2001…Tax Planning

by Carmen C. Garcia, CPA

1. Did you get a big refund?

   If you did, then your withholding on your salary is probably too much. You let Uncle Sam keep your money in the government's bank accounts and didn't even earn interest on your money. The solution is to give your payroll office a revised W-4, Employee's Withholding Allowance Certificate, and increase your withholding allowances accordingly. Remember, withholding allowances don't necessarily mean dependents. Use the worksheet on the W-4 to determine how many withholding allowances to claim.

   On the other hand, many people don't have the discipline to save and consider a refund a sort-of savings that they can do something with that would not normally be available, like a vacation, down payment on a new car, investments, etc. Then the lost interest becomes the cost of accumulating money that they would normally not have. Is it worth it? They think so.

2. Did you owe Uncle Sam lots of money?

   If you owed thousands after withholding and estimated taxes, then begin to plan now on how you can reduce your liability during 2001 or plan to pay it before January 15 of the next year. Again, you can increase your withholding on your salary or make estimated tax payments using Form 1040 ES, Individual Estimated Tax Vouchers for 2001. The U.S. tax system is a "pay as you go" system. If you work for an employer, he withholds your federal income tax and sends it in to IRS for you. You get a W-2, Wage and Tax Statement at the end of the year telling you what amount to claim as a credit for federal income tax withholding on your Form 1040.

   However, if you work for yourself, then you have to estimate your liability by annualizing your taxes and dividing by four and sending that amount in each quarter on April 15, June 15, September 15 and January 15. You can also just divide last years total taxes (line 57) by four and send in one fourth of the total each quarter. Paying in last year's tax will avoid a penalty if you didn't pay in 90% of your tax before filing. Remember that as a sole proprietor your pay two kinds of tax, federal income tax (usually 15-28%) and social security tax (15.3%) on net earnings from self-employment.

3. Do you think you paid too much in taxes?

   Start now to analyze your return and determine what you can do now to lower your 2001 tax bill. Here are some suggestions to consider:

   1. You can control some expenses to maximize your deductions in real estate taxes and charitable contributions. For real estate taxes, call the mortgage company and ask them to pay your real estate taxes early. These taxes are usually due in January, but the tax statements are mailed in October, offering a discount for early payment in Oct., Nov., and Dec. Asking the mortgage company to pay in December will give you a discount on the real estate tax and place you in the current tax year for an additional deduction. For subsequent years, continue to remind your mortgage company each December. However, payment in December will depend upon your mortgage escrow balance. If you have a shortage in escrow, you may have to pay in an additional amount into escrow to make the tax payment
   
   
   
   2. For additional charitable contributions deductions start cleaning out closets and giving away clothes and household articles to qualified charitable organizations. The limit without details is $500 but don't be afraid to donate more than $500 by using Form 8283, Noncash Charitable Contributions. You can donate more than $500 if the items are individually not greater than $500 and, in the aggregate, are less than $5000, using only the name, address and date of contribution on Form 8283. Also, don't over look donating cars, securities, buildings, antiques and collectibles. A contribution of over $5000 in non cash items will require an independent appraiser to sign off on Form 8283.
      
      Also, plan your charitable giving or tithing early. For most taxpayer, 50% of adjusted gross income is the limit on charitable deductions. Make certain you put cash contributions in the church envelopes. Any individual contribution of $250 must have a receipt from the donee, a cancelled check will not be acceptable. In tithing, ask your church if your tithe can be automatically withdrawn from your bank.
   
   
   
   3. Consider investing in rental property. Real estate is still a good tax shelter if your adjusted gross income is under $150,000 for a couple married filing joint and if you actively manage the property. That doesn't mean that you can't hire a company to collect rents make repairs as long as you make the decisions on managing the property. If you meet these requirements, you fall under the exception to the passive activity loss rules. That is, you can deduct up to a $25,000 loss on rental property if you actively managed it and your adjusted gross income is under $150,000. You get a tax loss but you are not necessarily using cash because the income collected is offset by interest, insurance and depreciation. Look for a property that you can assume with little or no money down.
   
   
   
   4. There are still some investments that will throw off tax credits in later years, for example low-income housing tax credits. However, unless you are a sophisticated investor, beware of sinking lots of money in tax shelters that require thousands of dollars in advance and tax credits and deductions that may not materialize.
   
   
   
   5. Consider starting a business, a home-based business. A business in your home can turn many personal expenses that are not deductible into ordinary and necessary expenses that are deductible. Using Form 8829, Expenses for Business Use of Your Home, some examples of these are mortgage interest, real estate taxes, insurance, utilities, securities monitoring, repairs, maintenance and depreciation on your home. Also, automobile expenses, either actual expenses or mileage, can be a significant expense item, but you must have written evidence to substantiate. Remember, in a home-based business there are hobby rules to follow. Basically, these hobby rules mean you must make money in 3 of 5 years. If you don't, it is really important to document your intent to make a profit by attending continuing education classes or upgrading your skills.
   
   
   
   6. If you already own a business, and you are making money, consider restructuring your business from a sole proprietor to a corporation or a limited liability company. There are many advantages and disadvantages of incorporating or restructuring. See your tax accountant to determine which business entity is best for you.
   
   
   
   7. Finally, don't wait until the end of the year to think about retirement planning. Start now and maximize your contributions to your 401(k), SEP IRA or SIMPLE IRAk Keogh or Money Purchase Pension Plan. A monthly contribution to these accounts will make your cash flow easier next April 15. All of these plans will reduce your tax bill and save your lots of tax dollars. Good Luck!
   
   
   

Carmen C. Garcia, CPA, is President and Owner of C.C. Garcia & Co., P.C. a San Antonio CPA firm serving individuals, small businesses and non-profit agencies. Email carmen@ccgarcia.com or visit her website at www.ccgarcia.com.