November 17, 2003 - Dear Client:
I am writing this letter to inform you that there is still ample time to effectively reduce your 2003 tax liability. Presented here are tax strategies that individuals, professionals, and business owners can still initiate before the end of the year and end up paying less in taxes when April 15 rolls around.
1. If you are making quarterly estimated payments to your state do not wait until the January 15, 2004 deadline to make your fourth-quarter payment for 2003- do it before December 31, 2003. The payment can be dropped in the mail on December 31st and you can claim the deduction on your 2003 tax return rather than waiting a full year until 2005 when you file your 2004 tax taxes.
2. Prepay January's rent or mortgage in December. Business owners who rent real property will benefit in the current year when January's rent is paid in December. Individuals who own homes can deduct the interest associated with January's mortgage payment if paid in December.
3. The tax truism 'to defer income and accelerate expenses' continues to make good sense for 2003 which reduces the tax liability for professional and business owners. Try pushing out payments from clients or third party payees by delaying in sending out 'year-end invoices' until the end of December. Thereby receiving the payment in 2004 rather 2003.
Both professionals and business owners should put forth a concerted effort to ensure that all vendor invoices are paid before December 31. If cash flow is an issue, credit cards can be used to pay certain vendor invoices in December and the expense will still be tax deductible in the current year.
4. The tax code is especially generous to professionals and business owners who purchase capital equipment by allowing accelerated depreciation. Capital purchases up to $100,000.00 can be written off against 2003 income if assets are placed in service before Dec 31st. For emample, if business plans call for expansion or procurment of equipment or machinery in 2004, do the acquisition before Dec 31. If cash flow is an issue, this capital expense can be made on credit and still qualify for the accelerated depreciation tax deduction.
5. Medical professionals and business owners who operate with supplies and are on a cash basis can purchase, on credit card if necessary, January's supplies in December and still be able to claim the deduction for 2003.
6. Individuals who contribute to charities should review their 2003 contributions to see that they have met their desired goal before 2003 is over. Also, make sure to receive a written acknowledgement since the IRS requires more than just a check when cash contributions are $250.00 or more.
7. Individuals who have suffered losses in investments should review their positions and offset any capital gains and/or up to $3,000.00 of ordinary income by selling the investment before December 31. Be aware, however, the 'wash sale rule' which requires you must wait 30 days before repurchase of an investment sold to claim the capital loss. Excess losses over $3,000.00 can be carried forward until they are used up.
8. For business owners and professionals one of the most effective ways to reduce your tax liability and also increase your net worth is to establish a retirement plan. Funds contributed to a retirement plan reduce your income tax liability and also your social security tax liability. On the investment side, the interest and capital appreciation your funds garner in the retirement plan are tax deferred until distribution when you retire. Also, importantly, if you decease the undistributed portion of your retirement plan remains in your estate unlike excess social security which does not. There are a multitude of plans which can be utilized, such as, a SEP, Roth and Traditional IRAs, Keogh or 401K plan. Although most plans must be funded by the due date of the tax return, year end planning is required since some plans must be established before the close of the year. Consult my office to ensure compliance with your plan choice. Please note on the down side, retirement plans must be made available and funded for all qualified employees of the business entity.
9. If cash flow is preventing you in paying your deductible expenses use your credit card for medical bills and charitable contributions before year end. These deductions will still be allowed to be claimed in 2003 even if you do not pay the credit card bill until next year.
10. One of the most effective means by which to escape estate taxes is to adopt a regular system of gifting to family children. In 2003 the maximum that can be gifted to any one person is $11,000.00. Thus in a family of four, both parents can gift $11,000.00 to each child for a total of $44,000.00 for the year. No tax is required to be paid by either the donors or donees. For households with high net worth or high future potential, gifting is highly recommended. The idea here is to reduce your taxable estate before you and your spouse pass away leaving a large estate which would be subject to high estate tax.
Please feel free to call or send an e-mail on any item to get additional understanding or discussion. My office is available for consultations not only on tax strategies but also on how to establish your business in order to maximize benefits under the US tax code.
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