Never A Bad Time To Do Some Tax Planning!
One of the biggest mistakes made by business owners and real estate investors is
waiting until it is too late to assess the tax impact of your business income and real estate transactions. There are several reasons for this:
1.The tax laws are complicated and change constantly.
2.Taxpayers often fear an IRS audit if they aggressively pursue tax savings.
3.Taxpayers often do not think about their taxes until the filing deadline is imminent.
However, taxpayers only need remember that the Internal Revenue Service only requires you to pay the amount of tax you owe under the current regulations and NOT A PENNY MORE! There are numerous tax court cases where judges have noted that it is the taxpayer's right and obligation to reduce their taxes to the minimum amount due as long as they are in compliance with the tax code.
There are several factors to consider when developing a tax strategy for each business owner or real estate investor's unique situation. Tax strategies that provide the most benefit should take into account the following:
1.How does the timing of a transaction impact the situation?
2.What options are available to minimize your taxable income?
3.Can you defer taxable income or tax payments without incurring a penalty?
4.What is your marginal tax rate and how does a given transaction affect that rate?
5.Do we have the ability to match high income with high expense?
6.What is the effect of long term versus short term holding periods?
While each taxpayers situation is unique, tax planning basically consists of the following steps:
1.Analyzing and obtaining an understanding of the taxpayer's situation and goals.
2.Development of a strategic tax plan to minimize the current and future tax liabilities.
3.Preparation of a tax projection which incorporates the strategic tax plan.
4.Implementation of the strategic tax plan.
5.Ensuring that the taxpayer has made sufficient tax payments to avoid a tax penalty.
There is numerous tax planning strategies available which can be used depending on your unique situation. The following is a brief description of some of the most common:
1.Deductibility of qualified business expenses paid at year-end in advance for the following year. A business check is considered payment in the year in which you mail or deliver it as long as no restrictions on it apply. In addition, a bank credit card can be used to pay such expenses even if the card balance is not paid off until the following year.
2.Purchases of needed business fixed assets such as furniture, machinery and equipment and business-use vehicles can lead to either a complete write-off of the cost of such equipment in the current year using Section 179 of the IRS code assuming the business has sufficient income or at a minimum, bonus depreciation on fixed asset purchases no matter what the business income is. The 2006 Section 179 deduction was been increased from $105,000 to $108,000 for qualified asset purchases and will remain the same or increase for 2007.
3.Funding of tax deferred IRAs, SEPs and 401(k) programs to defer the amount of taxable income and help fund your retirement.
4.Use of Section 1031 to defer gains on real estate held for investment purposes.
And there are many more depending on your unique tax situation and goals!
In addition, there are some recent items as it relates to taxpayers in states with high personal income tax. Beginning in 2004, taxpayers who itemize deductions were allowed to deduct sales tax paid during the year if it exceeds their state income tax. This means that it may make sense to purchase big ticket items you were planning to buy in a couple of years in 2007 if you think it will reduce your tax liability.
In order to take advantage of the benefits and savings that await you, you must have a plan that takes into account your unique situation. DON'T PROCRASTINATE. CONTACT A TAX ADVISOR TODAY!!
by: Theodore Lanzaro
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