It’s that time of year again. No, not the holly, jolly holiday time but the end of the year tax planning time! So what can you do to keep more of your hard earned dollars in your pocket and out of the IRS’s greedy hands? These ten tax tips might be a starting point. Always remember – be equal parts honest and aggressive, and you will be treating the IRS AND yourself ethically! (Be aware, these tips may not be appropriate for everyone – always get the advice of your tax professional for your individual situation.)
1. Hire your kids
You can pay your child up to $4,850 for 2004 without triggering a tax liability for them. This money is passed through as a payroll expense and saves you the amount of your marginal tax rate (up to 35% Federal and 9.3% State), the 15.3% SSI, and California Disability costs. There are no age limits – your six-year-old can shred papers and wrap gifts – but be reasonable with the compensation. Paying an 8-year-old $50/hour to dust will not stand up to IRS scrutiny and will not give your child a true understanding of what it means to work for pay. Also, although college financial aid considerations may make this an unsuitable option, keep in mind that your child can put up to $3,000 a year of earned income into a ROTH IRA.
2. Open a Health Savings Account (HSA)
An HSA is a high deductible health account that allows all of your health costs to be tax-deductible. For a detailed explanation, go to www.SFSadvisors.com and click on SFS Articles.
3. Track all your expenses
It seems reasonable but many people don’t. Except for commuting from your home to your main office, all the miles you drive for business are deductible. You can either take a flat 37.5 cents/mile or actual costs. Don’t forget to deduct meals with prospective clients and business associates, and the percentage of your cell phone minutes used for business.
4. Deduct your home office
If you have an area of your home used 100% for business (including storage needs) you can usually deduct most of the costs associated with it, such as utilities, taxes, depreciation, cleaning services, HOA dues, and insurance.
5. Be aware of travel costs
Or as I say, “Fly first Class, Stay at the Ritz, Eat at Burger King.” Transportation and lodging are 100% deductible, meals and entertainment only 50%. For meals it might be easier to simply use the IRS allowable per diem amounts based upon the city to which you are traveling.
6. Max out your retirement accounts
Set up a SEP, Simple, Solo 401(k), or Keough and use it to defer taxes. Think about a pension plan if you are close to retirement, have no employees, and can defer large amounts of income.
7. Evaluate your income
In those years when you have an unusually high income (did you ever think that would be a problem?), fully deduct your purchases via Section 179, prepay expenses, defer income, and invest in new equipment and supplies. When your income is going to be less than normal, depreciate everything possible to get the tax benefit in later years, postpone expenses, accelerate income and contribute to a ROTH IRA instead of a traditional IRA or your retirement plan.
8. Don’t overpay FICA
You only have to pay social security on the first $87,900 of income. If you are both self-employed and an employee for another company, you may pay too much into the system. Use your 1040 to claim your refund.
9. Be aware of gifting limits
For years and years the amount you could spend on a gift to a fabulous client was $25. Unfortunately, it still is. Of course, you can still spend more: you just can’t write it off.
10. Deduct Educational Expenses
The cost for classes, seminars, and continuing education in your profession are a deduction. (If you are changing careers you may qualify for the Lifetime Learning Credit.) If you purchase books, newsletters, and magazines to maintain your skills, they are all deductible. And never forget that professional organizations, networking clubs, and skill groups like Toastmasters all qualify.
The Challenge: Spend some time this month reviewing your plans with an eye to areas that need some outside support.