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End-of-Summer: Now is the Time to Make Sure This Year’s Taxes are Under Control
Posted By beth On August 29, 2007 @ 1:21 PM In Consumer News and Advice,Financing a Home,Home Buying 101 | Comments Disabled
By Eva Rosenberg
RISMEDIA, August 30, 2007-(MarketWatch)-This week, thousands of tax professionals converged on the IRS Tax Forum in Las Vegas. TaxMama asked the pros to tell you what you could be doing right now to bring this year’s tax burden under control — or under budget — and to finish up last year’s tax returns if you haven’t already done so.
If you’ve just gotten married, or are about to wed, Suzanne M. Mayeda, an enrolled agent from Los Angeles, encourages you to meet with your tax adviser before making changes to your withholding or financial lifestyle. Two may not really live as cheaply as one when it comes to tax liabilities — especially if your earnings are similar.
Speaking of withholding, Mayeda suggests this is a good month for all employees to review year-to-date withholding to see if there is a need to modify it (up or down) to account for changes in life or income.
There are obvious changes that most people realize affect withholding — like a baby, a new home or a new job. Often, there are invisible changes you forget to consider.
Your tax adviser can help you identify things like pass-through investments that will be generating unusual taxable income; mutual funds that sold off investments when the market started going haywire, which may generate substantial unplanned-for capital gains; or estates, of which you are a beneficiary, that haven’t been settled but will be passing income through to you.
Sometimes, just chatting with your tax pro will help you focus on information you need to start gathering so you aren’t hit with a big bill when April comes around — after you’ve spent money you thought was yours to spend freely.
Charitable withdrawals from IRAs
From San Diego, Lucie Sample, an enrolled agent, points out that there’s still time this year for seniors over age 70 1/2 to draw $100,000 from their retirement plans and contribute it to their favorite charities. The contribution must be made directly from the retirement plan. You won’t get a charitable deduction for this. But neither will you have to pay any taxes on the withdrawal.
The benefit? You cover your minimum mandatory annual withdrawal without adding to your adjusted gross income. Also, this will reduce the part of your estate that will be subject to both estate tax and income tax.
Kris Hix, an enrolled agent from Florence, Ky., says that as children are going back to school, this is a good time to collect all the information from child-care providers, which include preschool and kindergarten.
Don’t forget that the cost for before-school and after-school care for grade-school children qualifies for the Dependent Care Credit. Be sure to get the provider’s name, address and employer identification number (EIN) or Social Security number. And some states also require a phone number.
Incidentally, Hix says to watch for jobs across state lines. Her husband started working about an hour away, in Indiana, and didn’t notice for a month that they were deducting Indiana taxes instead of Kentucky state taxes. (The states have a reciprocal arrangement permitting the state tax to be based on your residence address rather than your job.) What are the arrangements in your state?
Or have you moved across the country? Check your pay stub!
Sept. 17 deadlines
Remember that estimated tax payments are coming due on Sept. 17. You have some extra time because the Sept. 15 falls on a weekend.
Corporate tax returns are due on Sept. 17 as well. If you’re not done yet, it’s time.
Self-employed medical breaks
Rick Foster is the national sales manager for Total Administrative Services Corporation (TASC) based in Madison, Wis., the folks who provide the Agri/BizPlan services. Foster pointed out an interesting feature of these special IRS Section 105 medical-expense deduction programs for those who run a business.
You can establish your Sec. 105 medical plan right now by hiring your spouse. You can provide family coverage for him or her — and deduct 100% of your family’s health-insurance premiums for 2007 as business expenses — in most business entities. In addition to cutting income taxes, this will cut your self-employment taxes — and your company’s payroll taxes on those wages.
You can deduct all the medical-insurance premiums even if the premiums were paid long before the plan was established. However, when it comes to out-of pocket medical expenses, your business may only deduct those expenses paid after the Sec. 105 plan is established. So Foster recommends that you set one up as soon as you can. TASC has a good explanation of how these plans work on its Web site — http://www.tasconline.com/buytasc/bizplan/.
When asked how this would affect domestic partners, Foster admitted that he hadn’t thought about it. Clearly there would be no federal tax benefit on IRS returns. But there’s likely to be a state benefit worth exploring with a knowledgeable tax adviser.
What can you still do for 2006?
For businesses, Hix says first of all, finish up all your bookkeeping — make it pretty. Remember to log all credit-card and cash purchases. Scramble to get anything you’re still missing so you can finish up your corporate returns. Don’t forget to list all your fixed-asset purchases and to depreciate them. Did you sell or dispose of any? You may have to recapture some depreciation or report some sales.
Business owners can still reduce last year’s taxes by opening and funding a SEP-IRA. Depending on the type of entity you operate, and your income level, you may be able to score a deduction as high as $44,000 based on 25% of your wages or profits. In fact, if your spouse or children own the business too and/or receive wages from it they may be eligible to open and fund SEP-IRAs as well.
Hix has a lot of clients who are mechanics. Typically they buy their tools from the same vendors. No doubt, some of you are in the same position. If you don’t have your receipts, check with your vendor for a printout of your account for the year.
For personal returns, if you still haven’t received K-1s from pass-through entities, it’s time for them to finish. You’re within your rights to be a pest now.
Hix says to bug those 2006 dependent care providers to cough up their EINs and identification.
It’s amazing the wealth of information people started to provide once they started offering advice. Imagine if you were the one speaking with your tax adviser instead of TaxMama. Just think how many great ideas you could get, if you meet with them when it’s not tax season.
Eva Rosenberg is the founder of TaxMama.com and an enrolled agent licensed to represent taxpayers before the IRS. She is the author of the book “Small Business Taxes Made Easy.” Reach her at email@example.com.
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