November, 2005
Wrapping Up the Tax Year
November, 2005
Wrapping Up the Tax Year
You may be able to give yourself a present in the upcoming tax-filing season by looking at these tax-saving strategies before the end of the year.
Investment Gains and Losses
Review the investments you hold in taxable accounts and your year-to-date transaction. You can use capital losses to offset capital gains and up to $3,000 of ordinary income on your 2005 tax return. So selling investments that have lost value can be a tax saver in the right situation. Just don't let taxes drive your investment decisions.
A Tale of Two Taxes
If you itemize deductions, the state and local income taxes you pay are deductible. Again this year, you can choose to deduct state and local general sales and use taxes instead. You can deduct either the actual amount you paid (and have receipts for) or use the IRS tables and add any sales tax you paid on certain big-ticket items. This option is scheduled to expire after 2005, so if you've been looking at cabin cruisers, you could get a boost if you buy before December 31, 2005.
You can also increase your itemized deduction for state income taxes by having more tax withheld from your pay or making any estimated tax payments due in January 2006 before the end of 2005. Just beware: These strategies could trigger (or cause you to pay more) alternative minimum tax (AMT).
Business Tax Tips
If you're a business owner, deferring income until the new year is a popular tax-saving strategy. Cash method businesses can "push" receipts into the following year by postponing December's billing cycle. Accrual method taxpayers can defer income by delaying the delivery of services or products until 2006.
Another strategy is to accelerate deductible business expenses. Purchasing necessary supplies or scheduling pending equipment repairs before the end of the year are two possibilities. However, if you expect business income - and your tax rate - to increase substantially next year, if may be better to postpone these deductible expenses until the 2006 tax year.
If you're serious about giving yourself the gift of tax savings, we're here to help.
How will you spend your retirement years? more and more American expect to continue working after they retire from their main job.
A 2005 national Work Trends survey* found that:
The Energy Policy Act of 2005 includes a potpourri of tax breaks. Here's a quick look at some of the more notable incentives for individuals and businesses.
On the Road
A variety of fuel-efficient vehicles, including hybrid, fuel cell, advanced lean burn, and vehicles that run on certain alternative fuels, provide buyers with special tax credits. The incentives begin for vehicles placed in service after 2005. The credit expiration date varies with the type of vehicle; the credit amount varies with the vehicle's fuel economy and weight.
In the Home
For 2006 and 2007, homeowners have some new tax-saving options. Certain improvements (such as some types of windows, doors, and insulation) made to an existing principal resident - as well as purchases of certain energy-saving equipment (furnaces, hot water boilers, etc.) - can result in a lifetime tax credit of up to $500 (no more than $200 for windows).
Also for 2006 and 2007, installing solar equipment to generate electricity and/or to heat water in a resident will be a tax-saving event. The credit is 30% of the cost (including labor), up to $2,000 per system. There is also a personal tax credit for installing a residential "fuel cell power plant." Various requirements apply.
For Your Business
Owners of commercial buildings have an opportunity to save taxes if they upgrade a building's energy efficiency or build a new energy-efficient structure. The new energy-efficient commercial building (EECB) deduction, available for property placed in service in 2006 and 2007, is $1.80 per building square foot ($.60 for certain separate building systems), less the sum of EECB deductions allowed for the building in previous years. The improved property must meet a number of technical requirements.
The new law also increases the existing 10% tax credit for the installation of solar equipment to 30% for periods after December 31, 2005, and before January 1, 2008. Equipment that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight is eligible.
On the Lot
Newly built energy-efficient residences also provide tax incentives. Eligible home builders can receive either a $1,000 or $2,000 tax credit for each qualifying home, depending on the type of home and the energy saving standards met. This credit is available for homes completed at August 8, 2005, and acquired in 2006 or 2007.
In the nonprofit world, how the IRS classifies an organization makes a difference. While many types of nonprofits are eligible for tax-exempt status, the particular section of the tax law that forms the basis for the nonprofit's tax exemption helps determine what the organization and cannot do.
Section 502(c)(3). This code section governs nonprofits that are organized and operated for charitable, religious, educational, scientific, or literary purposes. Also under Section 501(c)(3)'s umbrella are nonprofits engaged in testing for public safety, fostering national or international amateur sports competition, and prevent cruelty to children or animals. The IRS recognized over 700,000 active Section 501(c)(3) organizations in 2001.
