When we think of deductions, we often tend to think of them within the context of someone’s professional life, such as business expenses. But did you know that many of your personal expenses can help you qualify for tax credit as well? In this episode, Gene Marks and special guest, Joanne Bryson, discuss several strategies that will enable you to lower your individual income tax this year.

Executive Summary

5:34—One way to lower your personal taxes is by switching from a regular IRA (Individual Retirement Account) to a Roth IRA. With a Roth IRA, you’re not deducting the contribution to an IRA, which means that you won’t have to pay any taxes once you retire and take your money out from that account.

6:49—Unfortunately, due to income restrictions, those with higher income levels might not be able to make contributions to their Roth IRAs. If this is your situation, you can still make a non-deductible regular IRA contribution, which will automatically convert into a Roth IRA without any tax implications.

8:26—In households with only one high wage earner, the working individual can shield a portion of their income by making contributions to a non-deductible spousal IRA; these contributions will also be converted to a Roth IRA.

9:50— If you are a W-2 wage earner, you can check with your employer to find out whether they offer a Roth 401K plan.

10:24—Business owners have the option of using a SEP IRA (Simplified Employee Pension Individual Retirement Arrangement), which not only offers them a higher contribution limit, but also provides them with a longer contribution time frame.

12:18—For more assistance with retirement and financial planning, it’s best to consult with an investment advisor to help you meet your goals.   

15:01—As of 2018, the Tax Cuts and Jobs Act no longer allows W-2 earners to claim home office deductions or receive credit for employee business expenses.

16:45—Currently, only profit-generating business owners are eligible for the home office deduction.

16:58—For the purpose of tax deductions, the term “home office” is defined as any space that is used routinely and exclusively for business purposes.

17:39— The actual deduction is based on the square footage of your house compared to the total square footage of your property.

20:31— In order for a married couple to qualify for the childcare tax credit, both spouses must be generating consistent income. However, exceptions will be made in situations where one or both parents are incapacitated or studying full time.

21:10—The childcare tax credit covers expenses of up to $3,000 for one child and $6,000 for two or more children. The credit runs from 20% up to 35%.

22:02—The childcare tax credit can be used in addition to any dependent care benefits that you might be receiving from your employer as well.



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Gene: Hey everybody, it’s Gene Marks again, and thank you so much for coming back and joining us on the Hartford Small Biz Ahead podcast. Today my guest is Joanne Bryson. Joanne is a CPA based outside of Philadelphia. Joanne and I got to know each other because I interviewed her for a piece I did for the Philadelphia Inquirer and I liked her so much that I wanted to bring her on the Small Biz Ahead podcast to get some advice from her. Our focus conversation today is going to be on taxes, but individual taxes, like for you, the business owner or the entrepreneur. Joanne’s website is CPA Help Now, and I’ll say that again also at the end of our conversation. Joanne, thanks so much for joining.

Joanne: You’re very welcome. I’m really excited.

Gene: Give us a little bit of your background as a certified public accountant. How long have you been doing this?

Joanne: I’ve been doing this for 37 years.

Gene: Holy mackerel. So you started out with a needle and stone, is that right?

Joanne: I did. I started out when the Big 8 was Big 8.

Gene: Yes.

Joanne: That’s a very, very long time ago. I think now they’re down to Big 4?

Gene: Yeah, Big 4.

Joanne: Are you going to be smaller?

Gene: By the end of this conversation it’ll be two or three probably.

Joanne: Exactly. And I found that being in the Big 8 public accounting firm was really soul sucking. It was kind of like being in the army. They owned every one of your minutes and they gave you some time off. And I went to the big giant corporation after leaving public accounting and then I started working with some smaller companies, both everything from a startup that was struggling and day two said, “I’m really sorry to tell you, but we can’t afford to pay you what we told you we would pay you.” To a company which was in a super growth mode, a privately held company in super growth mode, that went from roughly 50 employees to 150 employees in a five-year period. And went to a couple of small publicly held companies as corporate controller until eventually I said I’ve had enough of corporate America and took a brief hiatus where I was running fitness centers of all things.

Gene: Wow.

Joanne: Completely different. And back to Monty Python “And now for something completely different.” That was kind of my, I’m done with accounting. But what I found was that I really needed to go back to accounting because being a small business owner is really hard. So it gives me a different perspective because I’m not just a numbers cruncher. I have lived trying to make payroll. So it definitely gives me that different perspective. So accounting for me went from when I was in corporate America, it was all about just making people rich, to now it’s really about helping people overcome problems, whether that is an individual that had a bad divorce and they need to figure out how to pay their tax bill because all of their money is going to child support or a business owner who is in that super growth mode and just needs to save money on their taxes.

