Tax Planning To Infinity And Beyond

Tax planning to​ infinity and beyond...
Another year has come and gone and what’s really changed? Are you​ sitting in​ roughly the​ same place you​ were last year at​ this time with respect to​ your taxes–wondering what you​ could have done differently in​ your business to​ positively affect your year- end tax bill?
All too often,​ when individuals and closely-held business owners begin discussing tax planning,​ what they really end up referring to​ is​ the​ process of​ tax compliance .​
Tax compliance is​ the​ process of​ reporting your income to​ the​ Internal Revenue Service and,​ hopefully,​ accurately ensuring that your tax preparer takes advantage of​ all the​ deductions and credits you​ are entitled to​ .​
Often by this time,​ however,​ it’s really too late to​ do any real tax planning .​
Having stated that,​ the​ accurate and timely preparation of​ your tax returns are obviously a​ crucial step in​ realizing the​ effect of​ this year’s tax planning (or lack thereof ),​ and there are still things you​ can do,​ even at​ this late stage,​ to​ help reduce your current and future income tax bite .​
Avoiding Common Pitfalls Because the​ effects of​ good tax planning can obviously be forgone without proper reporting and compliance,​ it​ is​ extremely important to​ make sure that you​ are working with a​ competent tax professional on​ your tax preparation .​
Because this is​ what tax preparers live for,​ and it​ is​ their specialty to​ make sure that you​ take advantage of​ all that the​ tax code affords you​ as​ a​ taxpayer,​ it​ is​ often well worth the​ additional investment in​ time and money to​ work with a​ competent tax preparer that has a​ good grasp of​ your business .​
Very often,​ a​ good tax preparer will earn their fee by recognizing additional tax savings through credits or​ deductions the​ taxpayer may have overlooked,​ or​ through the​ timely and accurate preparation of​ your tax return,​ which,​ at​ a​ minimum,​ can avoid the​ costly penalties and interest that come with late or​ inaccurate filings .​
Additionally,​ it​ is​ important to​ keep in​ mind that the​ cost of​ tax preparation is​ fully tax deductible for your business .​
For individuals,​ the​ fees are also deductible,​ although this a​ miscellaneous itemized deduction and in​ this case,​ the​ total of​ all miscellaneous itemized deductions must exceed 2 percent of​ your adjusted gross income before you​ can begin realizing any benefit .​
Whichever way you​ decide to​ go,​ with or​ without a​ professional tax preparer,​ it​ is​ important to​ not overlook some of​ the​ common tax preparation mistakes that befall many taxpayers .​
Here are a​ few of​ the​ most common pitfalls to​ avoid,​ as​ well as​ a​ few of​ the​ most commonly missed deductions:
Forgetting to​ sign your return or​ attach all required documentation and schedules .​
Carryover items - Don’t forget about charitable contributions,​ capital losses or​ net operating losses that are being carried forward from a​ prior year .​
It can be easy to​ overlook these items so be sure to​ refresh your memory by reviewing last year’s return .​
This type of​ review may also help ensure you​ don’t overlook other items of​ income or​ deduction that appeared on​ your previous returns .​
Disallowed Roth IRA contributions - If you​ are planning to​ contribute to​ a​ Roth IRA,​ make sure you​ are below the​ income limitations for such contributions .​
If you​ are a​ single taxpayer who’s modified adjusted gross income is​ in​ excess of​ $110,​000 (or in​ excess of​ $160,​000 for married couples filing a​ joint return),​ you​ are not permitted to​ contribute to​ a​ Roth IRA and doing so will subject you​ to​ a​ 6 percent penalty on​ the​ contribution amount .​
If you​ have made this mistake,​ however,​ there is​ still time to​ correct the​ problem,​ provided you​ withdraw the​ excess contribution prior to​ April 17,​ 2018,​ for 2018 contributions .​
Recent changes in​ marital status - If you​ are recently married or​ divorced,​ you​ should make sure that the​ name on​ your tax return matches the​ name registered with the​ Social Security Administration (SSA) .​
Any mismatch can cause significant delays in​ processing your return and can inadvertently affect the​ size of​ your tax bill or​ refund amount .​
