The best tool you can utilize
for protection from IRS audits is good recordkeeping. Keeping good
records will also assure that you will get the tax deductions you deserve.
Sometimes I realize that my clients do not know which records they should
be keeping. So let us look at the areas where records really count.
The single largest deduction on many small business returns is the
auto expense deduction. You stand to loose some serious money if you do
not keep adequate records of your business mileage. No matter if you use
the standard rate or actual expenses you must keep track of your total
mileage driven for the year, a breakdown of how much of that mileage was
for business, and how much was for personal. Moreover, it needs to
be in writing. Get a method to keep these records. Everyone does
it his or her way. It does not matter. You can use a PDA, a mileage log
kept in the vehicle, records from your lube place, or gas receipts with
the mileage written on them. The IRS does not specify the method, just
the results. Experiment with methods until you find one you like, then
just do it. You will not be sorry.
Take my word for it
I have been in this business for a long time and I have never met anyone
who had enough money when they retired. It is a sure bet that if you are
not saving now for your golden years, those years will definitely
not be golden. If you are covered by a 401 (k) or a 403 (b) or a
similar plan, the total amount you can defer has increased. The same is
true for IRAs, SEPs and SIMPLEs. If you are over 50, you can put even more
into some of these plans. It is so important that you take advantage
of these opportunities to save money in these plans. Sometimes, your employer
will match a percentage of your savings. Awesome – free money
Do not pass up this opportunity to provide for your future. If you are
in doubt as to the value of participating in these plans, visit a Medicare
Nursing Home and envision yourself in that environment. I suspect
it would not be number one on the list of where you wish to spend your
golden years If you are already in a plan, be sure to max out your contribution.
Believe it or not, each day you delay saving makes a huge difference in
the long term. Of course, the amount you save matters, but so does the
duration of time it is invested. . So…start today. Go get signed
up at your work or open an IRA and begin to save. Your future
really does depend on it.
Dependent Care Expenses
The childcare credit is increased for 2003 and the income brackets
are expanded. The amount of qualified expenses increases to $3000 for one
and $6000 for two or more qualifying individuals. The $5000 exclusion under
an employer dependent care assistance plan stays the same. Keep good
records of the amounts you paid and to whom. A social security number or
an employer’s federal identification number is required for this credit.
The commercial day care providers know the ropes and will give you statements
with the required information. But if your child stays with a neighbor
who keeps two or three in her home, be sure to get her full name, address
and social security number. Without that information, you will not be able
to take the credit even if you otherwise qualify. Do not let that neighbor
talk you out of reporting her earnings. You paid for the deduction and
you deserve it. She earned the income and she is required to report it.
The events of 9-11 prompted the Congress to be extra-generous with
the deduction for depreciation. An additional 30% is available for new
(used does not qualify) property acquired and placed into service after
9-10-01 and with a life of 20 years or less. This can be a significant
acceleration of deductions for machinery and leasehold improvements. The
purchase of buildings, commercial or rental would not apply. Keep
your receipts for purchases of these assets. You will need the dates of
purchase for the depreciation schedule. Luxury autos are included in this
special depreciation allowance, but the first year allowance is limited
to $7660 (up from $3060 last year).
Educators expenses deduction
Actually put in place for 2002, a new above-the-line deduction is available for kinder through grade 12 teachers for up to $250 of supplies and equipment purchased for use in the classroom. Above the line means the teacher can take the deduction even if he or she does not itemize. A family with two teachers can take a deduction of $500. Keep those receipts from HEB, Eckerds, Wal-Mart, etc. Circle the item and keep it for tax time. It is not a huge benefit, but something is better than nothing.
Education deductions and credits
If you qualify, those scary tuition payments to Jrs college can turn into some handsome credits. Both the Hope credit and the Lifetime Learning Credit are still with us. Tuition and some fees qualify. Room and board and certain other fees do not. If you cannot qualify for the credits, an above the line deduction is allowed for some educational expenses for certain taxpayers with Adjusted Gross Income of from zero to $65,000 (single, HOH) or zero to $130,000 (MFJ), for the years 2002 and 2003. The limits are increased for years 2004 and 2005. You must have records showing what you paid for and when.
These are a few ways you can reduce your taxes with good recordkeeping.
Don’t let them slip through your fingers. Keep good records and beat the
IRS at their own game.
Pension changes: just in time
Just when our investments had tanked, yet again, the Congress came through with a variety of new and better ways to save for our retirement. No matter that we are discouraged by the recent market downturns, there are new, shiny programs like the Solo 401 (k) tempting us to plunge even deeper into the seemingly black hole that is the equity market. These numbers are not for the faint of heart. The new maximum that a sole-prop can put into her SEP IRA in 2002 is $40,000 with qualifying income of $200,000 and up. With net income of just $50,000, one can put $12,500 into a SEP or $23,500 in a 401 (k). That is a significant increase from 2001. One neat feature of the new Solo 401(k) is that most plan administrators will allow loans against the plan assets. I am not in favor of that kind of borrowing unless it is an emergency, but having the flexibility in time of need is wonderful.
The so-called Saver’s Credit is a hoot. Those who are the targeted beneficiaries
are those who can least afford to save. The credit is limited to
the following AGI : MFJ zero to $50,000; HOH zero to $37,501 and Single
or MFS zero to $25,000. For example, if you are single, make
$15,000 or lower and save $2000 in an IRA or a pension plan, you would
get a credit of $1000 or your total tax for the year, whichever is smaller.
I suspect there will be few takers for this credit, since full-time students
are not eligible. I guess it could be a sweet $1000 in one’s pocket,
but I believe the only people who will actually qualify are those who get
help from Mom or Pop.
Thanks to the Enron debacle, new laws came into being last year resulting
in many changes to the regulations governing pension plans. The regulations
modernized allowable pension plan transactions and increased many of the
contribution limits. One of my favorite new provisions is the complete
transportability between plans. Before this provision was passed,
certain transfers were prohibited. Now, you can transfer into and out of
almost every plan without restriction. This ability was expanded for a
decedent’s surviving spouse as well. This is a boon for the boomers as
they begin to retire and need that flexibility.