Accounting Best Practices

Cover Your “End”
Tax planning – it’s that time of year again!
By Tatiana Gilbertson

Where does the time go? With the end of the year fast approaching, it’s time to start your year-end tax planning. There are some simple steps that every individual and business should take to ensure they get maximum benefit on their 2007 tax return. Whether you file an individual or business return, thoughtful planning can help reduce your tax liability. Review the following “must do” items to make sure you’ve done what you can to minimize your taxes. Just remember that making smart economic decisions should not be forgotten when planning. Don’t go out and buy that expensive vehicle for your business just for a tax deduction!

Individuals

• Avoid underpayment penalties by making sure you have met your “safe harbor” tax payments. Generally, you must pay in with your extension by April 15th, as much as 100% of your prior year tax liability, or 90% of your current year liability, to avoid underpayment penalties. If you are not receiving a W-2 as an employee, these payments should be made quarterly, but there is still time to make payments and reduce the penalties. If you own a business and you think you may owe taxes on your personal tax return, you could pay yourself an end of year bonus and withhold all of it as taxes.

• Adjust the timing of income and expenses to benefit your personal tax liability. The most straightforward way to do this is to defer income into the next year and accelerate deductions into the current year. For example, you could pay your January home mortgage interest in late December. Perhaps you can delay that December IRA withdrawal until January? Will your employer pay you that bonus in the New Year rather than before Christmas? Remember though, that like most things in life, there’s no free lunch. This year’s deferral is next year’s income, so although these may benefit you now, it may cost you more in the future. In other words, consider your options and tax brackets over the two-year period and do what benefits you best over the longer term.

• Take a good look at your 401(k) statements. Do you have room to make a larger contribution at the end of the year without exceeding the deductible limit? You may increase your deductions for the year while making catch-up contributions to your retirement plan.

• Review your medical and/or child-care flexible spending account. A balance at the end of the account's year may result in a loss. Take advantage of the balance you have left and fill some prescriptions early, order a new pair of glasses or get some more contact lenses.

• Review your stock portfolio. If you are an investor and have some stocks that are not doing well, but you had some capital gains during the year, then consider selling those “loser” stocks to offset the gains. Again, don’t forget to take a longer term focus when you do the planning because, depending on your future income, a 15% capital gains rate may not be a bad problem and remember that a married couple may only deduct $3,000 in excess losses each year.

Businesses

• Take a good look at your fixed assets. Are you in need of some additional equipment? Can some of next year’s asset purchases be accelerated into this year? If so, the end of the year is a good time to buy this needed equipment. Businesses are eligible to take an extra depreciation deduction under Section 179. In 2007, the limit of the Section 179 deduction is $112,000, but when planning your purchases, remember that every year the limit is raised for inflation. If you have not reached your limit and you purchase some equipment and have it in use before the end of the year, you maybe be entitled to this extra depreciation expense. A couple of things to remember about Section 179: you may not create a loss in your business by taking the deduction, and the deduction starts phasing out if you buy more than $450,000 in equipment.

• Time your income and expenses to benefit your business tax liability. For example, if you are on the cash basis, maybe you can delay billing for work for a couple weeks into January? Also, make sure all possible bills are paid before year-end. When your employees ask you to pay them their bonuses in January rather than before Christmas, just smile and say no!

• Make additional contributions to your Simplified Employee Pension (SEP). Contributions to your own and your employees' accounts may allow you to deduct up to $45,000 in 2007.

• Are you in the market to purchase a heavy SUV? The IRS limits the amount of Section 179 deduction that can be taken for a SUV of unloaded gross vehicle weight of more than 6,000 pounds but less than 14,000 pounds to $25,000. Even so, you may take the $25,000 plus the regular depreciation for the year and you may end up deducting about 50% of the value of the vehicle in the first year. Note that if the vehicle is more than 6,000 pounds and meets one of several criteria, it may be eligible for a full deduction under Section 179. See your tax advisor for more information.

• Are you planning to pay out year-end bonuses? It could help your business’ tax liability while letting you be very generous. If your business operates on the cash basis, the bonus must be paid by the end of the year so you may have to “negotiate” with your employees – a deduction for you is income for them. If you are on the accrual basis, you may accrue bonuses, but they must be paid within 75 days after year-end.

No matter what situation you are in, now is the time to plan your year-end course of action. Look at your income and deductions for the current year and forecast them for the following year so that you can seek to achieve a good balance of benefits overall. Now is the time to seek tax counsel to plan for your taxes - don’t wait until April. As you do your planning, just remember that “tax avoidance” is legal, but “tax evasion” isn’t – so abide by Judge Learned Hand’s dictum, not Leona Helmsley’s!

Kingery & Crouse, P.A.

Tatiana Gilberston is a member of the Tax team at Kingery & Crouse. A graduate of the University of South Florida with an MBA degree, she has previously worked on the Audit team. Tatiana speaks English, Spanish & German fluently. Kingery & Crouse, P.A. is a full service public accounting firm with a staff of 23 dedicated professionals providing tax and accounting services, including audits of SEC companies. You may contact Tatiana at (813) 874-1280 ext #228. Find us on the web @ www.tampacpa.com.

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