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September 2, 2004
For taxpayers in the 25% tax bracket (joint returns > $58,000 and singles > $29,050) dividend paying stocks become more attractive. Qualified dividend income is now taxed at a maximum rate of 15%.
C-Corporations Tax Savings for Owners
Closely held C-Corporation owners can consider paying dividends rather than salary to save almost 17.65% if owners are in the 25% individual tax bracket. This is particularly attractive to C- Corporations with taxable income just under the 15 % bracket at $50,000.
Heavy sport utilities currently qualify for Section 179 depreciation deductions. This could be changing any day now because Congress is poised to enact a deduction cap for this type of vehicle. In addition to this generous Section 179 deduction bonus depreciation equal to 50% of the cost of new equipment or business assets is available during the first year it is placed in service. This 50% bonus depreciation deduction is set to expire December 31, 2004. Congress may or may not extend it.
Long-term Capital Gains
Most long-term capital gains are taxed at a maximum federal rate. Those in lower tax brackets can end up paying at long-term capital gain rates of 5%. With the uncertainty of the upcoming presidential election it may be wise to consider selling appreciated capital gain property and investments.
It is most likely that tax rates will increase in the future. We recommend holding on to stocks that are in a loss position if sold. There is no need to reduce current capital gain income out of favorable rates.
Making annual gifts of up to $11,000 to an individual remains an effective estate-planning program.
Engage a CPA to construct and issue a personal financial statement to assess estate planning needs. Once family assets exceed 1.5 million it makes sense to compile a financial statement, based on fair value, to determine the next steps in the estate plan.
Elder Care Practice
Consider private annuities from children to parents. A private annuity can shelter assets and provide income stream to parents over their remaining lives. Consideration of Virginia state laws for retirement issues is a must.
Alternative Minimum Tax
Most recent tax law changes have reduced regular federal income tax but have not reduced alternative minimum taxable (AMT) income. AMT is an alternative tax computation applicable to every taxpayer each tax year. In most years the exemption amount ($58,000 on joint returns and $40,250 for singles) reduced alternative minimum tax below the regular tax. Because the AMT rules are complex please consult us for further clarification and planning.
Substantiation of business purpose is essential to preserve deduction on a tax return. For cell phones this means on the monthly billing statements of inbound and outbound calls business purpose must be documented and calculated. The monthly calculations are added together to determine a yearly business use %. Total cell phone costs are multiplied by this %. The resulting number is deducted on the tax return as cell phone business expense.
Rental of Residence
For partnerships, S-Corporations and the LLC we recommend to rent out an owners residence for annual and quarterly meetings and employee functions. The business deduction is computed based on the fair rental value and provides tax free income for the residence owner. The rental of your residence cannot exceed 14 days. Any rent received for 14 days or less is tax free. For small business owners in the 25% tax bracket (plus self employment of 15.3 %) this tax planning method would go along way toward covering your tax preparation fee each year. See us for more details.
Social Security Earnings
If you receive social security and are less than full retirement age (65 and 4 months) then a portion of your full social security will be withheld if you continue to work. You can earn up to $11,640 before $1 is withheld from your benefits for every $2 you earn.
We enjoy the chance to advise you and your business interests and if these affect your tax situation please call for an appointment.
Lawrence R. Yoder, CPA