PILLA TALKS TAXES -  Featured Article

 TAX PLANNING FOR THE NEW YEAR

 7 Simple Steps that Can Cut Taxes and Avoid Pain

Now that we ’ ve passed into 2015, now is the time to take simple steps to make sure your 2015 tax situation stays under control. Too many people wait until the last minute to attend to their tax matters. But that ’ s a mistake, and often it ’ s just too late to manage the situation after the tax year closes.

With that in mind, here are some ideas to get you moving in the right direction.

1. Re v iew y our wage withholding or estimated payments . Eighty-five perc e nt of all taxpayers get a tax refund when they file their tax return s . By February 2015, the IRS issued more than $66 billion in refunds to nearly 20 million people. The average refund — $3,366 — was slightly higher than last year ’ s average . If y ou g et a t ax refund , it doesn ’ t mean the g overnment got religion a nd decided to gi v e y ou f ree mone y . It means y ou paid about $280 per month more taxes than you owed . If yo u got (or will get) a refund in 2 015 for tax y ear 2014 , y ou n e ed to ex amine y our withholding s ituation now in 2 015 to make s ure y ou don ’ t ove rp ay again.

Whether you ’ re an employee or you make estimated tax pay ments as a self-employed person, sit down now and do some preliminary calculations on your 2015 tax liability. Use the 2014 data as your starting point. If you substantially overpaid for 2014, and there will be no significant changes in 2015, you need to adjust Form W-4 (for wage earners) or your estimated tax payment pattern (for self-employed persons). Keep in mind that no law requires you to pay more taxes than you owe. For withholding purposes, you avoid under-withholding penalties if you pay either: a) 100% of last year ’ s tax (2014), or b) 90 percent of this year ’ s tax (2015), whichever is less. Use that yardstick to guide you in adjusting your withholding.

These withholding adjustments are especially helpful if the IRS accepted (or will accept) an Offer in Compromise in your case during 2015. One of the conditions of the offer is that the IRS will keep any refund due in the year (or for the year) in which the offer is accepted. See Form 656, Offer in Compromise. For example, if the IRS accepted your OIC in February 2015, they will keep any refund you ’ re entitled to for 2015. Likewise, if the IRS accepts an offer in 2015, they will also keep any refund due for 2014 as well. You can reduce that refund by adjusting your withholding to ensure that you pay only the tax owed, and no more.

2. If you ’ re self-employed, count your money now . Each year, countless thousands of self-employed people are blind s ided come A pril 15 with surprise tax liabilities the y can ’ t pay . This is because they wait until M arch or A pril of the following year to s tart f iguring their tax liability. This is a big mistake for anybody, but particularly for self employed people.

As a self-employed person, you must make quarterly estimated payments of your income tax debt. As stated above, you must pay 90% of the current year ’ s liability or 100% of the prior year ’ s liability through estimated payment in order to avoid the estimated tax penalty. You can ’ t possibly make the required estimated payments unless you figure your tax on a quarterly basis. That means you cannot wait until the end of the year to do so.

You can use the prior year ’ s income and expenses as a starting point, but frankly, most self-employed people experience substantial fluctuations in their income and expenses. For that reason, it is a much better idea to use current information as the basis for your estimated payments. To do this, produce a quarterly statement of your income and expenses so you can see at a glance what your profit is. Then, base estimated payments on that. This way, you specifically account for changes to your income that may have the impact of increasing or decreasing y our tax burden . By staying on top of the situation in this manner, you won ’ t be blindsided at the end of the year with a tax debt you cannot pay.

3 . C ons ider m a king equipmen t purchases . If you own a s mall busin ess, no w i s a good t ime t o cons i der purchasing any e quipmen t y ou mi g ht n ee d f or y our business in 2015. A s peci a l tax c ode s ection creates a n ad v antage for acting now . However, Congress has tampered with this provision so many times since 2001, many people don ’ t know where we stand with it any more. Let me clarify.

Code section 179 allows you to claim a full deduction for the cost of business t ool s and equipment that are placed in service in the year i n qu estion. Ordinaril y, the cost of s uch equipme nt must be depreciated over the useful life of the equipment. For example, if y ou purchase a copier for $5,000, you would normally have to depreciate that copier over five years. In that case, you would get a deduction of $1,000 for each o f five years.

Bu t unde r section 179, you can fully expense up to $25,000 of equipme nt plac ed in service in 2015. This allo ws y ou to get the f ull bene fit of the de duction in the year of the purchase, rather than having to spread the recovery over several years. For most of the decade of the 2000s, the deduction was available for up to as much as $500,000 of equipment purchases. However, President Obama allowed the deduction to drop from its high-water mark of $500,000 back to just $25,000, the level it was a t prior to the Bush tax reform measures of 2001. Moreover, with the administration ’ s push to raise taxes on the “ rich ” per my article in the March 2015 issue of PTT, there ’ s just no way to know whether this deduction will survive at all in future years.

