Year End Tax Planning
The Difference Between Tax Preparation and Tax Planning
Tax preparation for the March 15th or April 15th return is not considered advance tax planning. It is merely tax compliance as opposed to voluntary tax reduction planning. Though returns aren’t due until April, they cover a tax year that ends Dec. 31. Some of the best tax-reduction moves really need to be done early. They often take some advance planning. Getting a head start could make you a lot happier in April, giving you a bigger refund or a smaller check to write to Uncle Sam.
A. Reduce Your Tax Liability
By taking certain steps now, you can reduce the size of your tax bill otherwise due when you file your return. Especially this year, when Congress has inserted a handful of powerful but temporary tax breaks to get the economy moving again, you do not want to overlook any deduction or credit that you can take in 2011 to lower this year’s tax bill. Managing what income you recognize or defer also can pay dividends as you focus on balancing your tax rates between 2011 and 2012, and beyond, with tax reform on the horizon.
B. Your Circumstances May Have Changed
Year-end tax planning is not only about what is happening in Congress and at the IRS. Addressing the changed circumstances in your life has always been a large part of year-end tax planning. What you planned for at the beginning of 2011 may not be what you are faced with now. Changes in your employment status, family, investments, or retirement plans raise new tax issues
• Self-employment, severance pay, sign-on bonuses, stock options, moving expenses, and COBRA health benefits, to name a few employment-related events, all present unique challenges.
• In your personal life, marriage, divorce, a larger family, and child care or eldercare expenses arising in 2011 can impact your tax situation.
• Investments, too, generally benefit from year-end tax strategies. You can take steps to balance out gains and losses. You also should take a year-end tally of dividends and interest to make certain that are paying the correct estimated tax.
Powerful Tax Planning Strategies for Real Estate Investors
Real estate investing is the number 1 way to build wealth in this country. It also offers many tax-saving opportunities that many investors are not aware of. Once you learn how to save hundreds, if not thousands off your tax bill, you will reap the rewards of your real estate investments much faster.
Here is a review of some tax saving tips by Al Aiello of www.alaiello.com
• Saving taxes accelerates wealth: Tax-free compounding means your earnings accumulate not only on the principal, but also on your tax-free earnings too. This means that compounding combines earning power on principal and earning power on interest. This is a definite advantage of real estate investing. For example, if you save $2,000 a year on your tax bill and invest it in an IRA on a 10{2ee5374c1fcbb6f9a1a36b8bdc56b374eea47e2ceebdb5979efe00a99360653c} return, after 20 years you will have id=”mce_marker”14,000. You can also use your tax savings to improve your rental properties for more cash flow.
• Entity Structure: Select the right entity for your investments to protect your assets and support tax deductions which would be more aggressive if takes as a sole proprietor. With an entity, such as an LLC, you can use corporate documents to authorize and support deductions. This is documentation you need now that the IRS is hot on active participation for bypassing passive loss limitations, avoiding dealer status as well as deductions such as; auto, meals, entertainment and travel.
• Avoid IRS: There are many ways to audit proof your return from IRS intervention. Here are just two;
a) File an extension on your tax return. File as late as legally allowed. The IRS system of ‘first come, first serve’ tends to audit early filers more. To file extensions, use IRS forms 4868 for individuals and 7004 for entities like LLC’s and partnerships. You still have to pay your taxes on time, but this strategy reduces your chances of an audit.
b) Include written explanations and tax law citations to your tax return for items that will raise a red flag. For example for entertainment deductions and lots of travel, you could site IRS regulation 1.274-5T(c). You should also file related bills and receipts with notarized statements.
• Fire Bad CPAs: There are too many incompetent or overly conservative CPA’s working and they are largely responsible for ‘helping’ real estate investors pay too many taxes. You must ask yourself “whose side is your tax preparer on? Yours or the IRS?”. Here are some questions you can ask prospective tax advisors to weed out the duds:
a) Tell me some recent real estate tax changes that could help me?
b) Can you help me plan my taxes to ensure the best outcome in any scenario?
c) How will your reduce the chances of my return being audited?
d) Can you show me references from real estate investor clients?
Powerful Tax Planning Strategies for Business
There are many strategies you can use as a business owner to keep more of your wealth and less away from Uncle Sam. I see too many people lose thousands of dollars of their hard earned money just because they did not plan a strategy or have no knowledge of the tax laws in this country. Here’s a review of some tips from Diane Kennedy at www.usataxaid.com
Avoid audits as an employer: the IRS is looking at employers who hire independent contractors, so make sure you:
• Write a job description for the position which indicates limited control and an independent working environment
• Make sure your company’s operating agreement and employment policies treat the position as an independent contractor
• Get a signed independent contractor’s agreement between the company and the worker
• Have a completed form W-9 from each independent contractor you hire.
Executive Compensation: Audits look out for reasonable salary and non salary compensation such as loans or stock options. Ensure you protect yourself by having market comparables to substantiate the “reasonableness” of your compensation. Examples include market salaries, interest rates, and stock prices. Document your backup information and save it in your tax file.
Fringe Benefits: Everyone loves these perks for executives and employees, but the IRS is watching to make sure that tax free and taxable fringe benefits such as cell phones, cars and insurance are appropriately reflected. This is the best time to review your company policy and update it to be compliant.
Payroll Taxes: The IRS will be looking closely at Forms 941 and Form 1099/W-2 for issues including withholding and next-day deposit requirements. Make sure you are working with a competent payroll service company to ensure all your filings and payments are made on time to avoid huge penalties.
WARNING: The IRS has warned that businesses that are audited should be prepared to open all their records for examination. Don’t wait to get that dreaded audit letter, save yourself money and headaches by getting organized now. Prepare by doing an internal audit to ensure all the documentation is where it’s supposed to be and fix any problems you find immediately.
Here are some recent questions from my blog:
QUESTION: Has there been a change to the tax treatment where an owner can move into a rental and convert it back to a residence then sell it w/o capital gain, within acceptable gains guidelines?
ANSWER: You need to have lived in it 2 out of the last five years and if less, you can prorate the exclusion
QUESTION: If someone 1031’s a place then is there a time limit the new property needs to be a rental before it can be lived in and converted via 2 year time horizon, into a residence and becoming eligible for tax exemption.
ANSWER: A key IRS rule is the holding period of the replacement property. Most experts recommend holding the property for two tax years before converting the property into a primary residence.
I address many of these issues in my Wealth Building Plan. Make sure you are getting the best tax advice. Let me evaluate your financial and tax situation, then develop a customized tax strategy just for you. Together, we will come up with a strategic plan designed to answer your questions as you build your own customized wealth-building plan. You can get more information at WEALTH BUILDING PLAN