Gene: It makes sense. And having somebody like yourself that comes from the world of business, I didn’t actually know that you actually owned businesses or worked in the fitness world, it really does connect you a lot more with your clients. So how many years now have you been independent now on your own?

Joanne: About 12.

Gene: Wow. It’s amazing. And would you say that your bread and butter clients are small business owners? I mean I’m sure you do individuals as well.

Joanne: Definitely. And a lot of our clients start out as Schedule C businesses where it’s one tax return, but as they grow we make the determination that they really will benefit from becoming a Subchapter S corporation. So my March 15th gets just as busy as my April 15th.

Gene: Got it. All right, let’s talk about some of the advice that you’re giving your clients this year. You and I are having this conversation now, it’s near the end of February 2023. I hate it when people do tax planning and ask for tax advice on December 29th of the year. So actually now is a really good time to think about 2023 as an individual. Let’s start with retirement savings.

Joanne: Absolutely.

Gene: I mean there are so many different options. Individual 401ks and set plans, IRAs, Roth IRAs, 401ks, I want to give you the floor. Give us some advice as individuals. What should we be doing to maximize our retirement savings? What do you tell your clients?

Joanne: Absolutely. So most of us are familiar with the concept of the regular IRAs where you contribute this year, it’s up to 6,000 if you are under the age of 50 or 7,000 if you’re over the age of 50. So most of us are familiar with that. What we might not be familiar with is the concept of a Roth IRA. With a regular IRA when you retire, you have to pay tax on it. So that can be really challenging when you’re on a reduced income. If there’s a way that you can get money tax-free and retirement, it’s nice. And a Roth IRA under the current rules is one of those ways. So with a Roth IRA, you’re not deducting the contribution to an IRA, it’s after tax. Exactly. So when you take the money out you are not having to pay tax on it.

Joanne: But if your income is too high, if your married filing jointly is over like 204,000, it starts to phase out being able to make a Roth IRA contribution. What you can do is make a non-deductible regular IRA contribution. So you just choose not to make it deductible and then you have basis in it. So if you contribute $6,000 but you’re not actually deducting it from your return, then you just convert it automatically to a Roth IRA. And there’s no tax implication. And in fact, because you can do that I don’t understand why they even have the income limits on a Roth IRA.

Gene: Yeah, that makes sense. So the Roth IRA is limited to what you can contribute to that specifically. But then you say by not deducting your regular IRA it can grow tax-free, it can almost be like a Roth. Is that the fact?

Joanne: Exactly. It gets converted. So you actually convert it from a regular IRA to a Roth so that you have full basis. So if you contribute $6,000 on February 22nd and then you can convert it on February 22nd to a Roth IRA, there’s no increase in value. So your basis is a hundred percent.

Gene: Got it.

Joanne: And that really can come in handy when you have a very high wage earner, their spouse may not work, but they want to shield some of their income in the future from having to pay tax when they do retire. So you can do a spousal IRA, put six or seven thousand depending on the age into a non-deductible spousal IRA, convert it automatically to a Roth. And it’s beneficial.

Gene: What I think a lot of people don’t understand about Roth IRAs is that they are subject to limitations based on your income, but as much as you could put away into a Roth IRA or a non-deductible IRA as well, it grows tax-free. And right now you and I are talking when the markets are down, as we know and in fact some people are predicting to go down even further, which would make sense that if you put money in to a Roth IRA in a down market, when ultimately markets turn around as those markets grow and your assets in that account grows over time, you’re not going to be taxed on that growth will you? And you won’t be taxed when you take it out either.

Joanne: Exactly. So it really is beneficial. And if you are a W2 wage earner, a lot of companies offer the option of putting money into a Roth 401k.

Gene: Okay.

Joanne: So that’s something else to look into. Even if you don’t do a hundred percent of your 401k contribution into a Roth, it’s beneficial.

Gene: Got it.

Joanne: The thing about the IRAs, whether it’s a Roth or a regular IRA, is that this year you have to get that money in by April 18th. But if you’re a business owner, you have a benefit in that you can do a SEP IRA. And a SEP IRA has much higher limits. I think it’s 50… I have a cheat sheet someplace, 58,000 this year. It’s 58,000 max that you can put in based on either 25% of your W2 wages from your business or 20% of your net business income.

Joanne: Let’s say that you’re a realtor and you know that you’ve got some nice big fat deals that are coming down and you’re going to get paid in August. So your cash flow is a little bit tight between now and August, but you know you’ve got money coming in, in August. And your taxes are done now. What you can do is put your taxes on extension as of April 18th. And even if you file on April 19th, you have until October 15th to fund that SEP IRA. So a SEP gives you a much longer time to fund the IRA, which is great.