Other nonprofits. While Section 501(c)(3) organizations are the most prevalent, more than 25 other categories of tax-exempt organizations are described in Section 501(c). Among them:
Note that an organization can be formed as a nonprofit corporation under state law but not be federally tax exempt. And even a tax-exempt organization can owe income taxes if it has "unrelated trade or business income.
Why not surprise your family with some different gifts this holiday season. Here are some suggestions:
A gift of stock or mutual fund shares may or may not be financially generous in and of itself, but it may spur an interest in investing that could pay off financially for the rest of the recipient's lifetime.
A gift of education could also bring the recipient a lifetime of benefits. Consider setting up a tax-favored Coverdell Education Savings Account or Section 529 college savings account for your future scholar.
a gift of a U.S. Series EE or Series I Savings Bond is convenient because these bonds can be purchased for as little as $50 ($25 if purchased online through the Treasury Department.)
If you're selling your business, you might be asked to consider an earnout. That's an agreement between the buyer and seller to base a position of the purchase price on the acquired company's future performance. Earn outs are relatively common in small business acquisitions and are frequently used when a buyer and seller are unable to agree on a purchase price.
How does it Work?
The structure is straightforward: The seller receives an agreed-upon amount at the time of sale plus the promise of a portion of the company's future earnings. For example, you may agree to take $5 million in cash for your business plus a stated percentage of gross sales over agreed-upon levels for the next four years.
No Crystal Ball
The danger, of course, is that the company won't perform as expected. For instance, the new owner may decided to take the business in a different direction. Or your customers may not be happy with the change in ownership and take their business elsewhere. And there's always a chance that if your relationship with the new ownership sours, you may be tempted to opt out early, which could mean forfeiting some (or all) of your payout.
Details, Details
Structuring an earnout can be very complex, even with a simple acquisition. Here are a couple of general guidelines to consider:
The details of your agreement are important too. Be sure you understand them.
Lauren has her heart set on going to a private college next fall. Will Lauren's parents be able to handle the bills?
Lauren is likely to get a merit scholarship, and her parents have been saving for her education for several years. Still, when they went over the figures, Mom and Dad were stunned. To make Lauren's dream come true, they'll have to come up with some additional financing.
Fortunately, Lauren's parents have a few options. They might start by reviewing their investment portfolio. If they own appreciated securities that they would consider liquidating, they could transfer the securities to Lauren and have her sell them. They would provide some cash - and save taxes since Lauren would pay tax on the gains at a significantly lower tax rate than her parents. A married couple can transfer up to $22,000 annually to a child without gift-tax consequences.
Another tax-friendly option is a home equity loan. The interest on up to $100,000 of qualifying debt is tax deductible. However, there is some risk. The additional debt would be secure by the family's home.
Although the next alternatives should be considered only if necessary, Lauren's parents could tap their 401(k) plans if loans are allowed, or take money out of their IRAs. (Plan loans will have to be repaid, and taxes may be due on IRA withdrawals.)
If your child is headed off to college soon, we can help you decide how to finance the expense. Please call for an appointment.
The electronic age is upon us. The IRS recently issued new rules allowing corporate officers or authorized agents to sign various employment tax forms by facsimile or using other signature methods (software programs, etc.).
Internet users beware. "Phishing" - fake e-mails asking you to click on a link or got to a website to submit or update your personal information is a real danger! Identity theft is usually the motivation. Surprisingly, a recent survey by the Pew Internet & American Life Project found that only 29% of users surveyed have "a good idea" of what phishing is, 55% aren't sure, and 15% have never heard of it.
S corporations are in the IRS's sights. The Service has launched a study to assess S corporation reporting compliance. The IRS intends to examine 5,000 randomly selected returns from the 2003 and 2004 tax years.
Only 35% of employees working for very small firms have access to a retirement plan. Source: U.S. Small Business Administration.
Q. What does the term "vested" mean in the context of an employer-sponsored retirement plan?
A. Think of vesting as your ownership of plan benefits. When a plan participant's benefits are vested, they are nonforfeitable. So, for example, an employee who quits her job when her profit-sharing plan account is 60% vested would forfeit only 40% of the account.
Q. I'm a junior high English teacher. Every year, I spend many hours volunteering as a reading tutor for a local charitable organization. May I claim a tax deduction for the value of my services?
A. Unfortunately, the tax law does not allow volunteers to deduct the value of their time as a charitable contribution, even if the charitable work they do is similar to what they do for a living. However, many of your out-of-pocket expenses (travel costs, etc.) may be deductible. We can help you determine which of your expenses qualify.