As tax time begins, here are some strategies
The following items identify planning strategies, tips and facts that could affect your 2000 and 2001 tax liability. Extensive and complicated rules govern the application of many of the items that follow, so please contact a qualified tax professional to see if they can be applied to your personal situation.
* A new checkbox on the 1040 form authorizes the IRS to discuss any problems directly with a paid preparer. The IRS says this will reduce the "correspondence burden" on the taxpayers. It won’t authorize the preparer to represent the taxpayer in an audit or collection matter.
* The standard mileage rate for business-related travel is up to 34.5 cents per mile for 2001. The mileage rate for 2000 is 32.5 cents per mile.
* Parents of children younger than 17 can qualify for a valuable tax break: the child tax credit. This credit allows you to subtract as much as $500 from your taxes for each qualifying child in your family. The credit is phased out for higher income taxpayers with modified adjusted gross income over $110,000 for joint filers, $75,000 for single filers.
* Up to $250,000 of qualifying home sale profits can escape taxes. This amount doubles to $500,000 for married people filing jointly. In general, you can take advantage of the exclusion only once every two years; and you must have owned and used the home as a principal residence for at least two of the five years immediately preceding the sale.
However, if you sell your residence sooner due to a change in employment, health problems, or other "unforeseen circumstances," you may qualify for a partial exclusion.
* Building an adequate fund for your retirement years may be one of your important financial goals. The government encourages retirement saving by allowing employers to sponsor tax-deferred savings plans, such as 401(k), 403(b) and SIMPLE plans. If you have such a plan available to you, take advantage of the opportunity to build a nest egg for the future and lower your current income taxes by contributing.
* Individual Retirement Accounts also offer tax advantages. With a "traditional" IRA, investment earnings are tax deferred, and account contributions may be tax deductible if you meet certain requirements. A Roth IRA offers the potential for tax-free earnings. Contributions to a Roth IRA are not tax deductible. If eligible, you can save as much as $2,000 annually in traditional and/or Roth IRAs.
* State-sponsored college savings plans are an option to consider if you’re a parent or grandparent interested in building a tax-advantaged education fund. Several states make their plans available to both residents and nonresidents, and most plans allow the account to be used for expenses at any accredited post-secondary school in the country.
Investments in an eligible college savings plan grow federal income tax free until distributed. Plan earnings are taxed to the student/beneficiary upon withdrawal to pay qualified tuition and related expenses.
* Reinvested mutual fund distributions should be added to the cost basis of your shares. Keep good records of reinvestment transactions so that you don’t pay more taxes than you should when you redeem or sell fund shares. Good records can allow for specific identification of shares sold that could result in favorable tax results.
* Several tax strategies may help lower your income taxes if you invest in real estate. For example, the like-kind exchange is a popular technique for deferring taxes on dispositions of appreciated real estate. If you exchange a property for like-kind property instead of selling it outright, you can defer your gain and postpone paying tax. In effect, the like-kind exchange allows you to reinvest your profits without paying immediate tax on them.
* The installment sale is also used frequently for real estate. In an installment sale, the buyer makes payments for a property to you in more than one tax year, leaving only part of your gain taxable each year.
* Capital gains are taxed at maximum rates that are significantly lower than the rates applicable to ordinary income. The rates vary depending upon the type of asset sold, your holding period, and your regular tax rate.
Instead of paying capital gains tax at 20 percent, you can qualify for an 18 percent rate on sales of investments acquired after 2000 and held longer than five years.
Starting in 2001, the 10 percent capital gains tax rate drops to 8 percent for assets that have been held more than five years before sale. Unlike the 18 percent rate, the 8 percent rate applies immediately, not to assets acquired after 2000.
* In 2001, eligible taxpayers can immediately expense up to $24,000 of business asset purchases. The amount is $20,000 in 2000. The expensing election is a valuable tax break.
* Up to $2,000 in student loan interest can be deductible, up from $1,500 in 1999. The amount goes up to $2,500 in 2001. The deduction isn’t available for married couples filing jointly with adjusted gross incomes above $75,000, $55,000 for singles.
* Smoking cessation programs and prescription drugs to alleviate the effects of nicotine withdrawal are tax deductible as a medical expense. Laser surgery to correct visual defects is also deductible as a medical expense.
Every individual’s tax situation involves numerous variables that may impact the usefulness of any of these ideas in unique ways. If you are considering implementing any of the above strategies, please contact a qualified tax professional.
Janet C. Kennedy is co-owner of Kennedy & Co. LLC in Wasilla.