Making The Best Mid-Year Tax Moves.Following our plan will help you trim your federal, state and local obligations Like most taxpayers, you probably receive tips from your accountant when you have your return prepared in March or April. Then, eight months later, you'll sit down with your tax pro to squeeze out every possible tax break for the calendar year. Such steps should point you in the right direction, but you may be placing yourself at a disadvantage. Tax planning Tax planning Devising strategies throughout the year in order to minimize tax liability, for example, by choosing a tax filing status that is most beneficial to the taxpayer. should be a year-round process, and a midyear mid·year n. 1. The middle of the calendar or academic year. 2. a. An examination given in the middle of a school year. b. midyears A series of such examinations. meeting can prove to be especially effective. To start, identify potential tax savings on the state and local levels (see chart, "State by State Tax Cuts"). To help you meet your goals, BLACK ENTERPRISE has provided you with a checklist of tax measures as you evaluate the first half of 1999 and plan for the rest of the year. KEEP THE TAXMAN AT BAY The following guidelines will help you estimate your taxes and identify expenses so that you will not have any more to worry about than the Y2K bug Y2K bug or Year 2000 bug or millennium bug Potential problem in computers and computer networks at the beginning of the year 2000. Until the 1990s, most computer programs used only the last two digits to designate the year, the first two digits being . Here's how you can steer clear of some rather unpleasant surprises. Estimate your tax burden. If you received a large tax refund Tax refund Money back from the government when too much tax has been paid or withheld from a salary. this year, then you gave the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. interest-free use of your money. To curb such future generosity, adjust your W-4 form W-4 Form A form completed by an employee to indicate his or her tax situation (exemptions, status, etc.) to the employer. The W-4 form tells the employer the correct amount of tax to withhold from an employee's paycheck. to claim more dependents and, in turn, receive additional cash from each paycheck. The same is true if you'll be entitled to larger tax deductions Tax deduction An expense that a taxpayer is allowed to deduct from taxable income. tax deduction See deduction. this year. "My wife and I recently bought a town house," says Roland Laird laird n. Scots The owner of a landed estate. [Scots, from Middle English lard, variant of lord, owner, master; see lord. , a software engineer and entrepreneur in Princeton, New Jersey
Princeton, New Jersey is located in Mercer County, New Jersey, United States. Princeton University has been sited in the town since 1756. . "Now, we're getting deductions for mortgage interest and property tax. As renters, we had no deductions." Before you adjust your W-4, though, check with your accountant to make sure you don't go too far--and wind up owing money to the IRS next year. "Keeping track is especially important if you operate an S corporation," asserts Jerome Thomas
Norcross was founded in 1866 by John Thrasher. . "The company's net income will pass through to your personal tax return. If you monitor your company's performance, you can adjust your withholding, making sure that you pay enough but not too much." Keep in mind that if you owe $1,000 or more in income tax, aside from withholding, you'll have to pay quarterly estimated taxes Federal and state tax laws require a quarterly payment of estimated taxes due from corporations, trusts, estates, non-wage employees, and wage employees with income not subject to withholding. in 1999. To avoid a penalty, the total of your payments must be at least 100% of the tax you paid in 1998, allocated evenly among the quarterly periods. With estimated taxes due on June 16 and September 15 this year, now is a good time to make sure you're paying enough to avoid a penalty. Take advantage of educational deductions. At this time of the year, you may be considering summer school or preregistration pre·reg·is·tra·tion n. An early registration, as for returning college students, that takes place before general registration. for fall classes. Such costs will be fully deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). if the course work helps you to "maintain or improve" the skills needed for your current job. You'll slam into a brick wall, however, if you seek tax breaks for classes that prepare you for a new career. Besides the tuition, you can write off such related expenses as travel and supplies. "Don't forget to include books you buy for your own education," says Taneshia Nash Laird, Roland's wife, who works as a development director for a design firm. "I deduct the cost of books about interior architecture, which I buy to improve