More On Tax Planningfrom The Advisor's Professional Library
- Taxation of Real Estate Real estate may be used to shelter income and may offer certain tax benefits. However, the type of real estate investment may result in different tax treatment. Learn how to use these investments to help your clients.
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
Tax planning is a struggle for every individual and business owner. There are constant changes to tax rules, and tax professionals are always in need of technical assistance from the Internal Revenue Service. Those of you who focus on tax planning will have more options to help clients reduce their tax burden the earlier you start planning. To help, here are 10 timely tax planning tips.
#1. Be Flexible
It may be a clich?, but for clients to improve their overall financial well-being, they need to spend less and save more. To encourage this effort, help clients find ways to stretch their dollars. First, recommend to working clients that they participate in their companies' flexible spending plans, which allow employees to pay for child care expenses and unreimbursed medical costs with pre-tax dollars. If this opportunity is not available, be sure clients understand which expenses are deductible on their income tax returns. For example, tuition for a child's summer day camp (not overnight camp) counts as an expense toward the child and dependent care credit on Federal Form 2441. Your clients will need a letter confirming the camp's name, address, Federal Identification Number, and the tuition amount paid in order to benefit from this opportunity. The credit is applicable to up to $3,000 of expenses, or $6,000 for two or more children, and ranges from 20% to 35% of expenses, depending on the taxpayer's income. The 35% rate applies for taxpayers with income under $15,000, while the 20% rate applies to incomes over $43,000.
#2. Fund Retirement
The earlier a taxpayer puts money into a savings plan, the better. Recent economic conditions may have prompted some consumers to slow or stop many savings efforts. However, encourage clients to set specific goals to improve their savings. The maximum retirement plan contribution increases for tax year 2004. The elective deferral is $13,000, or $16,000 if the taxpayer is aged 50 or older. For SIMPLE plans, the amount increases to $9,000, or $10,500 for those aged 50 or older.
#3. Get Educated
The amount of educational expenses that qualifies for a modified adjusted gross income (MAGI) deduction increases in 2004 from $3,000 to $4,000 if the taxpayer's income is less than $65,000, or $130,000 for married couples filing jointly. If MAGI is greater than $65,000 but less than $80,000 ($160,000 for MAJ taxpayers), the maximum tuition and fees deduction is limited to $2,000. Your tuition-paying clients should keep in mind that the Hope and Lifetime Learning Credits are qualified Education Credits and should be considered first by preparing Federal Form 8863. The tax benefit of using a credit versus a deduction on a tax return could provide additional savings to your client's bottom line.
#4. Raise Deductions
The standard deduction amount for taxpayers who do not itemize deductions on Schedule A of Form 1040 has increased for 2004. The basic standard deduction amounts are as follows:
Head of household$7,150
Married taxpayers filing jointly and qualifying widow(er)s $9,700
Married taxpayers filing separately $ 4,850
The allowable deductions for the standard mileage rates have increased as well:
Business: 37.5 cents/mile for all business miles driven
Medical reasons: 14 cents/mile
Moving: 14 cents/mile
#5. Donate a Car
More taxpayers are choosing to donate an old car to a favorite charity and file Federal Form 8283, NonCash Charitable Contributions, to claim a substantial deduction on their individual tax returns. The Internal Revenue Service has released two new publications explaining such provisions to protect taxpayers from possible consequences when they donate to charities. The number of car donation programs has significantly developed in recent years, yet charities don't always understand their obligations under the tax code. An online visit to www.irs.gov can lead you to Publication 4302, "A Charity's Guide to Car Donations." This publication outlines what charities need to do to develop a proper car donation program, including the filing and disclosure requirements that will insure deductibility of a taxpayer's contribution.
IRS Publication 4303, "A Donor's Guide to Car Donations," explains that taxpayers need to donate their cars to a qualified 501(c)(3) organization listed in IRS Publication 78, Cumulative List of Organizations. This is an annual directory listing most charities in the U.S., excluding most churches that are not required to register for exemption status with the IRS.
A taxpayer must also receive written notification from the charity if the fair market value of the vehicle is greater than $250. Most valuations are determined from the used car guide (the so-called "Blue Book" value) but a true fair-market value may be less than the listed Blue Book value if considerable repairs and maintenance are needed on the vehicle. If the valuation is greater than $5,000, taxpayers must get a valid appraisal on the vehicle from a qualified appraiser within 60 days of making the contribution.
#6. Accelerate Depreciation
The Section 179 Accelerated Depreciation Deduction has increased significantly since it took effect nearly 20 years ago: The maximum Section 179 deduction election is $102,000 for 2004. This limit is reduced, however, if property placed into service during the current year exceeds $410,000, an increase from $400,000 last year.
#7. Itemize Deductions
Don't overlook the opportunity to itemized deductions if your expenses are higher than your standard deduction. Allowable deductions are reduced by 3% of the excess of AGI over $142,700 for single, head of household, and married taxpayers filing a joint return; and $71,350 for married individuals filing separate returns.
#8.Tax the Self-Employed
The self-employment tax rate--12.4% for Social Security and 2.9% for Medicare--remains unchanged for 2004. But the maximum amount of net earnings subject to the Social Security tax has increased to $87,900. All annual net earnings over $400 are subject to the Medicare portion of the tax.
#9. Avoid a Penalty
The Internal Revenue Service is providing a one-time penalty refund in an effort to encourage enrollment and participation in the EFTPS--the Electronic Federal Tax Payment System. About one million employers could qualify for this rebate of a previously late-filed Federal tax deposit on Form 941, the Employer's Quarterly Federal Tax Return.
In order to qualify for this opportunity, the employer must not have previously been required to use electronic payments and it must enroll and then participate in the EFTPS for a minimum of four quarters. All future tax payments must be made on time, and all previous penalty assessments must be paid in full. In 2005, the IRS will select specific companies that have participated in the EFTPS program and refund the most recently paid penalty, less any current outstanding taxes owed by the employer.
The EFTPS, established in 1996, allows businesses and individuals to make Federal tax payments by telephone or through the Web 24 hours a day, seven days a week, and schedule payments up to 120 days in advance. Taxpayers receive a confirmation number for each transaction and a payment history is available for 16 months from the date of transaction. Taxpayers can enroll in EFTPS by visiting www.eftps.gov or by calling 800-555-4477.
#10. Lean on the IRS
The Internal Revenue Service also provides a new electronic service to tax professionals and other interested individuals through the "Newsroom" section of the IRS Web site--www.irs.gov. The service allows users to subscribe to a number of free e-newsletters for up-to-the minute tax advice, small business programs, or current developments in retirement planning.
Ginger Broderick is a CPA and president of Broderick & Company, CPA PC, an accounting firm in New York. Broderick helps art galleries and other businesses with money management and tax and business planning, provides financial counseling, and conducts business-planning workshops. She can be reached at firstname.lastname@example.org.