The
Tax Man Cometh
Free Info on our recommended Medical Transcription Program leading to an exciting home based medical transcription career
If you're used to pulling "all-nighters"
when April 15 (the current tax filing deadline) rolls around,
then you are probably not getting the most out of your tax
planning efforts. Tax planning should be viewed as a year-round
process - not just a once-a-year headache. Unfortunately,
most people don't know how or where to start.
The good news is that there are
some excellent (and we might add, user friendly) software
programs on the market that can take some of the frustration
out of the process. Quicken has two packages that are highly
recommended.
For planning, organizing, and managing
your day-to-day financial affairs, we recommend Intuit's fabled
financial management software:
Quicken (for individuals) and Quick
Books Pro (for small businesses)
At Tax time, Intuit again comes
to the rescue with its massively popular tax filing program:
Turbo-Tax
The beauty of these two programs
is that they are designed to be used in concert with one another.
In other words, if you use Quicken or Quick Books to manage
your personal or business finances, at the end of the year
it is a simple and very painless process to efile your financial
data into Turbo-tax and complete the filing process. And of
course, with the advent of the internet, returns can be sent
electronically for speedier refunds.
Of course tax laws are constantly
changing. It is always good to solicit the advice of a professional
tax planner before making final decisions. However, to help
you optimize your tax planning efforts consider the following
ideas:
Timing
Even though the deadline (for most
of us) for filing a current year tax return is April 15 of
next year, most of the deadlines for completing financial
transactions that can be deducted from current year taxes
is December 31 of the current year. The notable exception
being contributions to IRA's and certain retirement accounts
which can be made anytime prior to the filing deadline.
Most other deductions will need
to be completed before the end of the year to generate current
year tax benefits.
Year-end Tax Deductions
1. Make necessary equipment
purchases. If you are a small business owner or are an independent
contractor you should consider making any necessary equipment
purchases by the end of the year. As long as the purchase
is made by the end of the year it will be deductible (expensed
or depreciated - depending on the asset) in the current year
- even if you don't actually pay for it until the following
year.
2. Make a contribution to
a tax-deferred retirement plan. If you work for a company
that offers a 401K plan you should consider making your contributions
on a pre-tax basis to ensure that you get the full benefit
of the tax deduction. It should always go without saying that
you should take full advantage of any employer matching contributions
to your 401K or pension plan. This is basically free money
- which in this case is also tax-deferred. If you have a small
business consider setting up a Keogh plan to allow for tax-deferred
contributions.
3. Make charitable contributions.
By making charitable contributions or engaging in other tax-deductible
holiday gift giving you will generate a nice deduction for
youself at tax time.
4. Prepay expenses. Taxes
and other tax-deductible business expenses can be prepaid
in December - even if they are not due till after the first
of the year. If you own a home you may want to consider making
your January payment at the end of December so that you can
add an additional month's worth of interest to your annual
interest expense.
5. Defer Income. Find ways
to defer income until after the first of the year. You may
be able to talk with your employer or your customers to negotiate
some selective delays in current year income - effectively
postponing your tax hit for that income. If you have a business
you may delay sending certain invoices out until the end of
December to ensure that you do not receive payments until
the following year.
6. Manage your capital gains
and losses. If you have investments in stocks or other marketable
securities you may want to consider holding onto those stocks
which have appreciated in value and selling the losers in
order to recognize that loss on this year's taxes. Currently
you can use capital losses to offset other ordinary income
(subject to some limitations). Alternatively, you may choose
to offset gains in some investments with losses from others.
Of course, if you truly believe that a stock is positioned
for continued rapid appreciation you may want to hold onto
it - even if it has been a loser.
Free Info on our recommended Medical Transcription Program leading to an exciting home based medical transcription career
Home Office Deduction
One of the most common tax deductions
for independent contractors and small business owners, is
the home office deduction. Recent changes in the tax law have
made it easier to claim this deduction. Be aware that the
rules governing home office deductions are still quite complex.
You would be well advised to read the a couple of rules of
thumb to get you started:
Required Forms
If you're a sole proprietor, you
must fill out IRS Form 8829 and include it with your annual
tax return. Be sure to read the directions carefully. You
may also be required to fill out IRS Form 4562.
For information on obtaining these
and other tax forms, go to the IRS home page at IRS.USTreas.gov
or follow our link to the TurboTax web site shown above.
Qualifying for the Deduction
The primary condition that must
be met in order for a small business owner to qualify for
the home office deduction is as follows:
The home office space must be your
principal place of business and it must be used regularly
and exclusivley for business management tasks and activities.
The normal interpretation of the
law is that as long as you have a designated home office space
or area where you attend to your business activities and the
home office space is reserved exclusively for those activities
and you do not have another permanent office where you normally
conduct those activities, then you may claim the deduction.
Even if the home office is not your
principal place of business, if you use it regularly to meet
with clients and it is used exclusively for that purpose,
then it may still qualify as a deduction. Check with your
accountant.
A major change in the deduction
occurred in 1999. The new provisions suggest that even if
you are performing most of your actual labor outside of the
home, for example, as in the case of a plumber, electrician,
janitorial contractor, etc., but your home office is designated
as the primary and exclusive location where you attend to
administrative tasks, such as billing, customer service, payroll,
and the like, then you may claim the deduction.
Note: If you are an employee of
a company working from home, the deduction can only be claimed
if you are required to work at home by the employer for the
convenience of the employer.
How the Deduction Works
The home office deduction is based
on the size of the home office relative to the size of your
entire home. For example, if your home is 1,500 square feet
in size and your home office is 300 square feet in size, then
you may claim 20% of your home expenses as a home office deduction.
If your office consisted of a single 150 square foot room
then you would be able to deduct 10% (1,500 divided by 150)
of your home expenses.
Typical home expenses which may
be included in the home office deduction include mortgage
interest, homeowners insurance, property taxes, utilities,
garbage collection, and general maintenance and repairs. Of
course any expense related directly to your home office, such
as having it rewired or remodeled, are 100% deductible. Be
aware that certain remodeling and repair deductions must be
depreciated over time rather than expensed in a single year.
Caveat
Be aware that if you are a homeowner,
the deduction of home office expenses and depreciation may
trigger additional taxes if and when you sell your home. This
must be weighed out in your decision of whether to take advantage
of this deduction or not. Consult a tax professional for full
details on potential tax ramifications given your personal
circumstances.
Free Info on our recommended Medical Transcription Program leading to an exciting home based medical transcription career
|