need to consider is the realized gains on your investment. If you purchase a stock that sees an increase in value, you won’t be expected to pay taxes on those gains every tax season. You will only be expected to pay taxes when you “realize” the gain when you sell your stock shares.

For example, if you purchase 50 shares of a stock for a cost of $50 but the stock value increases to $75, you won’t be required to pay taxes on the $25 gain until you choose to sell your shares. With any investment, you can expect to see values rise and fall over time. If your stock share goes down in value, it will be a similar situation to realized gains where you won’t face any tax implications until your shares are sold.

Long Term & Short Term Gains

Now that you’re on your way to becoming an investing pro, you must understand the difference between short-term capital gains and long-term capital gains before heading into tax season.

Your investments’ tax implications will vary depending on how long you have held onto that particular stock. This means that your gains will be taxed at the short-term capital gains rate if you sell your shares after only holding them for a year or less. If you have held onto the stock for more than a year, your gains will be tased at the long term capital gains rates. Knowing how long you have held each of your investments can help you determine if selling or holding onto your shares a little longer is the best choice financially.

The tax rate for short-term capital gains is determined by your specific income tax bracket, while long term capital gains tax rates are typically lower than your income rate and not specific to an income bracket.

Offset Income with Capital Losses

If a few of your investments didn’t pay off this year and you have more losses than gains, you can apply up to $3,000 of your investment losses and apply that against your income. Although experiencing a loss on the investment isn’t the goal, applying the loss against your income allows you to reduce your annual income and potentially offset having a higher-taxed income. If your losses are more than $3,000, you can apply that loss to a future tax season as well.

Tax Consulting Services in Cedar City, Utah

As a first time investor, it can be difficult to understand the tax implications of your investments. If you’d like to feel confident in executing the right tax strategies to save you the most money, we recommend consulting certified public accountants like AA Tax & Accounting Services when preparing this year’s tax return.

From one-time tax consulting services to ongoing consulting services, our tax consultants work with many clients as their tax advisor and tax preparer — ensuring that your tax team understands your taxes backward and forwards. You can have peace of mind knowing that our team has unparalleled experience dealing with taxes on investments and can provide effective strategies for maximizing deductions and tax credits with our tax consulting services.

The AA Tax & Accounting Services team can help you execute the right tax strategies to save you money come tax season. Contact us to schedule an appointment.

Are Bonuses Taxable?


Receiving a bonus at work is always an exciting surprise. But before you spend it all to fund a vacation or pay off some bills, you might be wondering if your bonus is taxable.

The short answer: yes, your bonus is taxable.

Unlike the regular paycheck you receive from your employer, any bonus payments are considered supplemental wages, which means your bonus will be taxed — and they will be taxed more than the standard income rate. These same tax rules apply to more than bonuses, including moving costs, tips, overtime, and severance.

When you receive a bonus, your employer will also withhold a designated amount sent to the Internal Revenue Service. AA Tax & Accounting Services has put together a quick guide to help you calculate how much of your bonus will be taxed.

How to Calculate the Taxes on Your Bonus

How much of your bonus will you be able to put the deposit into the bank? To determine how much of your bonus will be taxed, consider the following factors:

  • Social security tax – As of 2020, you are required to pay socials security tax on any compensation received up to $137,000. Your employer will take out 6.20% from your bonus check for social security until you hit this benchmark.
  • Medicare tax – Any compensation you receive much have medicare tax factored in. This means your employer will deduct 1.45% of the total bonus for Medicare tax.
  • Federal income tax – The standard federal tax rate is 25% — however, under tax reform, this number has been adjusted to 22% for bonus withholdings. If your employer withholds more than 22% for federal income tax, you will receive that overpayment back in the form of a tax refund when you file your annual taxes.
  • State income tax – The majority of states require residents to pay state income tax, which applies to bonuses. Depending on the state you work in, your employer will withhold the designated amount required by state law.
  • 401k contributions – If you contribute to a 401k with your standard paycheck, you will likely have a portion withheld from your bonus as well. This percentage will vary depending on the number you have set with your employer
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All of these must be considered when determining how much of your bonus check will be withheld. To help illustrate these withholdings, we’ve put together an example calculation to demonstrate how you could calculate these numbers based on a $15,000 bonus check:

  • $15,000 x 25% = $3,750 in Federal tax
  • $15,000 x 5.25% = $787.50 in State tax (if applicable)
  • $15,000 x 1.45% = $217.50 in Medicare tax
  • $15,000 x 6.2% = $930 in Social Security tax

Using this example, you would deduct a total of $5,685 from the $15,000 bonus — which is a tax rate of 37.9%!