Name changes can be easily reported to​ the​ SSA by filing a​ form SS-5 at​ your local SSA office .​
Keep in​ mind,​ your marital status as​ of​ December 31st will also control whether you​ may file as​ single,​ married or​ head of​ household .​
Education tax credits and student loan interest - Interest paid on​ student loans can be deducted on​ your personal tax return,​ even if​ you​ do not itemize your deductions .​
If you​ or​ your dependent is​ attending college with the​ intent of​ earning a​ degree or​ certificate,​ you​ may qualify for the​ Hope or​ Lifetime Learning Credits,​ which can reduce your tax by as​ much as​ $2,​000 for 2018 .​
Business start-up expenses - the​ expenses a​ business owner incurs before he opens his doors for business can be capitalized and written-off by the​ owner over a​ 5-year period .​
Due to​ a​ change in​ the​ tax law in​ 2004,​ up to​ $5,​000 of​ start-up expenditures can now be currently deducted .​
Professional fees - the​ expenses paid for attorneys,​ tax professionals and consultants are generally deductible in​ the​ year they are incurred .​
In certain circumstances,​ however,​ the​ costs can be capitalized and deducted in​ future years .​
In other words,​ the​ cost of​ your tax preparation or​ legal advice is​ considered an​ ordinary and necessary business expense and you​ may offset this cost against your income .​
Therefore,​ this deduction has the​ effect of​ reducing the​ effective cost of​ these services,​ thereby making those professional services a​ little more affordable .​
Auto expenses - If you​ use your car for business,​ or​ your business owns the​ vehicle,​ you​ can deduct a​ portion of​ the​ expenses related to​ driving and maintaining it .​
Essentially you​ may either deduct the​ actual amount of​ business-related expenses,​ or​ you​ can deduct 40.5 cents per mile driven for business for 2018 .​
This rate was then increased to​ 48.5 cents per mile after September 1,​ 2018,​ due to​ the​ spike in​ gas prices .​
As noted below,​ the​ rate for 2018 has been modified again to​ 44.5 cents per mile .​
You must document the​ business use of​ your vehicle regardless if​ you​ use actual expenses or​ the​ mileage rate .​
Education expenses - as​ long as​ the​ education is​ related to​ your current business,​ trade or​ occupation,​ and the​ expense is​ incurred to​ maintain or​ improve your skills in​ your present employment; or​ is​ required by your employer; or​ is​ a​ legal requirement of​ your job,​ the​ expense is​ deductible .​
The cost of​ education to​ qualify you​ for a​ new job,​ however,​ is​ not deductible .​
Business gifts - Deductions for business gifts may be taken,​ provided they do not exceed $25 per recipient,​ per year .​
Business entertainment expenses - If you​ pick up the​ tab for entertaining current or​ prospective customers,​ 50 percent of​ the​ expense is​ deductible against your business income provided the​ expense is​ either directly related to​ the​ business and business is​ discussed at​ the​ entertainment event,​ or​ the​ expense is​ associated with the​ business,​ meaning the​ entertainment takes place immediately before or​ after the​ business discussion .​
New equipment depreciation - the​ normal tax treatment associated with the​ cost of​ new assets is​ that the​ cost should be capitalized and written-off over the​ life of​ the​ asset .​
For new asset purchases,​ however,​ Section 179 of​ the​ Internal Revenue Code allows taxpayers the​ option in​ the​ year of​ purchase to​ write-off up to​ $105,​000 of​ the​ asset cost in​ 2018 ($108,​000 in​ 2018).The limits on​ these deductions begin to​ phase out,​ however,​ if​ more than $430,​000 of​ assets have been placed in​ service during the​ year .​
Moving expenses - If you​ move because of​ your business or​ job,​ you​ may be able to​ deduct certain moving expenses that would otherwise be non-deductible as​ personal living expenses .​
In order to​ qualify for a​ moving expense deduction,​ you​ must have moved in​ connection with the​ business (or your job if​ you’re an​ employee of​ someone else),​ and the​ new workplace must be at​ least 50 miles further from your old residence than your old workplace was.

