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Plain English Analysis What it does, Why it works - The Answer, Alternatives
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YOUR ANSWERS What it does,
Explanation of this topic and how it may affect you:
Education There is the "Hope Scholarship Credit" and the
"Lifetime Learning Credit". Remember both credits are phased out between modified
adjusted gross income (AGI) of $80,000 and $100,000 for joint filers; $40,000 to
$50,000 for singles. The Hope Scholarship Credit. This credit is
intended to defray expenses for the first two years of college training. The
credit equals 100% of each qualified student's first $1,000 of tuition expenses
plus 50% of the next $1,000. So the maximum is $1,500 per student, and at least
$2,000 must be paid this year to get the full benefit on the current year return. You
can prepay before year-end for academic periods beginning during January through
March, if necessary, to get to $2,000. If that's not possible, you may
want to put off claiming the credit until next year if that would result in a
bigger number. Here's why. You can claim the Hope credit in only two tax years
for any one student. This gets tricky because the first two years of academic
work is almost always spread over three calendar years. Since you can
only take the credit in two, be sure to pick the two when the credit helps the
most. Ideally, those will be years when you pay at least $2,000 of tuition and
have AGI low enough to avoid the phaseout rule. The Lifetime Learning Credit. In years you
don't (or can't) claim the Hope credit, you may still be eligible for the
Lifetime Learning credit. This break is
less generous than the Hope credit and is mainly intended to help with college
tuition costs after the first two academic years. The credit equals 20% of qualifying annual tuition costs up
to $5,000, for a maximum benefit of $1,000 per year, regardless of how many
students are in your family. The Lifetime credit is available for an unlimited number of years, so timing is not an issue. Tax Planning at the Office If you can participate in a 401K, you should look at this
choice very closely - it may be the best investment you can make. On the
other hand, if there is very little employer matching and you are not
comfortable with the investment choices available, then you may want to have
your CPA prepare a cost v. benefit analysis and make a suggestion of some
alternatives for you. If your company has a cafeteria benefit plan [sometimes
referred to as a Flexible Plan, FSA, Flex-Plan, etc.) , before year-end
you must specify how much of your salary you wish to convert into tax-free
contributions to the plan. You can then take tax-free withdrawals next year to
reimburse yourself for your share of medical and dental insurance premiums,
out-of-pocket medical and dental expenses, and qualifying child care costs.
Stating this a different way, you obtain a tax deduction for the costs. Be certain that you submit requests fro reimbursement for all
the money you placed into the plan - as you will lose it otherwise. Tips for Business Owners The tax planning environment is also quite good for small
business entities and their owners. Here's a rundown on some of the best
year-end ideas. Play the cash-basis game. If your business
uses cash-basis accounting and you expect your tax rate next year to be the same as
the tax rate this year or lower, consider steps to defer income into next year and
accelerate deductible expenses into this year. That pushes part of your tax bill
into next year and allows you to defer
an amount equal to the decrease in income multiplied by your marginal tax
rate. I emphasize defer as the tax will need to be paid next
year. The true increase in your
net worth is the amount of investment income you make on the taxes deferred (for
the time period of the deferral). Watch The Typical Tax Planner ! Please be certain to read the Tax Killers
section Cash-basis taxpayers can take current year deductions for expenses
charged to third-party credit cards (like Visa and MasterCard) before year-end,
even though the actual bills may not get paid until next year. So if you're
short of cash, use credit cards to load up on deductible items like office
supplies, postage, subscriptions, and even equipment that you immediately write
off under the "Section 179 rule," explained below. However, you cannot
deduct items purchased with store revolving charge cards (like the Sears card)
until the bills are paid. Again, you can sidestep this issue by using
third-party credit cards for year-end purchases. Expenses paid with checks mailed before year-end are also
deductible this year, even though they may not be cashed or deposited until next
year. To ensure deductions for large last-minute checks, send them via
registered or certified mail. That proves they were mailed this year if the IRS
later questions the deduction. On the income side of the equation, the general rule for
cash-basis taxpayers is there is no taxable income until a check is actually
received, in hand or via the mail. As a year-end planning maneuver, you can
defer receipts by delaying billings. However, if you
simply let checks pile up in your mailbox until next January, you'll be taxed in
the current year under the tax-law doctrine of "constructive receipt." Deduct year-end equipment additions. As you
know, most business equipment must be capitalized and depreciated over five to
seven years. That means you pay the cost up-front but your tax deductions are
deferred. However, a special depreciation break is available to most small
businesses. The so-called Section 179 deduction permits immediate
write-offs for equipment purchases. You must have the equipment in
place and being used before the end of your tax year. Furthermore there
are some different rules when you trade-in existing equipment. Hire your kids over the holidays. If you
operate your business as a sole proprietorship or husband-wife partnership (or
LLC), consider hiring your under-age-18 kids as part-time help, especially over
weekends and during the year-end school holidays. Your business won't owe any
social security, Medicare, or federal unemployment taxes on the wages.