Gene: Yeah, that is really great. Before we leave the topics of retirement plans, because I have other questions I want to get to you, you’ve talked about Roth IRAs, you talked about setting up SEP IRAs, even a SEP 401k. You handle the tax side of this and advise your clients on this, but if I’m your client Joanne, and I’m like, I’m really interested in doing this, where should we go to set these things up? Who would you recommend that we talk to?

Joanne: I would recommend that people work with a trusted investment advisor. You can’t just go to your bank or go to your credit union and just set up an account. And to me that’s just really a stop gap. I would find a trusted investment advisor, someone that is going to sit down with you, even if it’s just by Zoom a couple of times a year to check in with you to see how things are going.

Gene: Got it.

Joanne: One of the good disciplines would be start funding your 2023 now so that you are not looking at 2024 saying, “Well I really wanted to take that cruise for six weeks. Do I fund my retirement or do I take the cruise?”

Joanne: And I actually do talk with people who are in that situation where they didn’t fund their retirement during the year and then they don’t bother to fund it at the end of the year. And that’s problematic. So having an investment advisor puts it front and center in your mind. I’m supposed to be saving for the future. I’m supposed to be saving for emergencies. And that’s really helpful.

Joanne: And I’m not an investment advisor. I don’t have any skin in that game. But I consistently recommend that my clients really look at their budget and budget for their retirement. Budget money into a retirement account because they might not thank me tomorrow when they don’t get to go on that fancy vacation, but they’ll thank me 10 years from now when they have money to do the things they want to in retirement.

Gene: The takeaway is good CPAs like yourself, Joanne, you will tell your clients you should set up this type of account and fund it with this amount of money. That’s what you’re allowed to do. Now talk to your investment advisor and get that done. And if the client has any questions about that, I’m sure you can talk to the investment advisor. But in the end, that advice is coming from a competent CPA.

Gene: Let’s move away a little bit from retirement accounts. Let’s talk again. We’re at individuals. Give me some of the rules. Tell me how you address when clients ask you about home office deductions and employee expense because that’s always an area that people get confused about and I’m hoping you can bring some clarity.

Joanne: Sure. The Tax Cuts and Jobs Act, the 2018 tax changes, eliminated the home office deduction for people who are W2 earners. And the same with employee business expenses. Believe it or not I still have people insist that they have been taking it and I say to them, “I’ll be happy to take it if you can show me where on your return you’ve been taking it.”

Gene: Well, I guess the question gets asked a lot now. So many people have been working from home because of COVID and afterwards they’re like, “Oh, I can take some deductions because I’m buying this for my work.”

Joanne: That’s exactly right. The answer is no, except if you’re in Pennsylvania, and unfortunately I forgot to look up the other six states, but there are a total of seven states that allow a home office deduction.

Gene: For state taxes?

Joanne: For state taxes.

Gene: Right.

Joanne: In Pennsylvania, that can actually be worth about 6% because if you are a Philadelphia resident and your primary office is in your home, then you get to take a refund for how much you overpaid because you have that home office.

Gene: Right. Okay.

Joanne: It’s definitely worth tracking that expense even if you are a W2 earner.

Gene: I guess the takeaway though there is that you can certainly Google if your state allows you to deduct…

Joanne: That’s exactly right.

Gene: You’re a W2 employee. What about the home office deduction though? So who can take it?

Joanne: Business owners.

Gene: Just business owners.

Joanne: Business owners, I should clarify. Business owners who have a profit.

Gene: How about business owners that have a W2 income but are doing side gigs?

Joanne: Yes, you can. If it is a place where you are routinely doing business, and that can include administrative work. So let’s say you are a W2 attorney and you have some clients on the side and you’re operating out of your home office. You can see I work in a basement, as long as that space is used exclusively and routinely just as an office.

Gene: Got it.

Joanne: And it’s based on the square footage of your house compared to the total square footage of your property. So it’s not based on how many rooms are being used or what the size of that room is.

Gene: Got it. So walk us through very quickly that calculation. It’s the square footage times like a dollar amount per square foot, correct?

Joanne: Well, that is if you’re using the safe harbor, which is $5 a square foot. If you are using your actual expenses, let’s say you have a room that is 10 by 20, that’s 120, I’m sorry, 10 by 12, that’s 120 square feet. And if you’re in a thousand square foot home or apartment, that would be 12% of the total square footage in the house. So let’s just talk about a renter. If you’re a renter and you’re using 12% of your home for a home office and it is a dedicated space, then you can take 12% of the rent that you pay, your renter’s insurance, your utilities, any of those expenses,

Gene: Is there a max to that?

Joanne: Is there what?

Gene: Is there a maximum to that? Like a ceiling to how much you can take as far as you know?

Joanne: So if you are a business owner, the maximum is basically going to be the amount of positive net income that you have. So if you have $100,000 in billings, but you’re in your startup phase and you have $110,000 in expenses, then your operating expenses for a home office will get carried forward to a future year.