Advertising costs - the​ cost of​ advertising for your goods and/or services is​ deductible as​ a​ current expense .​
Examples may include business cards,​ promotional materials that create business goodwill,​ or​ even the​ sponsoring of​ a​ local Little League baseball team,​ provided there is​ a​ clear connection between the​ sponsorship and your business (such as​ the​ business name being part of​ the​ team name or​ appearing on​ the​ uniforms) .​
Software - Generally speaking,​ software purchased in​ connection with your business must be amortized over a​ 36-month period .​
If the​ software has a​ useful life of​ less than one year,​ however,​ it​ may be fully deducted in​ the​ year of​ purchase .​
Also,​ under Section 179 (as noted above),​ computer software may now be fully deducted in​ the​ year of​ purchase .​
Previously,​ computer software did not qualify for Section 179 treatment.
Taxes - in​ general,​ taxes incurred in​ the​ operation of​ your business are tax deductible .​
How and where these taxes are deductible depends on​ the​ type of​ tax .​
For example:
Federal income tax paid on​ business income is​ not deductible although state income taxes are deductible on​ your federal return .​
The employer’s portion of​ Social Security is​ deductible as​ a​ business expense .​
Sales taxes paid on​ items you​ buy for your business’s day to​ day operations are deductible as​ part of​ the​ cost of​ those items .​
Sales tax on​ asset purchases that are capitalized will have the​ sales tax capitalized and deducted over the​ life of​ the​ asset .​
Real estate taxes paid on​ property used in​ your business is​ also deductible along with any local special assessments for repairs and maintenance .​
Assessments paid for improve ments (e.g.,​ adding a​ sidewalk) is​ not immediately deductible,​ but is​ rather capitalized and deducted over a​ period of​ years .​
Other expenses to​ keep in​ mind may include the​ cost of​ audio tapes (videotapes) related to​ training or​ business skills; bank charges; business association dues (chamber of​ commerce); business related periodicals or​ books; coffee or​ beverage services; office supplies; postage; seminars; and trade shows,​ to​ name a​ few .​
2018 Tax Planning Items as​ noted above,​ the​ real planning for 2018 should have begu​n with the​ beginning of​ the​ tax year .​
Nonetheless,​ although we are already into 2018,​ there is​ still time to​ take advantage of​ a​ few tax rules that could have a​ significant effect on​ your current 2018 tax bill,​ and on​ future tax bills .​
IRA Contributions you​ have until April 17,​ 2018,​ to​ make contributions to​ your Individual Retirement Account (IRA) for 2018 .​
In fact,​ you​ can contribute up to​ $4,​000 and take a​ deduction from your 2018 income for all of​ it,​ provided you​ did not participate in​ a​ company-sponsored retirement plan and provided your income falls below certain statutory levels ($50,​000 for single filers and $70,​000 for married couples) .​
If you​ were over the​ age of​ 50 by the​ end of​ 2018,​ the​ limit increases to​ $4,​500 .​
Even when you​ did participate in​ a​ company-sponsored retirement plan,​ your spouse can generally contribute (and fully deduct) $4,​000 to​ an​ IRA as​ long as​ your combined adjusted income is​ $150,​000 or​ lower,​ and your spouse is​ not a​ participant in​ a​ company sponsored plan .​
In other words,​ assuming a​ 25 percent tax bracket,​ a​ married couple could contribute $4,​000 each to​ their own IRAs and reduce their current tax bill by $2,​000 .​
Education Savings There are two primary tax-advantaged ways to​ save for education .​
One is​ a​ 529 Plan and the​ other is​ an​ Education Savings Account .​
Although contributions to​ a​ 529 Plan had to​ be made before the​ year-end,​ contributions to​ an​ Education Savings Account can be made any time until April 17,​ 2018 .​
An Education Savings Account allows you​ to​ invest up to​ $2,​000 per year in​ a​ savings account,​ mutual fund or​ brokerage account (through which you​ can invest in​ individual stocks and bonds) .​