Therefore, now is the time to take advantage of this de duction , especially if you anticipate increased income during 2015. The best way to offset that income for t ax purposes but s till get the benefit of the money is to buy e quipm en t y ou ne ed to operate y our bu siness more effectively.

4 . Fu n d a Me dical Sa vi ng s or H e alth Savings A ccount . O n e of t he best - ke pt secre t s in tax pl a nnin g re m a in s the Medical Savings Account and Health Savings Account. These accounts allow you to set aside money that is earmarked to pay medical expenses not covered by insurance (other than the insurance policy itself). By placing the money in a specially designated savings account, the contribution to the account is tax deductible, up to certain limits. It works much like an IRA or 401(k), except that you don ’ t have to pay taxes on the money when it ’ s distributed , provided you use it for medical expenses that are not covered by insurance. By funding the account now, you can get the benefit of interest growth over the span of 2015 if you don ’ t use the money. What ’ s more , any money left in the account at the end of the year carries over to 2016 and remains in your account , under your control. You do n ’ t lose the money. It ’ s always available to you.

Now that the threshold for deducting medical expenses is up to 10 percent of adjusted gross income (AGI), it ’ s more important than ever to fund medical expenses with pre-tax dollars. That is, in order to deduct medical expenses, the expenses must exceed 10 percent of AGI. Even then, only the portion that exceeds 10 percent of AGI may be deducted. By using a Medical Saving Account or Health Savings Account, you get a deduction for the money when it goes into the account but you don ’ t have to pay taxes on it when it comes out (provided it ’ s used for medical expenses only). This way, you get a dollar-for-dollar deduction for all the medical expenses paid through the account, thereby side-stepping the 10-percent threshold.

5. Fund a retirement account . An IRA , 401(k) or other retirement account can be funded at anytime throughout the year. In fact, you can fund an account up to April 15 of the following year and still get a deduction for the contribution (within limits) for the prior year. For example, you can fund an IRA on April 1, 2016 and still get an IRA deduction for 2015.

But why wait? The sooner you begin making contributions to an IRA, the sooner you begin to realize: a) potential growth on the account, and b) a reduction of your tax liability, which allows you to adjust your withholding or estimated tax payments. And if you use your tax refund to fund the IRA, you can offset the out-of-pocket cost of the contribution entirely. Say you got a tax refund of $3,300 this year (which is about average). You decide to fund an IRA with $3,300. By adjusting your withholding to stop the overpayment of taxes, you fully fund the IRA with no out-of-pocket costs whatsoever, and you further reduce your tax debt because you get a deduction for the $3,300 when it goes into an IRA, but you would get no benefit whatsoever if the IRS held the money. 

6. Consider restructuring your business . There are millions of people operating small businesses in the form of sole proprietorships. While this is probably the best way to start a new business, it may not be the best way to continue an existing business. Various forms of business entities are available, including small business corporation, partnership and Limited Liability Company (LLC). Depending upon the nature of your business and your non-tax considerations, one or more of the available entities might be a better idea than continuing as a sole proprietorship. Early in the tax year is generally the most convenient time to change the structure of an existing business. For more details on the business options that are available, including their advantages and disadvantages, see my special report, entitled, “DAN PILLA’S GUIDE TO STARTING YOUR OWN BUSINESS: Considerations for a Business Structure and Operation.” The report is available free of charge, just click the above link.

7. M ake sure you have the proper paperwork for charitable contributions . When making significant charitable contributions, note that you must have a contemporaneous acknowledgement from the donee organization if your contribution is $250 or more . This applies to single contributions, not a total of contributions to a given organization over the span of one year. If you don ’ t have the proper acknowledgement in hand by the time you file your tax return, the deduction is not allowed , even if you have your cancel e d check and e v en if you get the statement later. That ’ s why they call it a “ contemporaneous acknowledgement. ” Start now to make sure you have all the paperwork you need to deduct your charitable contributions. Don ’ t wait to take these actions. If you do, you ’ ll probably end up paying more taxes than you owe.

How to Get Help

For help with your tax return preparation and filing obligations, and to get help with tax planning for 2015, contact the Tax Freedom Institute consulting member nearest you. For a list of of current consulting members CLICK HERE.

ALSO FOUND IN THIS ISSUE:

THE PRESIDENT'S TAX PLAN

More Class Warfare in the Guise of Tax Policy, Part II

LERNER'S E-MAILS NOT LOST AFTER ALL

Did Treasury Inspector General Find the Smoking Gun?

OBAMA'S PROPOSALS COULD PUT MORE
THAN 57% OF THE PUBLIC ON THE PUBLIC DOLE

- by Dr. Merrill Mathews