Tax Consulting Services in Cedar City, Utah

Suppose you have received a bonus or will be receiving one and have questions regarding supplemental income tax withholding. In that case, we recommend consulting certified public accountants like AA Tax & Accounting Services. Our team can help you better understand how your bonuses will be taxed and prepare you for the upcoming tax season, where it might be possible to recoup some of it through a tax refund. We have the experience to guide business owners on the best strategies for maximizing their deductions and tax credits with our tax consulting services.

The AA Tax & Accounting Services team can help you navigate the tax process when receiving supplemental income from your employer. Contact us to schedule an appointment for tax consulting services.

Your Stimulus Check Tax Questions Answered


The COVID-19 pandemic has impacted the lives of many — from getting sick yourself or knowing someone with a positive test result to losing a job or business to being stuck inside working remotely. There have been a lot of obstacles to overcome. Because of the impact on the economy, many United States citizens received stimulus checks from the government.

While everyone likes waking up to a surprise deposit in their bank account, it might leave you with a lot of questions.

What are the qualifying factors to receive the money?

Will you need to pay taxes on the stimulus check?

There’s no reason to stress about your stimulus check as you head into tax season. To help you better understand who receives stimulus checks, how you’ll receive the payment, and if the payment will be taxed, AA Tax & Accounting Services, LLC has put together a quick guide to answer some of the most common questions about the stimulus checks.

Who Qualifies for a Stimulus Check?

Individuals will receive a stimulus check if they:

  • Have a social security number – Those with a social security number are eligible to receive the stimulus payment, as well as an additional payment for any children in the household with a social security number.
  • Are not claimed as a dependent – If claimed as a dependent, the individual will not be eligible to receive the stimulus check. The person claiming them would receive it.
  • Earned within the qualifying bracket – Individuals filing taxes solo and earned less than $87,000 are eligible to receive the payment. For joint filers, they must earn less than $174,000 jointly to receive the stimulus check. Those earning more than the specified amount will receive a reduced payment.

These are only a few of the qualifications to receive a stimulus check, but the most common ones to be aware of.

How Will You Recieve Your Stimulus Check?

If you continue to be eligible for upcoming stimulus checks, you’ll continue to receive them the same way you have previously. The three ways for you to receive a stimulus check are through a direct deposit (which will automatically be set up if you received your 2019 tax return via direct deposit), a paper check that you will receive by mail, or by a debit card.

If you did not receive any of the stimulus checks that went out in 2020 or early 2021 but were eligible for the payment, it’s not too late to receive it. When filing your tax return this year, you can claim the tax credit.

Will I Need to Pay Taxes on My Stimulus Check?

If you are eligible to receive a stimulus check, you will not be required to pay taxes on the payment when you file your tax return this year — this goes for stimulus checks received in both 2020 and 2021. In addition, your stimulus payment will not be counted as income used to determine your eligibility for government assistance.

Tax Consulting Services in Cedar City, Utah

Do you still have questions regarding stimulus checks?

If so, AA Tax & Accounting Services can help you better understand the stimulus check process and how it impacts your tax returns. No one should go into tax season with their questions unanswered. Our team of tax consultants has the experience navigating the most effective strategies for maximizing their deductions and tax credits with our tax consulting services.

The AA Tax & Accounting Services team can help you execute the right tax strategies to save you money. Contact us to schedule an appointment.

Federal And Utah State Tax Changes For 2021


2021 is here, which means it’s time to be out with the old and in with the new. The same goes for your taxes! While you will still be paying taxes in 2021, there are some new tax laws in place that might change your tax return.