Although this contribution is​ not tax-deductible for 2018,​ the​ money invested will grow tax-free and all withdrawals from the​ account will be tax-free as​ well provided the​ funds are used for qualified education expenses (e.g.,​ tuition,​ books,​ etc.) .​
Much like many of​ the​ tax benefits available to​ taxpayers,​ there is​ an​ income limitation that must be met in​ order to​ invest tax-free in​ an​ Education Savings Account .​
For joint return filers,​ this opportunity begins to​ phase out when their modified adjusted gross income exceeds $190,​000 .​
For single filers the​ phase-out begins at​ $95,​000 of​ modified adjusted gross income .​
What’s new for 2018 With a​ new year comes new tax laws .​
Being an​ educated taxpayer and staying abreast of​ these changes will help you​ plan for 2018 and allow you​ to​ take advantage of​ these opportunities .​
The following items are new to​ the​ tax code within the​ last year .​
The Katrina Emergency Relief Act of​ 2018 and the​ 2018 Gulf Zone Opportunity Act; the​ 2018 Katrina Relief Act was signed into law on​ September 23,​ 2018,​ and provides a​ package of​ income tax relief provisions to​ help victims of​ Hurricane Katrina .​
The Gulf Zone Opportunity Act of​ 2018 essentially extended the​ relief provisions of​ the​ Katrina Relief Act to​ victims of​ Hurricanes Rita and Wilma as​ well .​

Just a​ few of​ the​ opportunities available under these acts include:
Penalty free withdrawals from qualified plans of​ up to​ $100,​000 provided the​ individual making the​ withdrawal suffered an​ economic loss because of​ one of​ the​ three hurricanes (Katrina,​ Rita or​ Wilma) .​
Individuals that were eligible for tax relief for hurricane-related distributions may pay the​ income tax on​ such distributions ratably over a​ three year period .​
Loan limitations from qualified plans were also increased for hurricane victims by doubling the​ thresholds to​ the​ lesser of​ $100,​000 or​ 100 percent of​ the​ individual’s account balance .​
Additionally,​ loans due from hurricane victims to​ qualified plans can be deferred for an​ additional 12 months on​ top of​ the​ maximum repayment period .​
Non-business casualty losses are generally deductible by taxpayers who itemize their deductions and then only to​ the​ extent the​ casualty loss exceeds 10 percent of​ adjusted gross income and a​ $100 floor .​
These rules were eased by the​ Act by eliminating the​ 10 percent rule and the​ $100 floor for hurricane victims .​
Corporate charitable contributions were eased allowing corporations to​ claim a​ charitable deduction for cash contributions related to​ these hurricanes without regard to​ the​ 10 percent of​ taxable income cap .​
Additionally,​ these Acts contain a​ number of​ tax incentives to​ encourage rebuilding of​ the​ areas ravaged by these three hurricanes .​
If you​ have been affected by one of​ the​ hurricanes noted above,​ live in​ one of​ the​ hurricane zones or​ have contributed to​ relief efforts,​ you​ should consult with a​ professional tax advisor to​ discuss the​ full extent of​ these new provisions .​
Other changes for 2018 include:
Adjustment of​ the​ standard mileage rate to​ 44.5 cents per mile .​
Increase in​ the​ 401(k) contribution limit to​ $15,​000 per year (up from $14,​000),​ as​ well as​ an​ increase in​ the​ catch up contribution permitted for taxpayers that are 50 or​ older to​ an​ additional $5,​000 (up from $4,​000) .​
The Social Security wage limit has increased from $90,​000 in​ 2018 to​ $94,​200 for 2018 .​
Remember,​ this wage limitation applies only to​ the​ 6.2 percent OASDI component (old age survivors and disability insurance) of​ social security .​
The 1.45 percent Medicare component of​ payroll taxes applies to​ all wages .​
In the​ estate tax arena,​ the​ lifetime estate tax exclusion amount has increased from $1.5 million to​ $2 million for 2018 through 2008 and the​ annual gifting limit has increased from $11,​000 annually to​ $12,​000 annually .​
Under current law,​ the​ lifetime estate tax exclusion amount is​ slated for increase again in​ 2009 to​ $3.5 million before the​ repeal of​ the​ estate tax for one year in​ 2010 .​