Gene: I see.

Joanne: But if you have 110,000 in billings and you have a 100,000 in net income, then your deduction is basically limited to that 10,000 and any unused expenses will get carried forward to be used in a future year. So no, there really isn’t a limit.

Gene: Got it. Okay, that’s great. Final question, there’s so much we can talk about when it comes to taxes, but another issue that I have that a lot of business owners are younger, they’re in their thirties, they’re in their forties, they have kids, A lot of them are starting up businesses, a lot of them are doing freelancing contracts. So there’s a lot of confusion around the childcare tax credit and the benefits they can get. So walk us through that as an individual. What can an individual get if they’re a parent? What would be available to them from the childcare tax credit, if you can explain?

Joanne: So with the childcare tax, if you’re married and filing jointly, both of you need to have income unless one of the spouses, or actually both of you could be full-time students or incapacitated. So if you’re not capable, if you’re a one wage earner and your spouse is bedridden, then obviously they’re not expected to go out to work and somebody needs to take care of the kids.

Joanne: The limit is $3,000 of expenses, if you have one child and $6,000, if you have two or more children. If you have eight children, that limit is still $6,000. And the credit runs from 20% up to 35%. It’s not likely that too many people are getting the 35% because your income needs to be under 15,000. So for most people it’s 20% of what your allowable expenses are because that phases in at $43,000. So it’s very difficult to live these days on less than $43,000. If you have a dependent care benefit from your employer, and that is up to $5,000, if you have expenses that you are submitting to your employer under a dependent care plan-

Gene: Probably can’t use them for your individual?

Joanne: No, there’s no double dipping. Except it’s not unusual that expenses are going to exceed $5,000 nowadays. I mean, when my children were really young my expenses way exceeded $5,000 and my kids aren’t really all that young anymore. So childcare is really expensive. You can put $5,000 into your employer’s dependent care program and the remainder you can use for the dependent care credit. So from that point of view, you can double dip.

Gene: Got it. See, that’s such great information. And is the credit, is it a refundable credit? In other words, if it exceeds whatever your tax liability is, can you get money back…

Joanne: I forgot to double check that, but I don’t think it’s refundable.

Gene: I don’t think it is either. I’m not sure. So for all of you guys watching or listening to this check with your accountants, but I’m pretty sure that it is not refundable. It’s a good question because if it is refundable, I mean it could be cash coming back, but I don’t think that it is.

Joanne: I do want to mention something here. When you bring up the refundable credits, there is real confusion with people about what it means for something to be refundable. All it means is that credit is usable If you have an overall tax liability. If you have a tax liability of $10,000 and you only had $6,000 withheld, those refundable credits are going to reduce that tax liability of $10,000. It’s not really whether or not you’re due a refund it’s how much liability do you have?

Gene: Sure. A lot of people don’t realize that. Once again, you are blowing me away with all of your knowledge on taxes. Here I am, I’m also a CPA and I know one one hundredth of what you know and I appreciate it so much. And as you obviously know this as well, we’re scratching the surface. But listen, some of the takeaways are that as an independent business owner or if you are a business yourself, you really need to be putting money away as much as possible for your retirement. Look into those Roth accounts. Roth IRA, Roth 401ks. Very, very important stuff.

Gene: Your home office deduction. If you are running a business, even a side gig out of your house, as long as you’ve got income, you may be eligible for a good home office deduction, including all the expenses that are incurred to run it. And when it comes to if you have kids, you’re married and you have kids, you can have up to a $6,000 credit available to you up to that amount. You may be eligible for most of that, even in addition to whatever, dependent care benefits that you’re getting from your employer as well. It’s big money and it’s something that you need to be looking into and talking about with your accountant.

Joanne: It’s not a $6,000 credit, it’s $6,000 of expenses. That’s a big credit.

Gene: That’s exactly right. So thank you for correcting me on that. Joanne, thank you so much. I’ve been talking to Joanne Bryson. Joanne is an independent CPA based outside of Philadelphia, but who takes clients all around the world if necessary, at least in the U.S. Joanne can be reached at cpahelpnow.com. Joanne, again, thank you very much for your time. I really appreciate it.

Joanne: It was absolutely my pleasure.

Gene: My pleasure too. You’ve been watching Small Biz Ahead podcast from The Hartford. My name is Gene Marks. Thank you so much for joining us. Maybe you’re listening to this and watching it, but I hope you’ve gotten some good information from Joanne because I know that I have.

Gene: We’ll be back soon with another episode. If you need any tips or advice or help in running your business, please visit us at smallbizahead.com or sba.thehartford.com. Again, my name is Gene Marks. Thanks again. We will see you again soon. Take care.

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