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December
2003 On-line Tax Planning
Your Year-End Checklist
It's the time of year once again when we are
told that Santa is on his way and he's double checking his list to make sure he
gives the right presents to the right people. I
suspect that there is a lot of list-checking going on this month,
but don't forget the most important list - the year-end checklist.
That's the list of things you need to do before
the end of the year to maximize the money you keep in your pocket.
Just in case you forgot what those things are,
we thought this month would be a good time to help you remember.
Personal Checklist
Since most people report their income on the cash basis, we're going to assume
you do also. We are also going to assume that
you have taken a hard look at your taxable income picture and have a plan to
minimize your taxes. If you don't, give us a
call.
Income Taxes
Income
 | If you get paid a bonus, ask if it can be
paid in January. |
| Make sure you have put as much into an
employer-sponsored retirement plan as you can under the plan's governing
document. |
| If you are a more than 50% shareholder in a
corporation, and you want to minimize the corporation's income, make sure you
pay all your salary by December 31. |
| If you have taken big gains on stock sales
this year, look at your portfolio for any stocks
with losses you may want to sell by December 31 to offset the gains. |
| Do you have any stocks that have a paper
loss, but have long-term potential? You may want to sell the stock by December
31 and buy it back in 31 days. Be sure to wait the 31 days or the loss will be
disallowed. Don't forget you can be burned if the stock takes a sudden up-tick
when you are ready to buy it back. |
| Sell enough loss stock to take a $3,000 loss
against ordinary income. |
| If you are over 59 ½ and plan on taking money
out of a retirement account, postpone the withdrawal unless doing so will cost
you more in the long run. |
| If you are selling a piece of property or
other asset at a loss, complete the sale before year-end. |
| If you are selling a piece of property or
other asset at a gain, postpone the sale until January or structure the sale
as an installment sale. |
| If you do business as a sole proprietor or in
a partnership, postpone billing to maximize your chance of receiving the cash
in January. Of course, if you need the cash in December, bill fast! |
| If it makes sense otherwise, postpone
purchasing any dividend paying stocks until after their ex-dividend date. |
| If possible, postpone receipt of any taxable
litigation awards until January. |
| Postpone reporting of employee business
expenses to your employer if your total unreimbursed expenses will be over 2%
of your adjusted gross income. |
| Were possible, don't invest in interest
bearing accounts that will pay interest before December 31. |
Deductions
| If you are a sole proprietor or do business
in a pass-through entity, pay all the deductible expenses you can before
December 31. Advertising, rent, supplies,
insurance other than health, legal fees, accounting fees, property taxes,
wages, etc. are generally deductible. A good
place to look is at the Schedule C on your last year's tax return for guidance
on what's deductible. If you have any
questions, give us a call. |
| If you need new equipment and haven't
exceeded the $100,000 maximum to immediately expense the equipment, buy it and
put it into service by December 31. Even if
you have purchased more than $100,000 in equipment this year, the 50% bonus
depreciation you get on first use property may still make acquiring the
equipment attractive, but do it before December 31. |
| If you finance a piece of equipment, where
possible, make sure you don't finance by signing a note with the seller.
If you are a cash basis taxpayer, the only way
to get a deduction for less than the cash paid is to owe a third party. |
| If you are considered self-employed, make
sure all your health insurance premiums are paid by December 31.
Remember, this year, you will get a 100%
deduction for health premiums paid if you or your spouse are not covered under
an employer's plan. |
| If you are in a partnership and withhold from
your draw to fund a retirement plan, make sure the withdrawals are deposited,
or in the mail, to your plan by December 31. |
| If you are less than a 50% shareholder in an
accrual basis C Corporation, meet with the other owners and decide if bonuses
are to be paid. If so, devise a plan for
payments to be made to all less than 50% owners after December 31.
As long as a corporation has a defined plan in
place before year-end, the corporation can take a deduction in the year
accrued and the shareholder can pay the following year, if the cash is paid
between January 1 and March 15. |
| Pay any deductible medical bills by December
31. Remember, you can't deduct anything unless
it goes over 7 ½ % of your adjusted gross income, so make sure paying the bill
sooner rather than later is worthwhile. |
| Pay all deductible state and local income,
property or real estate taxes before December 31. |
| Clean out the closets and take clothing and
miscellaneous items that you no longer use to Goodwill, the local homeless
shelter, or other similar charitable organization. Be
sure to get a receipt and make a list of the valuable merchandise you take. |
| Pay your tax preparation bill from last year,
if you haven't already done so. |
| Make sure you pay any applicable union dues
or deductible employee business expenses by year-end. If
cash is tight, payment by credit card is sufficient. |
| Pay your charitable donations by December 31.
If you are contributing appreciated property,
make sure the contribution is complete by December 31. |
| Set up your 401(k) plan before December 31 if
you want a deduction this year. |
Miscellaneous Taxes and Other Items
| If you are making annual gifts to your
children for estate tax purposes, be sure to make the gifts of $11,000 per
donee by each donor prior to December 31. |
| If, as part of an estate plan, you are
gifting in excess of the $11,000 per donee amount, make sure the transaction
is consummated by December 31. If it looks
like the transaction will make you go over your $1 million lifetime exemption
in the current year, consider postponing the gift until 2004 when the amount
sheltered by the "Unified Credit" will be $1.5 million. |
| Thinking of having a medical procedure in the
near future and you have met your deductible or are near to it?
Have the procedure done in 2003 to maximize
your insurance reimbursement. |
| Do you have drug coverage, but you have a
deductible to meet first and you have met it? If
it is a drug that you require often, get as much as the insurance company will
allow before you lose your deductible credit. |
Businesses
Just about everything we mentioned in the preceding paragraphs for individuals
with businesses applies to businesses. This is
especially true if you are on a cash basis, but what about those businesses that
are on an accrual basis? In general, you will be
required to report income when you earn it and deduct expenses when they are
incurred. That means, if you want to reduce
income, not only should you not bill the sale or service by year end, but you
should also avoid making the sale or the providing the service until 2004.
If you want a deduction, you better make sure
you received the product or service in 2004 to be able to accrue the expense.
With respect to retirement programs like 401(k) plans, you must have the plan in
place by the end of the year. You do have a
one-time great option with the 401(k), if you wish. There
is nothing that will prevent you from having withheld the maximum amount based
on your total annual compensation even if you start the plan late in the year.
You just need to make sure that your salary is
enough to cover the withholdings. Be careful,
because what applies to you will also apply to your employees.
If you plan on matching contributions or making
a profit-sharing or top-heavy contribution, be certain you know what employees
will benefit and how much it will cost.
We previously discussed bonuses. Don't forget
that bonuses and salaries, along with interest on loans and similar
transactions, cannot be deducted until paid if made to a greater than 50% owner.
If you record prior to December 31 in your
minutes that it is the corporations intent to donate some percentage of taxable
income up to 10%, your accrual basis corporation can deduct the contributions
accrued even if made after year-end, but before March 15. The
same is true of many other accrued expenses.
Final Thoughts
This checklist is, by no means, exhaustive. For
every one item mentioned, there may be another hundred not on the list.
That's because the number of items that
constitute income and deductions is vast. If you
have a question, give us a call. We exist to
help you.
Tax
Planning Archives
For More Information Contact:
Bucheri McCarty & Metz LLP
2366 W. Boulevard
P.O. Box 2147
Kokomo, IN 46904-2147
Telephone: (765) 236-2300
FAX: (765) 236-2333
Internet:
info@bmmcpas.com
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