The amount of tax your child must pay will depend upon the other income s/he has
earned or has a right to. On your Schedule C, you get a business deduction for amounts
you may have simply given away to your kids if you did not hire them. The
deduction reduces both your income tax and self-employment tax bills, so this is
a very good deal for you too. Of course, the wages must be reasonable in
relation to the work your kids perform. Now, if you operate your business as a corporation or as a
partnership or LLC with someone other than your spouse, wages paid to your
children will be subject to the social security, Medicare, and federal
unemployment taxes, just like for "regular" employees. However, the
kids can still use their standard deductions to shelter their income and your
business still gets a write-off. Furthermore - the children will then be qualified to setup an
Individual Retirement Account based upon the wage base.
Increase your S corp write-off with year-end capital
injection. If your S corporation will generate a tax loss this
year, make sure you have enough basis in the stock to take the full deduction.
Excess losses are suspended until your basis is increased. If your basis will
fall short, consider making a capital contribution or a loan to the corporation
before year-end. That will increase your stock basis and allow additional
deductible losses in the current year. On the other hand, if you will be in a higher rate
bracket next year, it may pay to leave things alone for now. Then, to the extent
your stock basis is increased by next year income, capital contributions, or loans to
the company, you can deduct the suspended loss next year when it will do more
good. Plan ahead for new home office deduction rules. If
you are self-employed and keep an office in the home, you will have a much better
chance of qualifying for deductions. It will be enough to
satisfy the IRS if you use the space regularly and exclusively for
administrative and management activities (like billing) and have no other fixed
location for such work. Capital Gains and Investment Decisions The new legislation signed into law on July 22, 1998 provides
that if you hold a capital asset more than 12 months, any gain from the sale
will usually be taxed at a maximum rate of 20% (10% if you are in a 15% tax
bracket). Gain from certain types of capital assets (such as
"collectibles") are subject to a maximum long-term tax rate of 28%.
The long-term capital gain holding period of 12 months is retroactive to January
1, 1998. The long-term capital gains rates for most capital assets are as
follows: Sales after December 31, 1997 Property held 12 months or less: Taxed at individual’s ordinary income tax rate Property held more than 12 months: 10% if individual is in 15% marginal tax bracket 20% if individual is in higher marginal tax bracket Sales after December 31, 2000 Property held more than 5 years 8% if individual is in 15% marginal tax bracket ** 18% if individual is in higher marginal tax bracket **If individual is in 15% tax bracket, holding period may
start before 1/1/2001. For higher tax brackets, asset must generally be
acquired after 12/31/200. Shifting Capital Gains Tax Through Gifts If you are in a 28% tax bracket or higher, the lower capital
gains tax of 10% for individuals in a 15% tax bracket (8% after 12/31/2000, if
the property was held for more than 5 year) provides an incentive for you to
give stock or mutual funds to children or grandchildren who are in a 15% tax
bracket. A substantial tax savings can be achieved by such gifts. Invest In Small Business Code Section 1202(a) allows investors to exclude 50% of the
gain realized from the sale of qualified small business stock (QSBS). The stock
has to be held for at least five years and other requirements must be met. This
rule applies to stock issued by qualifying corporations after August 10, 1993.
Therefore, the exclusion only applies to QSBS sold after August 11, 1998. However, the low capital gains rate of 20% does not apply to
the portion of the gain that is included in the taxpayer’s income. Instead,
the maximum tax rate remains at 28%. But, because of the 50% exclusion, the
investor’s total gain from a qualified investment is subject to a maximum
effective tax rate of only 14%. The maximum gain that may be excludable by an
investor on the stock from one issuer cannot exceed the greater of (1) 10 times
the taxpayer’s basis in the stock, or (2) $10 million gain from stock in that
corporation. Further, stock can qualify only if issued after August 10, 1993, by
a C corporation. In order for its stock to qualify, the corporation’s gross
assets cannot exceed $50 million. The stock of certain corporations can never qualify under
these tax provisions. For example, if the principal asset of a corporation is
the skill of one or more of its employees, its stock will not qualify. Other
examples of excluded corporations are those engaged in providing health, legal,
engineering, or accounting services, and banking, investing or farming, or in
the hotel, motel or restaurant industry. Small Business Investment Companies Another significant tax advantage is offered to investors in
common stock or partnership interests of a specialized small business investment
company (SSBIC). An SSBIC is one that is licensed by the Small Business
Administration. Its investments are directed toward businesses owned by socially
or economically disadvantaged persons. Investors who sell publicly traded stock and use the proceeds
to buy an interest in an SSBIC can elect to defer taxation on any gain realized
from the sale of stock. The gain would be rolled over into the SSBIC and would
reduce the investor’s basis. In the case of SSBIC stock, the investor’s
basis is not reduced for purposes of calculating the gain eligible for the 50%
exclusion that now applies to investments to certain small business stock. The
amount of gain that an individual can elect to roll over is limited to a yearly
maximum of $50,000 and a lifetime cap of $500,000. Corporate investors are
subject to a yearly maximum rollover of $250,000 and a lifetime cap of
$1,000,000. Sale of Principal Residence Individuals may elect to exclude from income up to $250,000
of gain realized from the sale of a principal residence. For married
individuals, the maximum excluded amount may be as high as $500,000. If you own a vacation home as well as a principal residence,
with careful planning you will be able to have the exclusion apply to both of
your homes. In order to achieve this significant tax benefit, after you sell
your principal residence and claim the allowable exclusion permitted for that
property, you must take all necessary steps to establish your former vacation
home as your new principal residence. The IRS uses a facts and circumstances
test when it determines if a former vacation home was actually converted into a
new principal residence. Because there are no hard and fast rule that you can
depend upon to help establish the conversion, you should build as strong a case
as possible. Using Credit Cards at End of Year Paying tax deductible expenses by using your credit card will provide for a current year deduction, even if you do not pay the credit card bill until after the tax year end. Be warned, Sear and other Retail Cards may not offer this opportunity. Donate Unused Personal Property Donate old clothing, old furniture, tools and other personal property items before the end of the year. The market value at the date of the gift is the mount of your deduction. You must itemize to claim the deduction. Donate Business Inventory Donating business inventory will provide a deduction for charitable purposes. If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. You must remove the amount of your contribution deduction from your opening inventory. It is not part of the cost of goods sold. If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. Treat the inventory's cost as you would ordinarily treat it under your method of accounting. For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year.