Tax changes don’t need to be stressful or confusing. AA Tax & Accounting Services, LLC is here to walk you through the tax changes that will be impacting Utah residents in 2021 so you can feel confident as we head into tax season.

2021 Tax Changes for Utah

Although there are a few changes for Utah residents, there aren’t as many tax law adjustments as there have been in previous years. This is because the legislative session was shorter than usual because of the COVID-19 pandemic. Since sessions were shorter, fewer tax changes were put in place on January 1, 2021. While there aren’t many tax changes to be aware of, it’s still important that you have a full understanding of the changes and what they mean for you.

To help you feel more confident in these adjustments, here are two tax changes that will impact Utah residents and how they will impact your tax return.

Utah Excise Tax Changes

An excise tax refers to the taxes placed on manufactured goods that businesses often pay and pass along to the consumer. The taxes are levied when the product is manufactured instead of at the sale of the good because the tax costs are passed along to the consumer, the products’ price increases or decreases according to the current tax rate.

As of January 1, 2021, the state of Utah imposes an excise tax rate of 1.2% on the sale of prepaid wireless telecommunications services.

Other Utah Tax Changes

The excise tax rate isn’t the only change that Utah residents need to be aware of. As of January 1, 2021, individuals can use the revenue from the state’s income and personal property taxes for more than just public or higher education (like they were able to in the past). The allowable use has been expanded to be used for services supporting children and individuals with disabilities.

Tax Consulting Services in Cedar City, Utah

While there were fewer tax changes than usual in 2021 due to the COVID-19 pandemic, the adjustments to tax rules can still be challenging to navigate — especially if you’re dealing with a unique situation. Suppose you’d like to feel confident in how these tax changes affect your taxes. In that case, we recommend consulting certified public accountants like AA Tax & Accounting Services when making any decisions or changes to your tax return.

From one-time tax consulting services to ongoing consulting services, our tax consultants work with many clients as their tax advisor and tax preparer — ensuring that your tax team understands your taxes backward and forwards. You can have peace of mind knowing that our team has the experience to provide you with the most effective strategies for maximizing deductions and tax credits with our tax consulting services.

The AA Tax & Accounting Services team can help you execute the right tax strategies to save you money come tax season. Contact us to schedule an appointment.

Tax-Deductions For The Self-Employed


As a small business owner, you know how important it is to save money wherever possible. That’s why it’s important to take advantage of tax deductions available to you. If you are self-employed and work from your home, you might be eligible to subsidize some of the related costs you might otherwise classify as personal expenses — helping to lower your tax bill.

AA Tax & Accounting Services is here to guide self-employed individuals through the tax deductions process to save the most money possible. Here are a few tax deductions to watch out for when filing your taxes this year.

5 Tax Deductions for Self-Employed

1. Home Office

To claim a home office deduction, you need to have part of your home used exclusively to fulfill the role. If you can prove you have a home office within your home used consistently and solely for your job, you can have part of your utility bills and insurance costs deducted from your business income. In some instances, you are even able to write off a portion of your rent or mortgage.

While many self-employed individuals are eligible for a home office deduction, many taxpayers don’t take advantage of this deduction. This might be because they are afraid to claim it, or they might not have the required records organized and ready to go. If you have a designated space in your home to conduct your business, it’s worth looking into this deduction to see if you’re eligible.

3. Technology and Equipment

Whether you recently purchased a new laptop to be more efficient during the day or you need to stock up on tablets for a client project, you can write off any technology and equipment used for business purposes. This includes everything from large technology like laptops and camera equipment to small items like phone chargers and keyboards.

3. Bank Fees

If you have a bank account specific to your business that incurs any fees, as a self-employed individual, you are eligible to write those off. When reviewing your bank statement, keep an eye out for the following fees that can be claimed as a deduction:

  • Maintenance fees
  • Overdraft fees
  • Late fees
  • ATM fees
  • Credit card membership fees
  • Loan setup fees

4. Business Vehicle Use

Depending on the nature of your business, you might be able to receive a deduction for the use of your vehicle. While most people assume a business vehicle deduction is only applicable to services like Uber or Lyft, that’s most definitely not the case.

