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It is prudent to do tax planning before the end of the year. By taking some simple actions, you can reduce your income taxes. Here are a few tax-saving opportunities:
Deferring Income: If you anticipate being in the same or lower tax bracket in 2005, you may benefit by deferring income to next year. If you are self-employed, delay year-end billing or receivables to next year. An expense is deductible in the year paid, so date checks before year-end and mail those before Jan. 1, 2005.
Capital Gains: Capital gain on property held for one year or less is taxed at the individual’s ordinary tax rate. Capital gain on property held for more than one year is taxed a maximum of 15 percent. You may want to review your capital gains and losses for the year. Capital losses may be fully deductible against capital gains and also may offset up to $3,000 of ordinary income.
Charitable Contributions: Consider donating appreciated stock. You will avoid paying tax on appreciation but will get deduction for the full value. After 2004, for donation claims of cars, boats, and airplanes of more than $500, the deduction amount will depend on what the charity does with the donated property. If the charity sells the donated asset, then the deduction cannot be more than the gross proceeds received from the sale. So you could save on taxes by donating such an asset in 2004.
Equipment Purchases: American Job Creation Act 2004 has extended for an additional two years the provision that a business may expense under Code Sec 179 ($100,000 indexed for inflation). You can elect to deduct up to $102,000 if the assets were placed in service in 2004. However, for SUVs over 6000 pounds gross vehicle weight placed in service after Oct. 22, 2004, the expensing amount is limited to $25,000. For qualified property placed in service in 2004, you may take an additional depreciation allowance of 50 percent of the adjusted basis of the property. As the 50 percent allowance is scheduled to expire on Dec. 31, 2004, it might be beneficial to buy the eligible property in 2004.
State Taxes: If you owe state taxes for 2004, you may want to calculate whether paying those by Dec. 31 can reduce your federal tax liability. Note that beginning with the 2004 tax year and ending with 2005 tax year you can choose to deduct as an itemized deduction state and local sales taxes instead of state income taxes.
Alternative Minimum Taxes (AMT): If you are in the AMT tax category, then there is no benefit of paying balance state taxes by Dec. 31. If you exercised Incentive Stock Options (ISO) in 2004, and have not sold those shares, you may be subject to AMT taxes also. Because of the complexities of AMT, it would be wise to analyze your AMT exposure.
Retirement Savings: Most tax savings opportunities continue for retirement planning. The 401(k) elective deferral limit is $13,000 for 2004. The IRA contribution limit is $3,000 and can be contributed till April 15, 2005.
Parveen Maheshwari, C.P.A., has an office in Bur-lingame. (650) 340-1400. parveen@cpamax.com