Donate Capital Appreciation Items Amount of deduction – general rule.. When figuring your deduction for a gift of capital gain property, you usually can use the fair market value of the gift. Exceptions. However, in certain situations, you must reduce the fair market value by any amount that would have been long-term capital gain if you had sold the property for its fair market value. Generally, this means reducing the fair market value to the property's cost or other basis. You must do this if:
Maximize You Retirement Contributions This is the time of year to contribute to your retirement plan. The longer you keep the money - all the more it is worth. One very important and very cunning point is to keep the money fro a very long time - even if it is a small amount. Here is an example:
If one is to start a plan to build wealth, tomorrow is too late. It must be today. Even if the amount is small, start today. This is so important, I shall not cover the tax deduction aspects in this section. Start of Plain English Section Why or How it works - Both Sides of the Equation and Examples: Start of Plain English Section Start of Plain English Section Start of Plain English Section Other Start of Plain English Section Reserved
Start of Plain English Section
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Technical Analysis & Citations What It does, Why it works -
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CommentaryStart of Revenue Procedures Section Start of Private Letter Rulings
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Tax KillersThis is about Activity Based Taxplanning - maximizing deductions, minimizing cash outlay and maximizing the amount of cash retained and the net worth. Activity Based Taxplanning (ABT) is a methodology developed by Bob Parrish CPA, that assists people with the tax issues by focusing on the activity (or actions - events) that are being undertaken or contemplated (or have already taken place). The, research is compiled from the myriad of sources to help you complete the activity with the least tax cost, while maintaining compliance the tax laws, other laws and regulations and place yourself in a position to protect your objectives. Tax is a subject that many view in order to cut costs. Taxes are a cost just as any other cost. It happens this cost is somewhat intangible and is defined by legislation without a tangible item to view and control. The money is spent and the control of the expenditure is more appropriately administered by someone trained in the law.
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Cost Killers Management Info Sys, Cost Acctg, Activity Based Costing)This is about Activity Based Costing - methods to cut costs, management accounting, management information systems, decision support systems - in general about being a manager.
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Preparing for your CPA, attorney, or preparing to start your own What to gather -
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From Your Other Business, or Financial Records From Corporation Records or Organization Records (meetings, etc.) Start of Preparing For You CPA Section
Forms - checklists, time-line to do, etc. Assistance - What To Do -
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Financial Accounting: Bookkeeping & Financials
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Financial Statement Presentation Back to Start of Financial Accounting: Bookkeeping & Financials Back to Start of Financial Accounting: Bookkeeping & Financials Back to Start of Financial Accounting: Bookkeeping & Financials Back to Start of Financial Accounting: Bookkeeping & Financials Bookkeeping Methods - Cash, Accrual and Other Back to Start of Financial Accounting: Bookkeeping & Financials How the Business Entity Affects the Recording
Compliance - what is required for protection, defense, etc.Compliance Checklist Back to Start of What is required for protection, defense, etc.
Alerts & Dangers - Risks, Asset Protection, IRS DefenseClick on the title to expand or collapse the topics
Back to Start of Alerts & Dangers Back to Start of Alerts & Dangers Back to Start of Alerts & Dangers Back to Start of Alerts & Dangers
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Spreadsheets & Computations
Spreadsheet #1 Back to Start of Spreadsheets & Math
Contracts, Trusts, etc.Agreement #1 Back to Start of Contracts, Trusts, etc.
Reports RequiredReport #1 Back to Start of Reports Required
Checklists for DeploymentChecklist #1 Back to Start of Checklists - Deployment
Checklist for MonitoringChecklist #1 Back to Start of Checklist - Monitoring
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Introduction
Objectives - Your Question
Analyses
Plain English Analysis - Your Answers
Increase Wealth
How To Do This
Tools