Suppose you’re self-employed and use your personal vehicle for transportation to and from client meetings, to make deliveries, to pick up supplies, or another work-related outing. In that case, you can successfully claim this tax deduction. To make this claim, you will need to keep accurate records of the dates and miles you drove specifically for a work-related reason.

5. Meals

Although you won’t be able to claim a full deduction for meals, business-related meals can be claimed as a 50% deduction. This means that for any meals you purchase through your business, whether it’s a client dinner or a meal for a vendor, you are only allowed to deduct 50% of the total cost of the meal.

Review your dining transactions for the year and write off the following types of meals:

  • Client meals when you pay for the entire meal
  • Meals while traveling for business
  • Office snacks for you and employees
  • Meals for meetings with colleagues

Tax Consulting Services in Cedar City, Utah

If you’re self-employed, we recommend consulting certified public accountants like AA Tax & Accounting Services to better understand all the tax deductions available to you. We have the experience to guide business owners on the best strategies for maximizing their deductions and tax credits with our tax consulting services.

The AA Tax & Accounting Services team can help you execute the right self-employment tax strategies to save you money. Contact us to schedule an appointment.

Accounting Advice When Going Through A Divorce


When you’re in the middle of a divorce, you don’t have time to focus your attention and energy on much else. But unfortunately, your taxes aren’t going to wait until you have less on your plate. Filing your taxes for the first time post-divorce can be complicated — and there are a lot of details you and your ex will need to sort out beforehand.

To help guide you through tax season, AA Tax & Accounting Services has put together a list of accounting advice for when going through a divorce.

5 Accounting Tips For When You’re Going Through a Divorce

1. Determine Your Filing Status

First things first, you need to understand your filing status. Your marital status will determine this at the end of the year.

Were you divorced by December 31st of the tax year?

If you were divorced by then, you and your ex would file your taxes separately. However, if you were in the process of splitting up but didn’t have all the details of your divorce finalized by the end of the tax year, you will still have the option to file a joint tax return should you choose to do so.

Until your divorce decree is finalized, you can file jointly — which is likely to save you money.

2. Navigate the Transfer of Assets

It’s important to note that when transferring property assets from one spouse to another during a divorce settlement, the person receiving the asset will not be required to pay taxes on it. However, if the recipient chooses to sell that property, later on, they will have to pay capital gains tax on all the appreciation before and after the transfer. When navigating the transfer of assets process, you need to consider the tax basis and not just the property’s value.

3. Understand Exemptions for Dependents

Once finalized, your divorce decree will state which partner can claim any children as dependents. If this was not specified in your divorce decree, the custodial parent obtains the ability to claim the child(ren) as dependents.

In scenarios where parents have joint custody, the parent which the child resides for most of the tax year gets to claim the child as a dependent.

Suppose, for some reason, you and your ex would prefer that the noncustodial parent claims the dependent. In that case, this is possible if the custodial parent signs a waiver indicating that they will not claim the child as a dependent on their taxes that year.

4. Consider the Implications of Child Support

Child support will not affect your taxes at all. The child support payments are not taxable income for the recipient. Similarly, the payments are not tax-deductible for the parent that is paying child support.

5. Factor in Alimony Payments

Unlike child support payments, alimony payments are taxable income for the person receiving them. Likewise, they are tax-deductible for the parent who is paying the alimony.

All the details surrounding the alimony payments must be laid out within your divorce agreement for alimony payments to be taxable. If the alimony isn’t listed in the decree, the Internal Revenue Service won’t consider the payments to be true alimony.

Tax Preparation Services in Cedar City, Utah

Divorce can be stressful, but navigating the tax process post-divorce doesn’t have to be. AA Tax & Accounting Services is a full-service accounting firm that can help you navigate the process seamlessly. Our team has spent years serving Cedar City, Utah, and surrounding Southern Utah towns.

Contact us today to schedule an appointment for individual tax preparation.

