Still Time to Reduce Year-End Taxes

By Craig Koop as featured in Home Business

Businesses and individuals, armed with an understanding of changes in the federal tax code, can still make decisions that may significantly impact their 2003 tax liability. There are generally three basic strategies that can be employed to decrease income tax liability: 1) deferring or accelerating income; 2) accelerating expenses; and 3) taking advantage of available tax credits.

Deferring or Accelerating Income

Individuals with relatively stable income, who experience no significant movement between tax brackets, most commonly postpone payment of taxes by deferring income and accelerating deductions. For example, delaying a year-end bonus until January 2004 means the taxes are not due until April 15, 2005. One key objective may also involve shifting income into low tax-bracket years and maximizing deductions in high tax-bracket years.

On occasion, you may actually benefit by accelerating income from 2004 into 2003. For example, if you anticipate being in a higher tax bracket in 2004, or if you will need additional income in order to take advantage of an offsetting deduction or credit in 2003 that will not be available in the future, it may make sense to recognize that income in the current year.

Accelerating Expenses

To maximize the benefits of itemizing deductions, you should consider adjusting the timing of your deductible expenses so that they are higher in a tax year in which you may itemize those deductions. Any taxpayer may generally deduct all of its ordinary and necessary expenses, which are incurred in carrying on an active trade or business. Included in these normal operating expenses would be insurance premiums, advertising costs, and professional fees (legal and accounting), provided that such fees are incurred in connection with matters related to the business. Some expenditures,such as capital improvements, equipment, computers, and computer software, are deductible over the asset’s useful life, as opposed to being entirely deductible in the year the expenditure is made. Similarly, the costs incurred in starting-up a business are generally amortizable over a period of not less than sixty (60) months, beginning with the month in which the business begins.

When taxpayers use their personal residence for business purposes, the expenses associated with that use are generally not deductible unless certain tests are met. In particular, the expenses must be attributable to a specific portion of the home (or a separate structure), which is used only for the taxpayer’s trade or business. Where the taxpayer is an employee, the business use of a home must also be for the convenience of the employer.

To maximize the benefits of itemizing deductions, you should consider adjusting the timing of your deductible expenses. . .

Taking Tax Credits

Tax credits are another powerful planning tool. A tax credit is more valuable than a tax deduction, because it offers the taxpayer a dollarf or-dollar reduction in taxes as opposed to simply a reduction of taxable income. A few of the available tax credits available include:

  • Taxpayers who have qualifying children may be entitled to a $1,000 credit per child.
  • Credits for higher education and learning include the HOPE Credit and Lifetime Learning Credit.
  • The Work Opportunity Tax Credit is available for wages paid by employers who hire individuals from certain target groups.
  • The Small Employer Pension Plan Start-up Costs Credit allows certain qualified employers to take a credit for a portion of the ordinary and necessary costs of starting a qualified retirement plan.
  • Vehicles purchased during the year, weighing more than 6,000 pounds and used predominantly for business, are not subject to the luxury auto depreciation limitations, meaning they can be depreciated at a faster rate (over 6 years as opposed to 10 or more).
  • The limitation to expense depreciable tangible property in the year of purchase has been increased from $24,000 to $100,000 for 2003 through 2005.
  • Charitable giving is always a consideration in tax planning.

Last Minute Items for 2003

It’s still not too late to do some planning that will have an effect on your 2003 tax return. In particular, individuals have until April 15, 2004, to make a contribution to their IRA and still claim a deduction on their 2003 personal income tax return. Similarly, for employers that make contributions to a simplified employee pension (SEP), contributions are treated as made on the last day of the tax year if they are made by the due date of the employ e r ’s tax return, subject to some limitations.

Disclaimer: GPS, and ITA, provide the above information for the general benefit of the readers. Readers should always contact their tax advisors to obtain proper professional advice before any action is taken.