Year End Tax Moves
Hello everyone!
The end of the year is fast approaching. That means that now is the
time to plan for your 2004 taxes, while there is still time to do
something about them. After the end of the year, there is very little you
can do to lower the bill for the prior year. So let's strategize!
Remember, tax rules are complex and often counter-intuitive. This is
GENERAL advice. If you are a client of John Schachter + Associates, call
or email us for advice on your particular situation.
TAXES AND COMEDY - TIMING IS EVERYTHING
- In general, it's better to incur taxes as late as possible. Therefore, a
basic rule of tax planning is accelerating deductions and deferring
income. Here are ways to do that, if you, like most people and small
businesses, are on the cash basis of accounting:
DESK JOCKEYS AND OTHER SALARIED FOLK
- Participate to the fullest in deferred compensation plans at work.
Income grows tax-free, and you may well pay tax at a lower rate in your
retirement than you would if you took the money now.
- If your company offers Flexible Spending Accounts or cafeteria plan
benefits, consider participating. These plans let you pay for things like
medical and day care expenses with pre-tax dollars. They are quite
valuable for most people.
- Arrange to get your bonus at work in 2005. Some limits apply...
MASTERS OF THE UNIVERSE AND OTHER INVESTORS
- Sell losing stocks, bonds or mutual funds to get a capital loss. Losses
offset any gains, and extra losses can help reduce your regular tax. But
beware the "Wash sale rule'. You can't take a loss this year if you buy
the same loss-making stock within thirty days of sale. You must wait to
take the loss till you sell the "replacement' security.
- Remember to deduct margin interest and expenses of investment advice or
may costs of being an investor. Talk to us for details.
- Avoid buying into a mutual fund right before it makes an allocation of
taxable income to its holders. Many do such allocations near the end of
the year. Fund companies will tell you when they plan to do this.
- If you own part of a money-losing S Corporation or partnership, be sure
to invest enough in the company so that you can take any applicable losses
this year. You can't deduct losses of such pass-through entities in excess
of the amount you have invested in them.
BILL CLINTON AND OTHER SELF EMPLOYED
(some of these apply to
unreimbursed business expenses of employees, too.)
- If you are the boss, slow down billing or collection activities to
avoid hastening receipt of payment.
- Pay business expenses by the end of the year. If you mail the check,
the expense is considered paid, even if the vendor doesn't get it till the
next year. But holding the check in the drawer won't work - for income or
expenses. Our website has checklists of deductions for various
professions; see if there's one for you. Also note that prepaying rent and
most interest will NOT work - special tax rules disallow the deduction
until the year the bill is actually due.
- You can use a credit card to pay business expenses and take a
deduction in the year the charge hits your statement - even if you don't
pay the bill till a later year. If the card is 100% business, you can
deduct the interest, too.
- You can write off equipment that you purchase for your business or as
an unreimbursed employee expense if the equipment is ready for use by the
end of the year. Just ordering the equipment won't work, though.
- Buy a huge SUV that you use in business. Congress has made behemoth
SUVs eligible for bigger-than-ever depreciation deductions. This applies
to vehicles with a gross weight in excess of 6,000 pounds. Good for
Detroit - and OPEC! This deduction may go away after this year...
PEOPLE WHO ITEMIZE DEDUCTIONS
- Pay your January mortgage payment in December.
- Pay your final 2004 state estimated tax payment in December, even
though you could wait till January 15th.
- Pay off a pile of medical bills, if you have them lying around, and if
you itemize your deductions. But medical expenses are only deductible to
the extent they exceed 7.5% of your adjusted gross income (AGI). So, if
your AGI is $60,000, say, only medical expenses in excess of $4,500 would
be deductible.
- Make charitable contributions in December, not January. You must have
a receipt from the charity to substantiate a deduction of more than $200.
You can donate appreciated stock to a charity and help them in their good
works while getting a nifty tax benefit: you get a deduction for the fair
market value of the stock, even if you paid much less for it originally.
- If you were job-hunting in 2004, save records for associated expenses.
They can be deductible!
WHAT STINKS IN HERE? OH - THE AMT!
Warning! If you are subject to Alternative Minimum Tax (the dreaded AMT),
increasing your itemized deductions won't help. You should push such
deductions into next year, if you expect to avoid AMT then. How can you
tell if you will owe AMT? Well, it's a very gnarly computation, but it is
driven by the amount of your income, and the amount of most of your
itemized deductions and other tax breaks. An important AMT trigger is the
exercise of stock options. One way to see if you are liable for this tax
is to look at last year's return. If a number appears on Line 43, and your
income and deductions in 2004 are similar to 2003, you may be in for it.
Ask us for more guidance if you want.
WHEN TO DO THE OPPOSITE OF EVERYTHING JUST MENTIONED
If you think you will be in a higher tax bracket in 2005 than in 2004, you
may want to do the opposite of the preceding advice. That's because
deductions will be more valuable next year than this, and income more
burdensome, tax-wise.
IRAs MUST BE TAPPED BY YEAR END IF YOU ARE OVER 71
If you are 70 ½ or above in 2004, you must take money out of your IRAs. If
you are over 71, you must withdraw at least a minimum amount by December
31, or pay a nasty penalty. If this is the year you turn 70.5, then you
have till April. If you have several IRAs, you figure the minimum required
distribution by adding up the 2004 starting balances of ALL of them, then
multiplying by a factor provided by the IRS. You can take the money out of
any combination of the IRAs, however - you do NOT have to take an equal
portion from each.
Many pension accounts have similar rules.
This is a good place for a pitch for the Roth IRA. This turbo-charged
savings vehicle grows tax-free, and the money is more easily accessible
without tax penalty than a traditional IRA. Also, there are no minimum
required distributions, so you can leave the money in the account right up
to your death, if you want.
A SACK OF PRESENTS
It can be wise to give away money or income-producing property to members
of your family who are in lower tax brackets than you. They pay tax at a
lower rate than you do, and you might have to spend money supporting them
anyway. Plus you diminish your taxable estate, which can save a lot in
estate taxes. BUT don't give investments that throw off interest or
ordinary income to a kid under the age of 14. They pay tax at their
parents' rate. Consider capital gains investments like no-dividend stocks,
instead. And consider whether the gift to a child will disqualify him or
her for financial aid at school.
You can give up to $11,000 per year to as many people as you want
without triggering gift tax (or gift tax paperwork, which can be
burdensome). If you and a spouse agree, you can tack these limits
together, and make the tax-exempt amount $22,000. You do have to file a
tax form to report such gift-splitting.
You can also save by putting money into a 529 plan for college tuition.
The money grows tax-free and is tax-exempt if it is taken out to pay for
tuition and fees. You can save for yourself this way, too.
EXTRA CREDIT - FOR EMPLOYERS WHO SET UP RETIREMENT PLANS
If you set up a new retirement plan for employees of your small company,
you may be able to get $500 back from the government on your taxes. This
tax credit applies to expenses incurred in setting up and maintaining the
plan in its first three years of existence. You must not have offered a
retirement plan for at least three years before the "new' plan comes into
being.
EXTRA EXTRA CREDIT - FOR PEOPLE WHO SAVE
If your income is fairly modest - up to $50,000 for married joint filers;
up to $25,000 for singles - and you are neither a dependent of another nor
a student, you can get money back for contributing to an IRA, Roth IRA,
401(k), or other types of retirement plans. This can lessen the burden of
such contributions quite a bit.
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