Business Tax Strategies

Business Tax Strategies

Business Tax Strategies

When the financial year comes to a close, it’s important to take into account all the deductions and credits that can help you save money on your taxes. But navigating all of these cost-saving tax strategies can be a stressful process if you don’t know where to begin.

The team at AA Tax & Accounting Services has put together a list of strategies that can help you maximize your credits and deductions.

Take Advantage of the Health Care Tax Credit

If you pay for at least half of your employees’ health insurance premiums, have fewer than 25 full-time employees, and your employees earn an average annual salary of $50,000, then you might be eligible for the health care tax credit. This can save you money on your taxes but is helpful to navigate with the help of a certified public accountant.
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Consider Charitable Contribution Deductions

If your business has made any charitable contributions, you will want to deduct these when filing your taxes. A charitable contribution can be anything from donating money, goods, or services to an organization. When these offerings are donated, you can deduct the market value of the contribution when filing your tax return.

Account for Property Deductions

If your business has recently changed locations or acquired a new property, you can take advantage of property deductions. When this happens, you can deduct up to $500,000 of eligible business property. But keep in mind, that you can only use this deduction in the year that you first obtain the property.

Utilize the Work Opportunity Credit

When your business hires employees that are veterans, disabled, or part of another disenfranchised group, you are eligible for the work opportunity tax credit. This can be very beneficial when it comes to filing your tax report because you can receive up to 40% of the first $6,000 paid to a new employee from a disenfranchised group. However, it’s important to note that the size of this credit can vary in different situations.

Offer Child Care Expenses

Do you provide child care expenses for your employees? If so, you are eligible to receive a tax credit! If you pay for child care expenses, the credit will cover 25% of your paid expenses up to $150,000 annually.

Fund an Employee Retirement Plan

If you don’t have a retirement plan set up for your employees, it can be a great opportunity for you to save money on taxes. Set up and fund a qualified plan that is recognized by the Internal Revenue Service and you’ll be able to start taking advantage of the tax savings. There isn’t a one size fits all retirement plan for every company. Our team of professionals can help walk you through the different contribution plans and determine which is best for your business and your goals.

Account for the Cost of Gifts

If you’ve purchased any gifts for customers or vendors over the past year, you have the opportunity to deduct up to $25 per person off the cost of gifts. However, you aren’t able to claim this deduction if the gifts were provided to anyone bearing the same name as your business.

Tax Consulting Services in Cedar City, Utah

We recommend consulting certified public accountants like AA Tax & Accounting Services when making any decisions or changes to your business tax return. We have the experience to guide businesses on the best strategies for maximizing their deductions and tax credits with our accountant services.

The AA Tax & Accounting Services team can help you execute the right tax strategies to save you money come tax season. Contact us to schedule an appointment.

Gift Laws and Tax Implications in Utah

Gift Laws and Tax Implications in Utah

Gift Laws and Tax Implications in Utah

Everyone loves gifts, but did you know that if you gift a large sum of money you might need to pay a federal gift tax? Before gifting money, you must understand the federal tax laws to ensure you’re following all gift tax guidelines set by the Internal Revenue Service (IRS).

AA Tax & Accounting Services has compiled a guide to help you navigate gift tax for Utah residents — keep reading to learn more.

What Is Gift Tax?

The gift tax is a federal tax that is applied to money or property that is gifted to another person for nothing in return. It also applies to transfers where the gift giver receives less than the full value in return.

You may be wondering why you’ve never heard of this or paid a gift tax — it doesn’t apply to all gifts. If your gift or inheritance meets the set criteria, the IRS can collect a tax if you’ve already exceeded the annual or lifetime gift exemptions. So what are these exemptions? Let’s find out.

When Is a Gift Tax Applied?

As of 2020, the annual exclusion is set to a gift of at least $15,000 in a single calendar year — this number increases to $30,000 if a couple is gifting money from joint accounts or assets. Additionally, there is a cap on the amount a person can be gifted within their lifetime. This lifetime exclusion was raised to $11.58 million in 2020.

If your gifts are valued at or above these thresholds, you will need to report it to the IRS. Any gift of money or assets under these amounts are excluded from gift taxes.

