by: The National Association of Black Accountants
Popular techniques for individuals and business owners
Now is a good time to figure out how to cut your 2004 tax bill. Although everyone's situation is different, the National Association for Black Accountants www.nabainc.org (NABA) offers ten popular year-end strategies for individuals and small-business owners:
1. Charitable donations: As a general rule, the full amount of a cash donation is deductible on the donor's personal tax return. If a donation is made by credit card at year-end, the gift is deductible in 2004, even if the charge is not actually paid until next year. Added tax break: For donations of property, the full fair-market value is deductible if the property has been held for more than one year.
2. Alternative minimum tax liability: The alternative minimum tax (AMT) can sneak up on unsuspecting taxpayers. It applies if your AMT liability, based on a special tax computation involving tax preference items, exceeds your regular tax liability. Individual taxpayers should have their AMT liability calculated before year-end. Depending on the result, it may be advisable to shift tax preferences to next year to avoid or reduce AMT liability. Alternatively, you might accelerate income into 2004 if the AMT rate is lower than your top marginal tax rate.
3. Section 179 allowance: Under Section 179 of the tax code, you can elect to currently deduct some or all of the cost of business assets placed in service anytime this year. For 2004, the maximum Section 179 allowance, which was quadrupled from $25,000 to $100,000 for 2003, has been increased slightly to $102,000. The maximum allowance reverts to $25,000 for the 2006 tax year.
4. Bonus depreciation deduction: There is an extra tax incentive for buying equipment for your business this year. For assets acquired after May 5, 2003 and placed in service before January 1, 2005, you can claim a 50% bonus depreciation deduction in addition to the regular first-year depreciation deduction and the Section 179 allowance. As things stand now, the bonus depreciation deduction is scheduled to go off the books after 2004.
5. Estimated tax penalties: Even if you do not have enough federal income tax withheld during the year, you can avoid an estimated tax penalty by meeting one of two safe harbor exceptions. No penalty is imposed if annual tax payments for 2004 equal 90% of the current year's liability or 100% of the prior year's tax liability. The percentage for the 100% safe harbor is increased to 110% if your adjusted gross income (AGI) for the prior year exceeded $150,000.
6. Medical and dental expenses: You may deduct unreimbursed medical and dental expenses to the extent the annual total exceeds 7.5% of your AGI. Try to bunch together non-emergency expenses (e.g., new eyeglasses or dental cleanings) in the tax year that provides the best opportunity for a deduction. Note: Do not forget to include co-payments required under a company health insurance plan.
7. Dependency exemptions: The parent of a full-time student under age 24 can still claim a dependency exemption for the child by providing more than 50% of the child's support. Depending on the situation, it may make sense to add to the support total at year-end in order to clear the 50% mark. Each dependency exemption for 2004 is $3,100.
8. Wash sales: Under the wash sale rule, an investor cannot claim a tax loss if he or she buys back substantially identical securities within 30 days. To avoid this result, you can (a) wait at least 31 days to make the purchase or (b) buy replacement securities first and wait at least 31 days before selling the original shares. Note: This must be done more than 30 days before the end of the year to realize the loss in 2004.
9. Hobby losses: If you operate a sideline business, you can claim a tax loss for the year, but be careful. If the activity is characterized as a hobby, not a business, your loss is deductible only up to the amount of your income from the activity. Since the IRS generally presumes the activity is a legitimate business if you have shown a profit in three out of five consecutive years, you might accelerate income into this year and defer deductions to next year.
10. Income-shifting: You can reduce the overall family tax bill by shifting taxable income from your high tax bracket to other family members in lower tax brackets. For instance, you might transfer income-producing property to custodial accounts for your minor children. Caution: Be aware of the "kiddie tax." To the extent that the unearned income a child under age 14 exceeds an annual limit ($1,600 for 2004), the excess is taxed at the top marginal tax rate of the child's parents.
In summary: You may be able to use one or more of these techniques to reduce your 2004 tax bill. However, tax planning cannot be done in a vacuum. If you have additional questions concerning your tax return, consult with a CPA. To find a CPA, find one through NABA's Division of Firms, www.nabadof.org.