It's almost that time of year again when weary taxpayers gather their papers, spread sheets and Quick Books data and undertake the yearly challenge of Federal income taxes. Whether you're a "Go-It-Alone" type or an "I'll-Let-This-Be-My-Accountant's- Headache" person, you should know that there are still things you can do that will affect your tax burden as an individual, business owner or investor. Paul Cioffari, CPA, the head of the tax practice at Filomeno & Company has these suggestions:
Personal Tax Strategies
* Participate in employer-sponsored retirement vehicles. Take maximum advantage of your employer's flexible spending account or cafeteria plan, 401(k) and a medical savings account. For 401(k)s, you can invest up to $12,000 in 2003. If you're 50 years old or more, the amount goes to $14,000.
* Transfer your estate tax-free. Think about the best ways to gradually transfer your estate tax-free. "Consider establishing a gift program under which you and your spouse transfer $11,000 for each of you every year to any number of recipients," advises Mr. Cioffari.
* Make charitable donations of appreciated securities. "Since the stock market has done so well this year you may want to consider contributing appreciated securities to your favorite charity," suggests Mr. Cioffari. "This will help a good cause and, at the same time, help you when it comes to avoiding any capital gains tax. By the way, the amount of your deduction is the value of the property rather than its cost.
* Repay personal debt. Pay off personal debt or replace it with a home equity loan to avoid nondeductible interest payments. Home equity loan interest is fully tax-deductible up to $100,000.
* Consider moving end of year bonuses. If you can, consider whether pushing a year-end bonus or commission check into the New Year is best for you. "This would work to your advantage if you expect your income in 2004 to be less than 2003," says Mr. Cioffari. "If that is the case and you push the bonus in 2004, you'll pay taxes in a lower bracket and have a year to pay the taxes."
* Look at educational expenses. Run calculations on the value of the tax benefits you receive on the cost of your child's education. It may be better for you if your child claims the education deductions and/or credits.
* Consider charging some deductible purchases. Think about charging such deductible expenses as contributions, medical expenses, business expenses and some state tax payments if you need the deductions this year, but don't have the ready cash. "For tax purposes, a deductible purchase is considered 'paid' when charged," says Mr. Cioffari, who also cautions, "Just remember to pay these charged expenses off quickly or you'll be paying credit card interest rates on them."
* Make early payments. Pay state and local taxes or your January mortgage before Dec. 31 to increase federal deductions this year. One caution: this is not advantageous if the Alternative Minimum Tax (AMT) applies in your situation.
Business Tax Strategies
* Defer taxes. To the extent possible, shift income into next year and accelerate deductions. This defers paying the tax for a year.
* Shift compensation to fringe benefits. Avoid payroll taxes by shifting a portion of your employees' compensation from salary to fringe benefits. "Unreimbursed medical expenses and payroll deduction group insurance are ideal benefits for this kind of treatment," says Mr. Cioffari. "They can be included in a Section 125 cafeteria plan and everyone gets some benefit from that - the employer and the employee."
* Cover dependent care. Set up a cafeteria plan that allows employees to pay for their dependent care expenses. "This will likely save them more than they would with the childcare credit," points out Mr. Cioffari. "It also allows the employer to save on payroll taxes. Just remember, there's a $5,000 limit on dependent care expenses under these plans."
* Buy equipment before the end of the year. This enables you to take advantage of 2003's higher deduction of such items under Section 179. The Section 179 deduction for small business expensing of new equipment increased from $25,000 to $100,000 for 2003-2005.
* Time purchases properly. Make sure that the business' purchases of personal property are spread throughout the year or you won't maximize the company's depreciation deduction. If you acquire 40 percent or more of your assets in the fourth quarter of the year, the Mid-Quarter Convention applies. That limits depreciation for the year.
* Switch to an "accountable" plan. If your business is currently reimbursing employee business expenses under a "nonaccountable" plan, consider switching to an accountable plan. Under this arrangement, your business pays employees for their expenses as they occur as opposed to giving someone a set monthly allowance for say, auto expenses. Under an accountable plan, your employees gain the advantage of not declaring the reimbursement as income.
* Correctly classify expenses. Review entertainment, club dues and meal expense accounts to make sure they are correctly classified. "Most business owners think that all meals and entertainment are 50 percent deductible, but that's incorrect," points out Mr. Cioffari. "Certain meals are 100 percent deductible. These include company picnics and outings, other recreational expense for employees or a seasonal office party. These should be separated from regular meal and entertainment deductions."
* Look at health insurance premiums if you employ your spouse. Self-employed taxpayers who provide work for their spouses may deduct 100 percent of the health insurance premiums for the spouse and dependents.
* Conduct a cost segregation study to identify and price separately the nonstructural items and land improvements from your building to accelerate depreciation. "The objective of this study is to identify the components of a business-owner's building and property that qualify as personal property or land improvements," says Mr. Cioffari. "When these items are properly identified they can generate immediate tax savings by accelerating depreciation deductions and deferring taxes."
Investor Tax Tips
* Delay late-year mutual fund investments. "If you wait until after the fund's dividend date, you don't have to pay tax on the dividend," points out Mr. Cioffari.
* Save all that paper. To calculate exact gains or losses on mutual funds or stocks, save every statement you receive.
* Share your next good investment opportunity with your children. "Even if you have to gift your children with the money to participate that can be beneficial to you," says Mr. Cioffari. "They will pay the income tax on any gain recognized on the investment and the appreciation will be kept out of your estate. This can mean smaller gains when you sell the shares."
* To avoid being taxed twice, count reinvested dividends as part of your tax basis when you sell stock.
"Tax-payers still have quite a few opportunities to lower their tax loads as long as they are proactive. We suggest they work with their accountants to make sure they take advantage of as many savings as possible. The key is to have this discussion before you dump all your income tax data on your accountant's desk on April 14," he concludes.
Paul Cioffari, CPA is a partner and head of the tax department at Filomeno & Company, P.C. This Certified Public Accounting and Business Advisory firm is located in West Hartford, Connecticut. For over 35 years, the firm has been advising business owners on financial matters as partners in helping them grow their businesses. In addition, the firm helps its clients maintain and increase their wealth. For more tax tips, check the "Helpful Tax Information" on their website, www.filomeno.com. Or contact Mr. Cioffari at [email protected].