my professional knowledge." Weigh your stock options. If you're like many corporate employees, your real payday will come in the form of stock options. That means that you will be in need of even more savvy tax planning. Such securities may be doled out Adj. 1. doled out - given out in portions apportioned, dealt out, meted out, parceled out distributed - spread out or scattered about or divided up as incentive stock options (ISOs), which are granted to executives if the company achieves such financial goals as a certain level of sales or profits, or nonqualified stock options (NQSOs), which are given to employees as part of their compensation package. With an ISO (1) See ISO speed. (2) (International Organization for Standardization, Geneva, Switzerland, www.iso.ch) An organization that sets international standards, founded in 1946. The U.S. member body is ANSI. , taxes are due when the underlying security is sold, not when the options are converted to a company stock. Favorable capital gains rates apply if you wait to sell the underlying stock after two years of the granting of the option and one year since the option was exercised. Roland Laird has some ISOs that recently became more valuable because a larger corporation bought his employer. He is now thinking about making a possible conversion. "Whenever you exercise an ISO, the spread between the grant price and the exercise price is an adjustment for the alternative minimum tax [AMT See vPro. ]," says the Lairds' tax advisor A tax advisor is a financial expert especially trained in tax law. Some countries require tax advisors to verify the balance sheets of companies above a certain size. Individuals usually require tax advisors to minimize taxation, to avoid learning the details of tax law in , Peter Weitsen of Mendlowitz Weitsen in East Brunswick, New Jersey. "If you're affected by the AMT, certain tax benefits can be delayed or even wasted. Therefore, you need to plan before you exercise ISOs. We'll sit down with Roland and work out a schedule to maximize his gains and minimize his tax obligations, keeping in mind his long-term goals Long-term goals Financial goals expected to be accomplished in five years or longer. and objectives." Holders of NQSOs don't have to worry about the AMT. However, when those options are exercised, the holder is taxed at a regular rate. So if you delay the transaction, then you defer the tax hit. One caveat: doing so may leave you vulnerable to a drop in the stock price. The best course is to gradually exercise your stock options over a period of years to reduce the overall tax bill. Shelter your taxes with a second home. You can rent a home for up to 14 days per year without having to declare a cent of taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. . This tax break, which has been threatened by proposed federal legislation, may not be around for long--but you can use it in 1999. "This tax opportunity is especially appealing if you own a vacation home Vacation Home A home separate from an individual's primary residence that is used for recreational purposes and may also be rented out at unused times. Notes: For tax purposes, those who rent their vacation homes may result in a lower amount of allowable expense ," says Roger Lusby, a partner in the Atlanta-based accounting firm Frazier & Deeter, "because you may find short-term renters, especially in the summer." WHAT THE SELF-EMPLOYED CAN DO There are advantages to hanging out your own shingle shingle Thin piece of building material made of wood, asphaltic material, slate, metal, or concrete, laid in overlapping rows to shed water. Shingles are widely used as roof covering on residential buildings and sometimes also for siding (see Shingle style). . For example, expenses associated with company-related classes may be fully deductible and you can use them to off-set income on Schedule C. If you filed as an employee--even of your own company--the costs of courses, books and subscriptions would be considered an "employee business expense" and categorized cat·e·go·rize tr.v. cat·e·go·rized, cat·e·go·riz·ing, cat·e·go·riz·es To put into a category or categories; classify. cat as "miscellaneous itemized deductions Itemized Deduction A deduction from a taxpayer's taxable adjusted gross income that is made up of deductions for money spent on certain goods and services throughout the year. ." This would include investment expenses and tax preparation, deductible only if they exceed 2% of your adjusted gross income (AGI (Artificial General Intelligence) A machine intelligence that resembles that of a human being. Considered impossible by many, most artificial intelligence (AI) research, projects and products deal with specific applications such as industrial robots, playing chess, ). That means that if you made $100,000, then you could deduct the amount in excess of $2,000. Project income and miscellaneous deductions. If you're certain that