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Tax Matters

 


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. 
 
 
1

Mileage
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. 
2

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. 
 
3

Depreciation
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). 
 
4

Educator’s 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, Eckerd’s, Wal-Mart, etc. Circle the item and keep it for tax time. It is not a huge benefit, but something is better than nothing. 
 
5

Education deductions and credits
If you qualify, those scary tuition payments to Jr’s 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.


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