Gift Tax for Utah Homeowners

If you live in Utah, there is no inheritance tax. But that doesn’t mean you’re always off the hook when it comes to paying taxes. If you are gifted something in an inheritance from a person who lives in a state other than Utah, there might be an inheritance tax applied to out-of-state inheritors. This varies from state to state, so you must take the time to understand inheritance laws if you inherit money or assets above the specified threshold from someone who lives outside of Utah.

Similarly, Utah also doesn’t have a gift tax. You will follow the same federal exclusions of $15,000 per individual — if you receive a gift at or above this amount you will need to report it to the IRS. While you won’t pay tax on the specified amount, the gift will reduce your lifetime exemption of $11.18 million.

Tax Consulting Services in Cedar City, Utah

There’s no reason to stress out about receiving a gift or inheritance. If you have questions about reporting a gift over $15,000 to the Internal Revenue Service, AA Tax & Accounting Services can help you navigate the process and walk you through everything you need to know.

The AA Tax & Accounting Services team is committed to helping you feel confident come tax season. Contact us to schedule an appointment.

Personal & Business Tax Changes To Expect If Joe Biden Takes Office

Personal and Business Tax Changes To Expect If Joe Biden Takes Office

With November 3rd on the horizon, the deadline to cast your vote in the presidential election is nearly here. Democratic presidential nominee, Joe Biden, has shared his tax policy proposals that will impact both business owners and individuals. As a way to raise federal revenue by $3.2 billion, Biden focuses on getting more taxes from both the wealthy and big corporations.

AA Tax & Accounting is here to inform you of some of the biggest proposed tax changes, not to sway you on your presidential vote. Let’s take a deeper look at how Biden’s plans will impact individual taxes and business taxes so you can have a well-rounded picture when casting your ballot on election day.

Individual Tax Changes

Although everyone will likely see some tax changes in 2021 based on Biden’s proposed tax plan, the most impacted will be wealthier Americans.

Taxes Remain Steady for Incomes Below $400,000
Under Biden’s proposed tax plan, households with an annual income under $400,000 shouldn’t see the amount they pay in taxes change. While middle-income families’ taxes will typically remain steady, there are a few instances where they could end up paying more.

One way individuals could end up paying more is through Biden’s proposed reinstatement of Obamacare’s mandate penalty for not having insurance. If health insurance isn’t purchased, the penalty would be an additional tax. Another way households might find themselves paying more in taxes is because of corporate tax increases. This will directly impact those owning stocks.

Adjustments for the Top 1% of Taxpayers
While middle-income families are mostly in the clear for tax increases, high-income households will likely take the burden of the proposed tax plan. In fact, Americans in the top 1% of households would see an after-tax income decrease of 16%—averaging a tax increase of $265,640.

Cap Deductions for Wealthy Taxpayers
For taxpayers that earn less than $400,000, they’ll be able to take the full value of itemized deductions. Households earning more than the $400,000 threshold will have the value of itemized deductions capped at 28%.

Capital Gains Taxed as Income
This proposed tax change has the largest impact on investors — especially those who have large investments in the stock and bond markets. When investors currently sell a share, they’re taxed differently than income. Under Biden’s plan, these gains would be treated like standard income.

As a result, any capital gains earned annually would be added as a form of income similar to salary and bonuses. This means that if individuals currently earn a lot of money through capital gains, they could find themselves with a big increase in their taxes.

Business Tax Changes

Businesses tend to take the brunt of the impact of Biden’s proposed business tax changes.

Increase the Corporate Tax Rate to 28%
The current tax rate for corporations is 21%. Under Biden, he is proposing the tax rate is increased to 28%—a pretty big jump in size. While there is a chance that tax increases get passed down to consumers through raised prices and labor, the increase in corporate tax rates shouldn’t impact the consumer much.

Set a Corporate Tax Minimum
In the past, large corporations like Amazon have been able to find ways to not pay taxes through various loopholes. However, Biden’s proposed tax plan ensures that all companies, no matter the scenario, will pay a minimum of 15% on all reported profits.