you will be over the 2% threshold, shoot the works on classes, books and investment publications in the coming months. The following are some other savings that the self-employed should look out for: Check up on medical expenses. The same logic applies to medical bills, which are deductible to the extent that they exceed 7.5% of your AGI. "At midyear, if it looks like you'll be over the 7.5% mark for the year, accelerate optional medical expenses such as checkups, eyeglasses eyeglasses or spectacles, instrument or device for aiding and correcting defective sight. Eyeglasses usually consist of a pair of lenses mounted in a frame to hold them in position before the eyes. and dental care into 1999 to get the deductions," says Ed Mendlowitz of Mendlowitz Weitsen. "If you think you'll be short of 7.5% in 1999, try to bunch those expenses in 2000 to get a deduction." Consider the "home sweet home" deduction. If you're self-employed or run a sideline sideline See on the sidelines. business out of your abode One's home; habitation; place of dwelling; or residence. Ordinarily means "domicile." Living place impermanent in character. The place where a person dwells. Residence of a legal voter. Fixed place of residence for the time being. , make sure you meet the qualifications for home office deductions. Effective this year, you can take the deduction even if you use a space only for administrative purposes--as long as you have no other place where you can run the business. "We have a room we use for matters related to our work," says Taneshia Nash Laird. "I may begin my own business and, if I do, I would make sure that this room is not used for anything else, so we can get the home office deduction." If you qualify, deduct a proportionate share of such costs as utilities, security monitoring and homeowner's insurance, as well as direct costs like office furnishings. However, the deductions can't exceed the income you receive from your home-based business. "Expense" business equipment. This year, you can write off as much as $19,000 worth of equipment, costs that normally would be depreciated Depreciated may refer to:
Also, such deductions can't exceed your income. Therefore, if Taneshia Laird had no income from her start-up venture in 1999, she wouldn't be entitled to those deductions. Counters Weitsen, "If she has income from a job, however, she can take this deduction against that income. Moreover, as long as she files a joint return with Roland, they can use his income, too, to support this deduction." Consider buying a car for your business. This summer may be an ideal time for buying new cars--perhaps catching a bargain on the '99 models before the millennium cars roll onto dealers' lots. Says Herb Lewis, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , a Frazier & Deeter partner who serves as tax advisor to Exceptional Restaurant: "I've advised Jerome that it's more tax-efficient to have the company provide him a car than use his own car for business. If he used his own car, then his personal deductions might be limited by the restrictions on miscellaneous itemized deductions." If you're thinking about trading in a business car--think again. "The tax law defines automobiles selling for more than approximately $16,000 as `luxury automobiles,'" says Alan Zipp, a CPA in Rockville, Maryland Rockville is the county seat of Montgomery County, Maryland, United States. According to the 2006 census update, the city had a total population of 59,114, making it the second largest city in Maryland. . "With such cars, there are limits on the depreciation deductions you're allowed, and those limits hit hardest with truly expensive cars. When you trade in one expensive car for another, you're stuck with those limitations on depreciation." You're generally better off, says Zipp, if you sell your old business car, since "you'll probably have a tax loss and that loss--which might be tens of thousands of dollars--can be deducted from your other income." After selling your business car and deducting the loss, consider replacing it with a luxury sports utility vehicle sports utility vehicle sport n → véhicule m de loisirs (de type SUV) sports utility vehicle n (esp US) → fuoristrada m inv instead of a car. If the vehicle weighs more than 6,000 pounds, it's not subject to the luxury car limits. "If the car is used solely for business, you may be able to deduct $19,000 in the first year plus 20% of the remaining cost as depreciation," says Zipp. "With a luxury car, your first-year deduction would be limited to about $3,000." Take a business trip. If you own a business, you can mix business with pleasure and, at the same time, shave some of your travel costs. The trick? Make sure your trip is primarily for business. Attend an industry convention and tack on a couple of days at the end for vacationing, or schedule a series of meetings with clients or business prospects. Advises Mendlowitz: "If most of your