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