Transcript Tax Training Tips for 2005

Tax Saving
Tips for 2005
Advice from CPAs
Recent Tax Law Changes
• Reduced tax rates, new credits
and increased phase-out limits
• Extension of individual
and business tax breaks
• New definition of “qualifying child”
Health Savings Accounts
• Became effective in 2004
• For individuals with high-deductible health
insurance plans and not eligible for Medicare
• Tax-deductible contributions
• Tax-free earnings
• Tax-free distributions for qualified medical
expenses
HSA Contribution Limits
Contributions are limited to the lesser
of the plan’s annual deductible or:
• $2,650 for individuals
• $5,250 for families
2004 Act Extends Tax
Breaks to 2010
• $1,000 child tax credit
• Expanded 10% tax bracket
• Marriage penalty relief
2004 Act Extends Tax Breaks
Additional Tax Breaks
• One year extension for AMT relief
• $250 above-the-line deduction for
qualifying elementary and high school
educator expenses – extended through
2005
New Provisions and Tax Breaks
• Uniform definition of “qualifying child”
simplifies code
• New treatment of combat pay for earned
income credit and refundable child tax credit
Filing Status
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Married filing jointly
Married filing separately
Single
Head of Household
Qualifying widow(er)
2005 Tax Rates
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10%
15%
25%
28%
33%
35%
Standard Deduction
Filing
Status
Standard
Deduction
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$10,000
$ 5,000
$ 5,000
$ 7,300
$10,000
Married filing jointly
Married filing separately
Single
Head of Household
Qualifying widow(er)
Standard Deduction
Taxpayers 65 and older or blind get an
additional standard deduction
• Married - $1,000
• Single or Head of Household - $1,250
Itemizing Deductions
• An alternative to the standard deduction
• Use when these deductions exceed
standard deduction
• Phase-out rules apply
-- Single/joint/head of household -$145,950
-- Married filing separately -$72,975
Personal Exemption
Filing Status
Phase-out
starts
Phase-out
ends
Joint return
Head of Household
Single
Married filing
separately
$218,950
$182,450
$145,950
$109,475
$341,450
$304,950
$268,450
$170,725
Timing Strategies
Control tax bill by –
• Deferring income, such as bonuses
• Accelerating deductions, such as
qualified charitable contributions
• Bunching deductions that are based on
a percentage of AGI
Tax Strategies for Life
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Family
Education
Home
Investments
Retirement
Family Strategies
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Child Credit
Dependent Care Credit
Adoption Credit
Earned Income Credit
Shifting Income
Child Credit
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Child must be under 17 at year end
Child must be claimed as a dependent
$1,000 credit per child
Reduces tax bill dollar-for-dollar
Phase-out for higher income families
Adoption Credit
• Credit of up to $10,630 per eligible child
• Exemption for first $10,630
reimbursed by employer
• Parents adopting special needs
child get full credit
Dependent Care Credit
• Child must be under 13 and a dependent
• Tax credit from 20% to 35%
of qualifying expenses
• Use up to $3,000 of expenses
($6,000 for two or more dependents)
to calculate credit
• Not restricted to children
Earned Income Credit
Family Size
Maximum Credit
Two or more
children
$4,400
One child
$2,662
Shifting Income
• Make gifts to children
• Transfer appreciated stock to children
• Hire your children
Tax Credits
• Hope Credit worth up to $1,500
per student, per year
• Applies to first two years of college only
• Phase-out applies
Single -- $43,000 -- $53,000
Joint -$87,000 -- $107,000
Tax Credits
• Lifetime Learning Credit of up to
$2,000 per year
• Applies to undergraduate, graduate
and professional courses
• Phase-out applies
Tuition Deduction
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Maximum deduction of $4,000
No need to itemize
Covers tuition and fees
Phase-out applies
Single -- $65,000 - $80,000
Joint -- $130,000 - $160,000
Student Loan Deduction
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Deduct up to $2,500
No need to itemize
No limit on repayment period length
$50,000 to $65,000 – phase-out range
for single filers
• $105,000 to $135,000 – phase-out range
for married filing jointly
Deductions
• Mortgage interest on first and second homes
• Up to $100,000 in home equity loan
or line of credit interest
• Points paid on mortgage or refinancing
• Real estate property taxes
Selling Your Home
• Exclude up to $250,000 in capital gains
from sale of home; $500,000 for joint filers
• Must own and use home as principal residence
for two out of five years
• Eligible only once every two years
• Reduced exclusion available
Dividends
• Top dividend tax rate of 15%
• Rate is 5% for taxpayers in 10% and
15% brackets
• Check ex-dividend date
• Does not apply to interest payments
Capital Gains Tax
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Maximum tax rate on long-term gains is 15%
5% for taxpayers in 10% and 15% brackets
Asset must be held more than one year
Does not apply to collectibles
Offset Capital Gains with Losses
• Capital losses offset capital gains
• $3,000 ($1,500 for single filers) in net
capital losses can be deducted against
ordinary income
• Beware of wash sale rule
Employer-Sponsored Plans
• Contributions help reduce tax bill
• Take advantage of employer matches
• $14,000 is 2005 maximum contribution,
$15,000 in 2006
• $4,000 additional contribution for age 50
and older
• New for 2006 – “Roth 401(k)”
IRAs
• $4,000 is maximum 2005 contribution
• $500 additional catch-up contribution
for age 50 or older
• Phase-out applies
• Open by April 17, 2006
Structure
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C Corporation
S Corporation
Limited Liability Company
Partnership
Sole proprietor
Expensing Deduction
• Deduct up to 100% of the cost of up to
$105,000 in property
• Applies to new or used property
• Equipment must be put into service by
December 31, 2005
• Now applies to software
• Phase-out rules apply
Small Business Tax Credits
Credits extended through 2005:
• Research and Development
• Welfare to Work
• Work Opportunity
Additional Business Strategies
• Deduct 100% of health insurance costs
if self-employed
• Defer income and accelerate deductions
• Write off bad debt
• Make the most of business-related
deductions – travel, auto, meals and
entertainment, interest expenses
Charitable Deductions
• Donate appreciated property and avoid
capital gains tax
• Donate clothing, household goods,
furniture and deduct fair market value
• Volunteer your time and deduct
qualified travel and related expenses
FSAs
• Reduce taxable income
• Use up remaining 2005 balances
• Over-the-counter drugs are now allowable
Avoid AMT
AMT triggers:
• Higher than average dependency exemptions
• Large deductions for state and local
income taxes and real estate taxes
• High miscellaneous itemized
deductions and medical expenses
• Incentive stock options
Training for Success
• Focus on tax savings year-round
• Consider year-end opportunities
• Get help if you need it