Disclaimer: Information contained below was accurate as of the date of publication. Due to frequent tax law changes, information may no longer be accurate. For the latest tax information, please contact a member CPA.

'TIS THE SEASON

by Andrew D. Schwartz, CPA

Don't look now, but August 23rd will be here before you know it.  Are you wondering what's so great about the 23rd day of the 8th month?

August 23rd represents the precise mid-point between April 15th and December 31st.  Are you in the vast majority of people who haven't even thought one iota about your taxes since April 15th?  As Homer Simpson once asked his son Bart, "If everyone were on top of the Empire State Building, and no one jumped, would you also not jump?"

Let's take a look at some of the mid-year tax planning issues that might affect you:

AMT Angst Again

Here we go again.  The year is more than half over, and we once again find ourselves with a huge Alternative Minimum Tax catastrophe hanging over our heads.  If nothing is done about the AMT for 2008, the number of taxpayers paying this tax will jump from 4 million in 2006 to more than 23 million as was previously predicted for 2007 before Congress finally passed last year's temporary fix.

Each year since 2001, Congress has provided for relief from the AMT.  Last year, Congress needed all the way until December 19th to pass a bill extending the more palatable 2006 AMT rules through 2007.  With 2008 being a presidential election year, who knows whether Congress can come through in time to prevent millions of individuals from paying this tax?

For more information about last year's AMT fix, check out these two articles:

• "What A Relief" in our January 2008 monthly newsletter

• "AMT Spells Bad News For Taxpayers in 2007" in our October 2007 monthly newsletter

Great Time To Buy

This Economic Stimulus Act of 2008 provided a huge tax break to people who purchase, open, or expand their practices.  Under the new rules, you can now write off the first $250,000 of machinery and equipment that you purchase in 2008.  Spend more than $250k, and you can write off 50% of the excess as "bonus depreciation".  The only catch is that used equipment doesn't qualify for bonus depreciation, and real estate doesn't qualify for either tax break.

Let's take a look at a physician who opens an office from scratch and purchases $250,000 of medical equipment.  Prior to this tax act, the doctor could only take a full write off the first year for $128,000 of equipment purchased, with the remaining $122,000 being depreciated over its useful life of five or seven years, for a total first year depreciation of $145k.   Now, thanks to this tax law change, the total purchase price of $250,000 can be fully deducted this year.

More Tax Planning Ideas

• Take a look at your withholding and instruct your employer to withhold additional taxes if you haven’t had enough taxes withheld during the year to avoid getting hit with an underpayment penalty. 

• Adjust your third and fourth quarter estimated tax payments if you're remitting your taxes through quarterly estimates.  Most accountants and tax programs set up your estimates based on your prior year's tax return.  Since your income or deductions probably changed somewhat from last year, consider adjusting your remaining two quarterly payments accordingly.

• With the market down so far this year, consider selling your investments held in non-retirement accounts that have decreased in value, since your capital losses can offset other capital gains realized during the year (including from your mutual funds).  Excess losses can then be used to offset up to $3,000 of wages and other income.  Make sure to wait at least 31 days before buying back a security sold at a loss, or the IRS will disallow the loss under the "wash sale" rules.

• Increase your 401(k) and 403(b) contributions if you're not contributing at the maximum rate so far this year.  For 2008, you can put up to $15,500 into your 401(k) or 403(b) plan.  Anyone 50 or older by December 31st can put away an additional $5,000.  Contributing to a 401(k) or 403(b) plan at work is one of the best tax shelters available to you during your working years.

• If you’re self-employed, you have until October 1st to set up a SIMPLE IRA or until December 31st to set up a Solo 401(k).  Maxing out your contributions into a retirement plan is a great way to minimize the taxes you'll owe on your self-employment income.

• Get ready to make your 2009 elections to pay for your health insurance, health care expenses, and daycare expenses with pre-tax dollars through a Flexible Spending Account offered through your employer's benefits package.  Generally, November is the "open enrollment period" for this tax savings opportunity.

Half-way Home

Don't let August 23rd pass you by without at least taking a quick glimpse at your 2008 tax situation.  If you work with a CPA or plan to start working with one for the first time, now's the time to touch base with your tax preparer and spend a few minutes working through a tax projection.  Otherwise, either re-enter this year's projected information into your 2007 tax program or make a copy of your 2007 tax return and pencil in this year's projected numbers in the margin of each form, and see how your taxes look for 2008.

Investing some time now as we hit the mid-point between April 15th and December 31st is the only way to minimize your 2008 tax burden and avoid any unpleasant tax surprises next winter.

TOP

TRACK YOUR PROFESSIONAL EXPENSES

Setting up a system to keep track of your professional expenses throughout the year will save you taxes.  Here are a few suggestions:

• Use Quicken or Microsoft Money to track all of your expenditures throughout the year.  Both of these personal finance programs allow you to assign a category for each check written and credit card purchase made.  At the end of the year, simply print out a report that includes all your professional expenses to deduct on your tax return.

• Use a Separate Credit Card For Business Related Purchases.  This allows you to easily compile all your professional expenses made during the year, since all your deductible expenditures will be reflected on your 12 credit card bills.  Or even better, use a credit card from one of the companies that sends their customers an annual summary of their activity for the year.

• File Your Receipts In a Folder or Envelope.  At the end of the year, all you need to do is tally up your receipts to figure out the professional expenses you can deduct.

• Download Our Excel Spreadsheet , which lets you easily track your professional expenses on a monthly basis.  We recently updated this Excel spreadsheet to reflect increases in the standard mileage rates.  (To download the Excel Spreadsheet, right click your mouse and hit "Save Target As", and then choose the directory on your computer where you want this file to sit.)

TOP

TAX AND FINANCIAL PLANNING CALENDAR FOR AUGUST, 2008

 TOP

2007 & 2008 TAX FACTS

• For 2007, the standard deduction for a single individual is $5,350 and for a married couple is $10,700. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
• For 2007, the personal exemption is $3,400. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  
• The maximum earnings subject to social security taxes is $102,000 for 2008, up from $97,500 in 2007.
  
• The standard mileage rate is $.585 per business mile as of July 1, 2008, up from $.505 per mile for the first six months of 2008.
  
• The maximum annual contribution into a 401(k) plan or a 403(b) plan is $15,500 in 2008.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,000 into your 401(k) or 403(b) account that year.
• The maximum annual contribution to your IRA is $5,000 for 2008.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2009 to make your 2008 IRA contributions. 

TOP

copyright - 2007 - CPANiche, LLC