December 31st Is The Last Day for Most Tax Planning Strategies

Just a reminder that 2008 will be over in less than two weeks, and that means that your opportunity to reduce your 2008 taxes is coming to an end soon as well.  Most tax planning strategies must be implemented before the end of the year to reduce the current year’s taxes.  There are a few exceptions (funding your IRA for example), but for the most part, once the tax year is over, it’s too late to reduce your taxes for that year.

There have been many changes to the tax law this year so you may not even be aware of all the tax credits and deductions that you may qualify for.  Here are some tax planning strategies that you may be able to take advantage of before the year ends:

Real Estate Tax Deduction — New for 2008, there is an additional standard deduction for those who don’t itemize their deductions, but who pay real estate taxes. The additional deduction amount is equal to the amount of real estate taxes paid up to $500 for single filers or up to $1,000 for joint filers. This deduction is available for the 2008 and 2009 tax years and increases your standard deduction.

Continue Reading December 31st Is The Last Day for Most Tax Planning Strategies

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Year End Tax Tips

It’s hard to believe we’re almost at the end of the year already.  As I write this, there are only a few weeks left in 2008.

Most people probably aren’t thinking about taxes yet, but the time to do tax planning is before the year ends.  Once December 31 has passed, there’s very little you can do to help reduce your 2008 taxes.

The first step in tax planning is to determine where you are for the year.  Pull out last year’s tax return for a reference.  You also need your most current profit and loss statement, so if your books aren’t up to date, now’s the time to get caught up.

Compare your income and expenses to last year’s tax return.  Is your income up?  Do you have the same amount of deductions as last year?  If your income is up, or if your expenses were down, you may owe more taxes than you did last year.

Continue Reading Year End Tax Tips

IM Courses May Be Tax Deductible

If you’re an online business owner, you’ve probably noticed a LOT of product launches this year.

Many of us are on a budget, and struggled with the decision to purchase a product, even if it was something we really needed to grow our business.

Well, don’t forget that ordinary and necessary business expenses – including courses that you take, or course materials that you purchase for your business – are tax deductible.  Keep in mind, it does need to be business related, but if it helps you learn your business, or if it helps you market your business, then it is probably a deductible expense.

Which means that the $400 product you’ve got your eye on may only cost you $250-350 after taxes, depending on what tax bracket you are in.

Let me give you an example: let’s say you are in the 15% tax bracket and you operate your business as a sole proprietor.  Your total tax percentage is approximately 35% (15% Federal tax + 15.3% self employment tax + 5% state income tax).

When you purchase an item for your business that is tax deductible, you’ll get approximately 35% back in tax deductions, meaning a $400 product will cost you only $260 after taxes.

So if you’re got your eye on a marketing course, or the latest and greatest product that is being launched, and you’re only objection is the price, don’t forget about the tax benefits of being a small business owner.  You may be able to afford that new info-product that’s being launched today after all

Year end tax tips for home businesses

Someone recently asked me what they could do now to make tax time easier for this upcoming tax season.

The best thing you can do is to think about taxes before then year ends.  Most people wait until the tax filing deadline before they ask how they can reduce their income taxes.  Unfortunately, once 2007 ends, there’s very little you can do to minimize your taxes for 2007. 

To start your tax planning, you should review your income, deductions and withholdings before the year ends.  Which means you need to get your bookkeeping caught up!  You should use a software program, such as QuickBooks, Quicken Home and Business, or spreadsheets to keep track of your income and expenses for your business.

Once you’re bookkeeping is caught up… do you expect your home business to have a profit or a loss this year? 

If you have a profit, here are some tax planning tips to help minimize your home business taxes this year:

1.  Defer your income.  If you have a home based business and it looks like you’ll have a good profit this year, consider invoicing your clients in January instead of December, to defer the income to next year.  Or, just wait until the end of December to send invoices.  Any money you receive in January will go on your 2008 tax return, not 2007. 

2.  Accelerate expenses.  Do you need to purchase any inventory?  What about supplies?  Does your computer need to be replaced?  If you’ve got a profit for 2007, consider purchasing inventory, supplies or other items that will need to be replaced soon this year to reduce your taxable profit. 

In addition, if you itemize your tax deductions, make sure you pay all mortgage payments, property tax, medical expenses, etc. this year, even if they aren’t due til next year, to help increase your tax deductions for this year.

3.  Contribute the maximum amount to retirement plans.  As a home based business owner, you have several retirement plans to choose from.  You can setup a traditional IRA, a SEP IRA, a Simple IRA, or even a 401K.  The maximum contribution amounts vary based on the retirement plan, but these plans allow contributions from $4,000 up to $44,000 per year.  Contributing to a retirement plan is a great way to maximize your retirement savings and to minimize your taxes at the same time.

4. Give to charity.  Although charitable donations don’t reduce your business income, they do reduce your taxable income if you itemize your deductions.  Gifts of cash or goods are a great way to help reduce your tax bill this year. 

On the flip side, if you expect a larger profit next year, or if you expect to jump into a higher tax bracket next year, it’s best to report as much income this year, and to defer as many expenses as possible til next year.

Either way, year end tax planning can really help minimize your taxes.  But you have to make it a point to review your taxes before the year ends.  Once 2007 is gone, so are your tax planning opportunities for 2007.

Don’t forget your third quarter tax estimate!

If you have your own business, then you’re probably aware that the third quarter tax estimate is due very soon (Sept 17).

If you just started your business, you may not be aware of how tax estimates work.

Basically, in the United States, we operate on a pay-as-you-go tax
system.  That means you pay taxes as you earn income throughout the
year.

If you are an employee, you pay taxes through withholding.  If you
are self employed, you pay taxes by making estimated tax payments.

The general rule is that you must make estimated tax
payments if you expect to owe at least $1,000 in tax for the current
tax year, after subtracting your withholding and tax credits, AND if
you expect your withholding and tax credits to be less than the
smaller of:

• 90% of the tax liability on your current year
  tax return, or
• 100% of the tax liability on your prior year’s
  tax return

Generally, you will estimate your tax liability for
the entire year and divide that amount by four to determine your
quarterly estimated tax payments.

The due dates for quarterly estimated tax payments are April 15,
June 15, September 15 and January 15.  If the 15th falls on a weekend
or a holiday, the due date is the next business day.

It’s important to send the right amount in at the right time to avoid interest and penalties.

For help estimating your quarterly estimated tax payments, check out How to Pay Estimated Taxes, or contact Kristine for tax planning/estimates today.