days are spent on business--and you have the paperwork to back up your claims--you can write off your airfare and perhaps a large part of your hotel bill or car rental." Put your child to work. The summer also may be an ideal time to hire out your kids. Not only will they gain valuable exposure to the real world, but they can also earn up to $4,300 this year, tax free. This break is available to children of all ages, as long as they receive a fair price for work they've actually performed. Moreover, you get to deduct the money you pay them. If your business is unincorporated Adj. 1. unincorporated - not organized and maintained as a legal corporation unorganised, unorganized - not having or belonging to a structured whole; "unorganized territories lack a formal government" and your children are under 18, no Social Security or Medicare taxes need be withheld. "If your children earn up to $2,000 this year, they can contribute that much to a Roth IRA Roth IRA An individual retirement plan that bears many similarities to the Traditional IRA. Contributions are never deductible, and qualified distributions are tax-free. A qualified distribution is one that is taken at least five years after the taxpayer established his/her first ," says Lusby. "Assuming they keep the money in the account until age 59 1/2, an extraordinary amount may compound and all future withdrawals will be completely tax free." BENEFITS FOR BUSINESS OWNERS There are even more benefits if you own a company with employees. For example, if you have a second home, you can rent it to your company for a retreat or a management meeting. Your company can deduct the payment, as long as it's reasonable, while you may receive tax-free income tax-free income The income received but not subject to income taxes. For example, interest from most municipal bonds is free of federal income taxes and often from state and local income taxes as well. Compare tax-deferred income, tax-sheltered income. . Here are some other advantages that you can unearth: Planning for retirement. If you're a business owner, you'll probably want to sponsor a retirement plan for your employees. Not only can such a plan reduce your company's taxable income and help provide for your own retirement, it can also help you recruit and retain talented workers. "We're going to be looking at a retirement plan," says Jerome Thomas, whose company was formed last December. "We're weighing profit sharing profit sharing, arrangement by which employees receive, in addition to their wages, a share of the net profits of a business. The purpose is to give them an incentive to increase their output through enhanced morale, less wasteful use of materials, better care of and 401(k) plans now." He can award tenure with profit sharing, which will match employee contributions up to a certain percentage and vest over a period of time. Business owners who prefer simplicity may want to consider SEP 1. SEP - Someone Else's Problem. 2. (tool) SEP - A SASD tool from IDE. and SIMPLE plans, both of which require minimal administration. "SIMPLE plans are particularly attractive if your net earnings are low," says Mendlowitz, "because you can contribute--and deduct--all of your earnings up to $6,000. You must move soon, though, because a SIMPLE plan has to be established by October 1." New acquisitions. Exceptional Restaurant, which owns 22 Taco Bells Taco Bell Corp., a subsidiary of Yum! Brands, Inc., is a Mexican-style quick service restaurant chain based in Irvine, California, United States. The restaurant has locations primarily in the United States and Canada, but also operates outlets in several other markets. , may make future acquisitions. If the company makes such a move, the owners should pay close attention to the way assets are classified. The more an acquisition target includes equipment and furnishings and the less brick and mortar See bricks and mortar. , the more rapid the depreciation schedule. Faster depreciation, in turn, accelerates tax deductions. "Business owners need to be careful when adding depreciable depreciable Of, relating to, or being a long-term tangible asset that is subject to depreciation. property," says Lewis. "With an S corporation, those deductions pass through to personal tax returns. They're considered an adjustment, for purposes of calculating the AMT, so there may be adverse tax consequences. Again, it's vital to plan with a tax professional." Other items may arise, too, from a mid-year checkup check·up n. 1. An examination or inspection. 2. A general physical examination. checkup See Yearly checkup. with your tax pro. If you pass up a tax-planning session because you'd rather spend the summer golfing or fishing, you may. miss out on an even more enjoyable exercise--saving money. The chart below shows you the laws enacted in 36 states and the total impact in tax savings. The new legislation may just save you more than a few dollars off your tax bill.
