The Holidays and Year End Tax Reminders
Don’t celebrate the one, while forgetting the other
By Adam Skarsgard, Esq., CPA
As we approach the end of the year, it is easy to get caught up in the spirit of the holiday season, while forgetting important tax issues. Spending a few minutes paying attention to your forthcoming year-end tax filing may help you save some money and thus have an even happier holiday season.
We at Asset Exchange Company appreciate the opportunities we have to work with you and your clients on 1031 Exchange matters. But we also know that tax-deferred investment exchanges are not your only tax concern. So here is a brief list to keep in mind as we approach year end. And most importantly, speak with your tax advisor. There is no substitute for quality advice.
Perhaps the most important thing an independent contractor can do as it relates to tax planning is to predict the future. Will there be any major changes in tax policy in Washington? Will you make more, or less, next year? Predicting the future is difficult, but often worth the effort.
Most experts feel there will not be significant changes made to the individual income tax rates during the next several years. While certain exemptions and deductions may pass Congress, you can rely on rates to remain unchanged for the foreseeable future. However, if you are certain that you will earn either substantially more or less income next year; you may save some money through proper planning. If you feel you will earn more next year, you should consider delaying some expenses until 2007. The relative value of those expense deductions may be higher next year if you are in a higher income tax bracket. The reverse is also true. If you know you will earn more this year than next, you should consider accelerating expenses so that you pay for them this year rather than next.
One example of expenses that may be delayed or accelerated is marketing related items such as business cards, mailer inserts and yearly web maintenance fees. Also, certain business equipment such as computers may be deducted immediately. The decision of when to purchase such equipment may be effected by your predictions for future earnings.
Remember that most ordinary and necessary business expenses are deductible if you are an independent contractor. You should speak with your tax advisor for more information. You may also consult IRS Publication 535 at the following web address. http://www.irs.gov/publications/p535/index.html
Retirement planning requires sometimes complicated and often very personal decisions. If you are investing in an IRA or Roth IRA, you may contribute up to $4,000 to the plan this year, assuming you are eligible. Almost every tax planner suggests contributing the maximum you can comfortably contribute, without sacrificing essentials. For most people, that means, contribute the full amount available.
More difficult decisions are required when determining whether to invest in a traditional or Roth IRA. And if you are in a traditional IRA, you may find it difficult to decide whether to convert to a Roth. Proper planning is essential and the year-end is as good a time as any to make the tough decisions. For more information, please consult with your tax advisor and www.ira.com
Odds and Ends
If you are an independent contractor or business owner, you should consider hiring your children to perform work for you. Although you will have to cover payroll taxes of 20%, the income earned by the children is deductible by you and tax-free to them up to $3,300. There is still time left in the year to hire them. This is an excellent choice for high earning business owners.
Hybrid cars are not just good for the planet; they are also potentially good for your individual tax situation. There are tax credits available to some hybrid car owners, but only for certain models and makes. Please check with your tax advisor prior to purchasing your hybrid vehicle.
This article was written and prepared for informational purposes only and is not intended to provide tax or legal advice. Please always consult your tax advisor for specific guidance.