By Howard Abrams
Q: I haven’t paid my estimated taxes this year. I don’t know how much money I will owe the government on my income taxes. What should I do?
A: As a business person you need to know the answer to that question, and you need to know it now, not next April. Otherwise, there is no way you can plan for the next six months to a year.
Your records should be looked at by your tax preparer periodically throughout the year so that you will be aware of potential problems and able to make necessary adjustments.
A tax projection based on your operations year to date will best indicate what your tax situation will be on April 15, 2009.
Completing a tax projection now will give you time at the end of this year to do proper tax planning or to adjust your estimated taxes to minimize any potential penalties.
If you are contemplating acquiring new equipment in 2008 or 2009, project your taxes to see whether you should complete the purchase in 2008. If you are holding stocks or other assets that have substantial gains and are contemplating selling in the next year or two, consider taking profits this year.
For the 2008 tax year, capital gains and certain dividends are tax free for taxpayers in the 15 percent tax bracket or lower. That rule could change in 2009 or 2010.
Q: I want to put money away for retirement. What would you advise?
A: Consider opening a Roth IRA or a Roth 401(k) nontaxable retirement account. Although contributions are not deductible, all investment returns earned on them and distributions from them can be tax free. Who knows what the tax rates will be years from now when you start withdrawing your retirement funds.
Q: I want to loan my child money to help her buy a house, but I don’t want to charge interest. Can I do that?
A: A parent can loan a child up to $100,000 tax free to start a business, buy a house, or pay for education.
Q: My children can help me in my business, and I want to pay them. How much can I pay without them having to pay income tax?
A: A child can receive up to $5,450 tax free. If the child’s salary is paid by a parent’s business, the parent can deduct the salary. If the child is under age 18 and the parent’s business is unincorporated, no Social Security tax is due on the child’s wages. The salary must be reasonable for the type of work, hours and age of the child.
Q: I inherited cash and property when my father passed away. Is this taxable to me?
A: When a person inherits cash or property, it is generally considered to be tax free. The estate, depending on the amount of money involved, may have to pay taxes. In addition, if your inheritance comes from a retirement plan, it may be subject to taxes. But if you receive cash and property from an inheritance – not from a retirement plan – it is not taxable to you.
If you receive property, such as a residence of the deceased person, that property gets assigned a value on the date of death. If you later sell that property, your basis is the value of that property on the date of death. So using the value at the date of death is extremely beneficial to the recipient because the seller might have bought the property decades earlier at a much reduced cost. LL
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 professional.
Written by Howard Abrams of PBS Tax & Bookkeeping Service. Contributions were made by Shasta May, director of business development for PBS. For more information, call 1-800-697-5153 or visit pbstax.com.