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Individual Tax Strategies
Focusing on Tax Rates
Knowing your tax bracket allows you
to estimate how a particular tax strategy will affect your tax
bill. For example, an individual in the new 30% tax bracket
who claims an additional $ 1,000 deduction will save $ 300 in taxes
($ 1,000 X 30%).
The former tax rates above 15% are
being reduced over six years. To the extent possible, take
advantage of the rate cuts by deferring taxable income to a future
tax year. For example, You might ask your employer to delay
paying a year end bonus until after the first of the year. Transferring
income producing assets to children in lower tax brackets can reduce
your family's tax burden. The new 10% tax rate makes this
strategy even more beneficial. Consider limiting annual gifts
to each recipient to $ 11,000, so that the gifts won't be taxable ($
22,000 limit if your spouse agrees to split the gifts; these
estimated annual exclusion amounts may be adjusted for inflation in
future years). Be mindful of the "kiddie tax"
rule that applies to children under age14. Under this rule, a
child's unearned income in excess of $ 1,500 is taxed at his or her
parents top rate.
Planning For Life's Changes While
staying on top of the tax law changes that may affect you is
important, you should also consider changes in your life that may
alter your tax situation.
Marital Status |
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Growing Family |
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Job Changes |
Paying For Education
As you plan your taxes, several
education related tax incentives may be of interest.
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Education Savings Accounts |
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Qualified Tuition Programs |
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Education Tax Credits |
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Deduction For Student Loan Interest |
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Deduction For Higher Education
Expenses |
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Employer Provided Educational
Assistance |
Planning For Retirement Having
adequate retirement savings is an important financial goal.
Various tax favored plans can help you build your nest egg.
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Retirement Savings Plans |
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Individual Retirement Accounts |
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Required Minimum Distributions -
RMD's |
Minimizing Capital Gains Taxes
If you invest outside of a tax deferred
plan, your current taxes may be affected. For example, you may
have a taxable capital gain when you sell securities at a profit. When
you buy shares of the same stock or mutual fund over a period of
time, you typically pay different prices. If you sell only
some of your shares, you should be able to identify the share you
want to sell to achieve the best tax results. If you don't
identify the shares or choose to use an average cost method, a
first-in, first-out rule applies *
If you trade securities online, check to see whether you can
designate the shares you want to sell.
Track Down Your Deductions As
you plan for the year, become familiar with the types of expenses
that are potentially tax deductible.
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Medical Expenses |
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Taxes |
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Interest |
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Charitable Contributions |
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Miscellaneous Deductions |
Contact
us for information on how to optimize your tax situation. We
welcome the opportunity to help you reach your goals.
Business Tax Strategies
Minimizing Corporate Taxes
That tax rates that apply to regular
"C" corporations are shown in the accompanying table
below.
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Corporate
Tax Rates |
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Taxable
Income |
Rate |
| Up
to $ 50,000 |
15% |
| $
50,001 - $ 75,000 |
25% |
| $
75,001 - $ 100,000 |
34% |
| $
100,001 - $ 335,000 |
39%* |
| $
335,001 - $ 10 million |
34% |
| $
10 million - $ 15 million |
35%** |
| $
15 million - $ 18,333,333 |
38%*** |
| Over
$ 18,333,333 |
35% |
| *
Includes additional 5% "recapture" tax under 1986
law. |
| **
Personal service corporations pay tax at a flat rate of 35% |
| ***
Includes additional 3% "recapture" tax under 1993
law. |
A corporation may also be subject to
alternative minimum tax. The corporate AMT rate is 20%.
A $ 40,000 exemption amount is subject to phase out and is not
available for a corporation with an alternative minimum taxable
income of $ 310,000 or more. Some
small corporations (generally, those with average gross receipts of
$7.5 million or less) are exempt from AMT. A lower $ 5million
threshold applies for a corporation's first three tax year period
beginning after 1993 and ending the current year.
Accumulated Earnings Tax
A regular C corporation that retains
earnings and profits of more than $ 250,000 ($ 150,000 for a
personal service corporation) instead of paying dividends to
shareholders may have to pay a 38.6% penalty tax in 2002. Such
a company can try to avoid the penalty by explaining in it's
corporate minutes the reasonable business requirements for the
retained earnings.