In 2011,​ the​ estate tax system returns with the​ exemption amount returning to​ $1 million .​
This is​ an​ important planning consideration; however,​ most experts in​ this field believe that more estate tax changes are on​ the​ way .​
As a​ result,​ it​ is​ likely these rules will all be modified again before the​ next set of​ changes come into effect in​ 2009 and beyond .​
The top estate tax rate has also dropped from 47 percent to​ 46 percent for 2018 .​
This rate is​ again scheduled to​ drop one percent to​ 45 percent in​ 2018 and that rate will stay in​ effect until the​ 2010 repeal .​
As noted above,​ however,​ it​ is​ likely the​ estate tax laws will change by that time .​
The gift tax credit remains at​ $1 million .​
If you​ plan on​ making significant gifts during your lifetime,​ the​ difference between the​ estate tax exclusion and the​ gift tax exclusion must be noted to​ ensure that you​ don’t get a​ surprise from the​ IRS .​
Tax Planning - Let’s look ahead as​ previously discussed,​ the​ process of​ tax planning is​ often confused with tax compliance .​
Individuals and closely-held business owners that are armed with a​ good understanding of​ the​ tax code can have a​ tremendous effect on​ their ultimate year- end tax liability with some good,​ forward-thinking tax planning .​
Unfortunately,​ however,​ by the​ time most people usually consider tax planning,​ they are past the​ point that they can positively effect a​ transaction .​
Before you​ enter into any significant business transaction,​ it​ would be wise to​ consult with a​ competent tax professional to​ determine whether the​ transaction is​ structured properly from a​ tax perspective .​
There are often very tax efficient ways to​ accomplish your business goals; however,​ without proper planning,​ the​ tax opportunities that may otherwise be available in​ a​ transaction could vanish forever .​
For example,​ if​ you​ are considering selling investment real estate or​ business property and replacing that real estate with another piece of​ property,​ you​ should be considering handling the​ transaction as​ a​ like-kind exchange .​
The like-kind exchange rules under Section 1031 of​ the​ Internal Revenue Code allow any gain realized on​ the​ sale of​ the​ property to​ be deferred until the​ subsequent sale of​ the​ replacement property .​
Like-kind exchanges are also appropriate with property other than real estate,​ provided of​ course the​ property is​ of​ like-kind,​ the​ determination of​ which requires an​ understanding of​ the​ tax rules and the​ various tax classifications for personal and real property .​
Like-kind exchanges are also a​ perfect example of​ a​ planning opportunity that will be unavailable if​ not properly addressed in​ advance of​ the​ transaction .​
There are very strict rules regarding the​ timing of​ the​ transaction,​ when property is​ identified and purchased,​ and even very strict rules about how the​ proceeds from the​ sale need to​ be handled in​ order to​ preserve the​ like-kind treatment .​
If these rules are not met,​ you​ can not have a​ like-kind exchange .​
The like-kind exchange example was simply meant to​ illustrate how important it​ is​ to​ address the​ tax ramifications in​ advance of​ an​ impending transaction .​
Always keep your professional advisors in​ the​ loop when considering any significant business transaction or​ your opportunity may be lost,​ which can have significant costs that perhaps could have been avoided .​
Remember,​ good tax planning is​ not about making sure your tax returns are properly prepared and that you​ have availed yourself of​ all the​ appropriate tax deductions and credits available to​ you​ and your business .​
It is​ really about structuring your business and your transactions in​ a​ way that not only meet your business needs,​ but do so in​ the​ most tax advantaged manner.
Tax Planning To Infinity And Beyond Tax Planning To Infinity And Beyond Reviewed by Henda Yesti on July 01, 2018 Rating: 5

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