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Host: Patrick Allman, President, Strategic Equity
Guest: Sandy Botkin , Founder, Tax Reduction Institute
December is year-end tax season.
With that in mind, we are giving you some ips that will help you and your clients all year long.
For individuals
• Since you can deduct capital losses against capital gains, you might want to sell whatever stocks, mutual funds or real estate where you have experienced a loss to offset your gains
• If you have investment interest, that is deductible against investment earnings and can offset dividends if you make an election (check the box) on your tax return
• If you make a more than usual this year, you might want to defer some of your income – bonuses, royalty checks, etc. – to January
• Consider converting interest-bearing investments to dividend-receiving investments, which are taxed at a maximum 15 percent tax rate
• If you sell real estate at a loss, you can take those losses against any income instead of carrying them over.
For IRAs and Retirement Plan Contributions
• You can directly contribute up to $100,000 through your IRA custodian to a charity and not be taxed on that money
• In a 401K, the maximum contribution is $15,000; In a ROTH IRA, the maximum is $4,000; with a simple IRA you save up to $10,000. In addition, you can match your contribution up to 3 percent from your business. The new part is that if you are over 50, the Catch Up Contribution allows you to put away an extra $5,000 in a 401K or $1,000 in a simple IRA. The contribution only has to be made before you file your tax return in April, but the plan has to be set up by Dec. 31, 2006. Changes in 2006
• Your business can pay up to $5,150 to your children in your business tax free. If they are under 18 and independent contractors, no social security or federal unemployment tax is paid either
• Capital gains are 15 percent unless you are in that tax bracket anyway, then it is reduced to 5 percent. Therefore, you might want to give stock or real estate that has appreciated significantly to your children over 18 who make less than $31,000 a year and have them sell it. You just have to stay within gift tax limits.
• You can deduct equipment used more than 50 percent for the business as long as you elect it (check the box). That includes computers, software, desks and sport utility vehicles
• Losses for S-Corporations require sufficient basis or contribution for you to be able to deduct on your individual tax return
• If you forgot to pay your children throughout the year and you can reconstruct those hours, you can pay them in December
• If you owner-finance a real estate sale, you pay tax over the time the payments are made so you stretch out the taxes and you earn interest
• Household items given away to charity have to be in good condition
• You must either use a check or get a receipt rather than using cash to write off monetary charity contributions.
And we will end the year with some of the exceptions for the rule that interest incurred to pay life insurance policies is not tax-deductible. Exceptions to this double-dipping rule include:
• If interest is under $100 a year
• If an unforeseen event occurs that forces you to borrow to pay an insurance policy, including a casualty loss, job loss or medical emergency
• Interest incurred in conjunction with a trade or business – if you use life insurance as capital for a loan to expand inventory, key employee insurance
• If you make four years of payments out of seven years of equal insurance payments, you can borrow to make the rest of the payments and deduct that interest.
End of Year Tax Planning