A family owned company may be able to
retain excess earnings - and avoid the accumulated earnings tax - if
the earnings are being held for possible redemptions of dissenting
minority shareholder's restricted stock.
Compensation C
corporation shareholder employees often prefer to withdraw corporate
earnings in the form of tax deductible salary and bonuses instead of
nondeductible dividends. However, a company can deduct only
reasonable amounts of compensation. Whether a certain compensation
is reasonable depends on several factors, including the employee's
role in the company and how the employee's salary compares to those
paid by similar companies for similar services. Leasing
business property or equipment to your corporation is another way to
draw out earnings on a tax deductible basis. Your corporation
can deduct the rent expense; you declare the rent as income.
Here too, amounts charged for rent should be reasonable.
S Corporation Elections
Corporate shareholders can elect to
be taxed under the provisions of Subchapter S of the Internal
Revenue Code. With a valid S corporation election, corporate
income, deductions, credits, and losses are passed through to the
shareholders for inclusion on their separate tax returns. S
corporation shareholders can deduct losses allocated to them by the
corporation only to the extent they have sufficient "adjusted
basis" in their stock and any loans they have made to the
corporation. If you expect your S corporation to show a loss
in 2002, you should confirm that you will have enough basis to
deduct the loss. If you need additional basis, you might
consider advancing money to the corporation. Sponsoring
A Retirement Plan Sponsoring
a retirement plan for your employees can be an effective way to
attract and retain talented workers and may serve as an excellent
tax shelter for your own retirement savings. When all
requirements are met, contributions to employer sponsored are tax deductible
and participants are not taxed on the contributions of investment
earnings until they receive benefits from the plan Various
changes made by the 2001 Act - including increased contribution,
benefit, and deduction limits - make sponsoring a retirement plan
more attractive than ever. The
2001 Act provides a new tax credit to eligible small businesses that
establish retirement plans after 2001. The credit can be
claimed for 50% of the top $ 1000 of qualifying administrative and retirement
education expenses (maximum $ 500credit) in each of the three plan
years. Most types of plans can qualify for the credit. Writing
Off Business Assets Your
business may invest large amounts of money in machinery, equipment,
furniture and fixtures, real property, and other assets.
Recovering some of costs through tax deductions is an important tax
benefit. Depreciation If
your fixed asset costs are properly segregated, you may be able to depreciate
certain items in a newly acquired or constructed business facility
faster than the lengthy 39 year depreciation period which generally
applies to commercial buildings and their structural components. Maximizing
Business Deductions and Credits Try
to take advantage of all the tax deductions and credits available to
your business Business Automobiles One
way to compute tax deductions for business related use of a vehicle
is to keep track of the actual expenses. The other way is to
multiply the number of business miles driven by the standard mileage
rate (3405 cents per mile for 2001, subject to adjustment for 2002). Using
the standard mileage rate simplifies record keeping, but won't necessarily
produce the largest deduction. Home
Office Expenses To deduct
the expenses of maintaining an office in your home (e.g. utilities,
repairs, and depreciation), you generally must use the space
exclusively and regularly as your principal place of business or as
a place where you meet patients, clients, or customers. Self
Employed Health Insurance A
self employed sole proprietor, an S corporation shareholder, or a
partner in a partnership can deduct 70% of insurance premiums paid
for individual or family medical coverage provided by the business
in computing his or her AGI. The 70% deduction will increase
to 100% in 2003 and later years. Child
Care Assistance Beginning
with 2002 tax years, employers may claim a tax credit equal to 25%
of qualified expenses for employer provided child care and 10% of
qualified expenses for employer provided child care resource and referral
services, up to a maximum $ 150,000 credit per tax year. Many
tax law changes are in store for 2002. The sooner you start
planning for your 2002 taxes, the better. We would be happy to
review your situation with you. Marcel
can also personally assist you with financial planning. Contact us to learn more about the broad range of
services we offer.
For more information please feel free
to browse around our web site. We are always happy to answer
any questions, or to schedule a consultation contact:
Email Us or call us at 847-215-8630.
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