Personal Corporate
Income Income Sales Property
Tax Tax Tax Tax
State Savings(*) Savings(*) Savings(*) Savings(*)
Arizona $33.2 $12.2 $80.0
California 772.0 35.0 $7.4 533.0
Colorado 594.4
Connecticut 173.0 75.1 23.3
Delaware 45.9 2.3
Florida 16.4 40.2
Georgia 258.3 17.0
Hawaii 80.0 4.0 10.0
Idaho 2.7 0.6
Illinois 96.0 21.0
Indiana 1.0 1.0
Iowa 83.9 1.1 16.5
Kansas 67.3 16.0 36.9 71.2
Kentucky 1.5 6.0 6.8
Louisiana 1.2
Maine 31.7
Maryland 18.6
Mass. 674.0 7.5
Minnesota 14.1 5.3 3.4 894.5
Mississippi 15.1
Missouri 89.0 18.0
Nebraska 27.6 81.9
New Jersey 5.3 1.0
New Mexico 15.6 5.0
New York 20.0 69.0 537.0
N. Carolina 87.4 2.6
Ohio 671.4 179.1
Oklahoma 15.9
Pennsylvania 87.6 90.3 13.5 11.7
Rhode Island 5.0 31.5
S. Carolina 11.5 2.0
South Dakota 20.0
Vermont 0.3 0.3 0.2
Virginia 35.1 2.5 160.0
Washington 13.1 4.4
Wisconsin 111.4 0.2
Other
Tax State
Savings(*) Totals(*) Tax Cut
Arizona $125.4 Vehicle excise tax
California 1,347.4 Personal dependent
exemption increase;
vehicle license fee cut
Colorado 594.4 Automatic rebate
Connecticut $73.2 344.6 Personal income
credit increase; personal
income tax apo corporate
income tax changes;
increase in gas tax
Delaware 6.8 55.0 Personal income
tax cut;
deduction increase
Florida 85.4 142.0
Georgia 92.2 367.5 Personal
income tax
exemption increase
Hawaii 94.0 Personal income tax increase
Idaho 30.0 33.3 Unemployment taxes cut
Illinois 117.0
Indiana 0.3 2.3
Iowa 101.5 Various personal income
tax cuts
Kansas 33.3 224.7 Broad range of tax cuts
Kentucky 2.0 16.3
Louisiana 6.2 7.4
Maine 31.7 Personal income tax
exemption increase
Maryland 18.6
Mass. 10.0 691.5 Personal income tax exemption
Increase; unearned
income rate cut
Minnesota 2.7 920.0 Local property tax rate cuts,
rebates
Mississippi 15.1
Missouri 319.0 431.0 Personal income tax deduction
and credit increases
Nebraska 109.5 Permanent personal
income tax rate cut
New Jersey 6.3
New Mexic 20.6
New York 75.0 701.0 Property tax relief
N. Carolina 17.3 107.3
Ohio 850.5 One-year rate reduction
Oklahoma 15.9
Pennsylvania 1.3 204.4 Various cuts
Rhode Island 36.5 Local vehicle tax cut
South Carolina 13.5
South Dakota 20.0 Property tax cut
Vermont 0.8
Virginia 197.6 Local car tax cut
Washington 17.5
Wisconsin 6.0 117.6 Personal income tax rate cut
(*) In millions Source: Center for the Study of the States at the Nelson A. Rockefeller Institute of Government The Nelson A. Rockefeller Institute of Government is a public policy research institute, or think tank, that conducts studies and other projects relating to state and local government in the United States, American federalism, public management and finance, the implementation of 3 |
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