You need equipment and want to expand your business, buy a home, add to retirement savings, and take some time off, but can you afford to?
In addition to knowing how much available money you have, you will need to know the answer to the following question: Will you owe money to the IRS on April 15, 2007, or will you be getting a refund?
You need to know this answer now, not after your tax return for the year has been completed.
You will need this answer to plan your finances for the next six months in order to alleviate any tax problems or to enable you to purchase new equipment, etc.
Although it is a good idea to have your tax preparer review your financial records throughout the year, it is advisable to have a tax projection prepared based on your operations to date so that there is enough time before the end of the year to do proper tax and/or investment planning or to adjust your estimated taxes to minimize any potential penalties.
Your books and records should reflect at least six months’ operations to get a true picture of how the year is going. That can then be annualized to reflect a full year’s activity to use as a starting point for your tax projection and tax planning.
Following is a list of some ideas for smart tax and financial planning. All, some or none may apply to you.
1. High-bracket taxpayers can shift income to a low-bracket taxpayer by income splitting with children or aged parents.
2. There is little reason not to have an IRA.
3. Tax credits are available for investments in building or remodeling low-income housing.
4. Municipal bonds and/or municipal bond funds earn tax-exempt interest.
5. Some advantages of owning your own business or having a profession include fringe benefits, retirement plans and income shifting.
6. There are several good reasons to own your own home: Long-term inflation, economic growth and population growth push up real estate values; most of the cost can be financed and the interest is tax deductible; upon selling their primary residence, married couples may exclude up to $500,000 in gains from the sale of a principal residence. Singles may exclude up to $250,000.
7. In addition to IRAs, participate in retirement plans sponsored by employers. The tax-deferred compounding can provide growth to your savings for retirement.
8. Contributions to a Roth IRA are nondeductible. However, distributions, which include earnings, are tax-free when certain requirements are met.
9. Only taxpayers who work for nonprofit employers are eligible for tax-sheltered annuities. TSAs are similar to 401(k)s, except the contribution limits are more liberal.
10. An investor in the stock market or mutual funds can enjoy tax-deferred growth in securities appreciation and a possible lower capital gains tax upon sale.
11. Universal life insurance combines pure life protection – known as term insurance – with a cash value fund that earns tax-free interest at current market rates as long as the policy remains in force.
12. If you have U.S. Government Series EE bonds, interest income is subject to federal income tax, but not to state or local income tax. You can pay federal income tax annually as interest accrues or defer federal income tax until you liquidate the bonds. Interest on bonds purchased in 1990 or later may be tax-free income when used for college tuition and fees.
13. Variable life insurance combines the traditional tax-deferred savings functions of life insurance with the growth potential of equities.
This article was written by PBS Tax & Bookkeeping Service. Contributions to this article were made by Shasta May, director of business development for PBS. If you would like further information, please call 1-800-697-5153 or visit www.pbstax.comon the Web.
Everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.