Tax Foreign Profits at 21%
One of the most drastic changes to tax rates impacts corporations and is related to foreign profits. Any money that is earned by foreign arms will have its tax doubled from 10.5% to 21%.

Tax Consulting Services in Cedar City, Utah

With proposed tax changes right around the corner, it can be overwhelming wondering what to expect. As you run into scenarios that may affect your taxes, you might decide that you’d like a tax consultant on your side to walk you through everything you need to know.

The AA Tax & Accounting Services team is committed to maximizing our clients’ tax savings and helping you feel confident come tax season. Contact us to schedule an appointment.

Important Tax Info For Multi-Family Properties

Important Tax Info For Multi Family Properties

As a residential property investor, it’s important to take advantage of tax benefits when possible to ensure you’re boosting your bottom line. Paying taxes is a must and can be quite costly, which is why there are many tricks to minimize the obligations surrounding multi-family home taxes.

Let’s explore the different ways that real estate investors can make reductions to the amount of property taxes owed on their multi-family homes.

Real Estate Depreciation Tax

Real estate depreciation is based on the principle that a rental property’s value declines over time due to wear and tear on the home. Think about it like a car’s value. As soon as the car comes off the lot, the quality and value begin to diminish. However, the home’s value is not usually decreasing because of factors like maintenance, renovations, neighborhood popularity, and market demand — which is why real estate depreciation is often referred to as a “phantom” expense for investors.

Because of real estate depreciation, the IRS allows investors to take a tax deduction based on the estimated decrease in the value of the multi-family property. This means that the investors can actually have a positive cash flow from the multi-family property, but shows a tax loss on paper — offering investors a major tax break.

How to Calculate Real Estate Depreciation

The IRS believes that a residential property is only useful for 27.5 years. This means that investors are able to deduct a depreciation expense from their taxes. Calculating your multi-family property’s depreciation amount is relatively simple and requires you to divide the property’s value by 27.5.

As an example, let’s look at a multi-family property worth $750,000. When dividing it’s value by 27.5, you will calculate a depreciation expense of $27,272.

Factoring that depreciation expense into your taxable income illustrates just how much an investor will save. Consider that your multi-family property generates $100,000 per year. This means you would have the following tax obligations:

Taxes owed without depreciation = $100,000 x 25% (federal income tax) = $25,000
Taxes owed with depreciation = ($100,000 – $27,272) x 25% = $18,182

With no other deductions other than a real estate depreciation tax, investors in this scenario would save $6,818 annually — which is massive tax savings of property taxes for multi-family homes!

Cost-Segregation

Similar to real estate depreciation, there is another tax benefit known as cost-segregation which also factors in the depreciation of elements within the multi-family property. This includes elements such as appliances, fixtures, and cabinets.

Unlike the home itself, these items within the home have a much shorter lifespan which can be written off taxes for no more than seven years.

One important thing to note when considering cost-segregation is that the more you use this on your annual taxes, the higher your tax bill will be upon selling the property. If you plan to sell the property and want to reduce taxes during the sale, be mindful of this tax benefit for multi-family homes in Utah.

Tax Deductions

As a residential real estate investor, you must take advantage of various tax deductions. In layman’s terms, a tax deduction is any type of expense that can be written off of your taxable income. With your multi-family home taxes, you have the ability to deduct any expenses incurred while managing, maintaining, or repairing your property from the total taxable rental income.

Consider writing off the following expenses you might incur with your multi-family property:

  • Property management costs
  • Maintenance or repair fees
  • Monthly utilities (water, gas, electric, etc.)
  • Property marketing costs
  • Mortgage interest
  • And more!

Investors of multi-family properties can really benefit from tax deductions (as well as depreciation and cost-segregation) in comparison to single-family investments. When filing property taxes for multi-family homes, you can pay a single tax bill that covers all the units within the property — making it more efficient to file and likely offers a higher rate than that of a single-family home.

The AA Tax & Accounting Services team is committed to maximizing our clients’ tax savings. Our full-service accounting firm has spent years serving Cedar City, Utah, and surrounding Southern Utah towns providing effective tax strategies for multi-family investors. Contact us to schedule an appointment.

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