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Many Americans make annual contributions to individual retirement accounts. If you haven?t done so for the 2005 tax year, you still can.

Not To Late To Make 2005 IRA Contribution

Contributing to individual retirement accounts just makes sense. Most don?t believe social security is going to survive for long. Even if it does, one has to wonder how small the distributions are going to be. With the baby boomer generation about to put significant strain on the system, distributions in ten or twenty years are going to be paltry.

If you failed to contribute to your individual retirement account in 2005, you have until April 15, 2006 to do so. This is also true if you contributed during 2005, but failed to deposit the maximum amount allowed under law.

The contribution limits for individual retirement accounts went up in 2005. You can generally contribute up to $4,000. If you are older than 50 years of age, the limit bumps up another $500 to $4,500. When making contributions, just make sure you note on the deposit slip that it is for the 2005 year, not 2006.

Although there are variations, individual retirement accounts come in two general forms. The traditional independent retirement account is a pre-tax contribution vehicle. If you meet salary and filing requirements, the money you contribute from your earning is excluded from your adjusted gross tax calculations. If you are looking for extra deductions for 2005, catching up on your individual retirement account contribution can create a healthy reduction of your reported earnings. The downside, of course, Read more…

If you son or daughter had a summer or after-school job this year you should seriously consider opening up a ROTH IRA account.

To be eligible for an IRA your child must have “earned income”, such as wages that are reported on a W-2 or “net earnings from self-employment”. Money you give your child for doing chores around the house won’t count as earned income, but earnings from babysitting or mowing lawns may qualify.

You can contribute 100% of your child’s earnings to the account, up to a maximum of $4,000.00 for 2005. If your son earned $2,400.00 for the year you can contribute $2,400.00 to a ROTH for him. If he earns $4,500.00 you can contribute $4,000.00. You have until April 17, 2006 to open the account and make your contribution for 2005.

If you are self employed you can hire your child to work in your business and pay him, or her, a salary. A sole-proprietor who pays a salary to his or her child who is under age 18 does not have to pay the federal, and probably state, government any payroll tax on the wages. Of course the child must be paid a reasonable salary for doing actual work. You can put the wages, up to the $4,000.00 maximum, into a ROTH IRA.

Your child will not get a current tax deduction for contributions to a ROTH IRA, but then most teen-agers don’t need the deduction. A dependent child can earn $5,000.00, including up to $250.00 in interest, dividends and capital gains, before having to pay any federal income tax.

Distributions from a ROTH, after age 59 1/2, will be exempt from federal and state income tax, assuming, of course, Congress does not change the rules in the future. Even if Congress was to revise the ROTH rules down the road it is very unlikely that any changes would be retroactive, so earnings on a ROTH up to the point of change should remain tax-free.

You can use a ROTH IRA as an incentive to encourage your children to work or to save. If your son earns $4,000.00 in a part-time job put $4,000.00 into a ROTH IRA for him. Or, if your daughter agrees to put $1,000.00 of her salary in a ROTH give her a 3-for-1 match and put in another $3,000.00.

There is nothing in the tax code that says that the money deposited in an IRA for your son or daughter has to come from the child’s funds.

The $4,000.00 maximum applies for tax Read more…

The American Jobs Creation Act of 2004 imposed strict new rules on non-qualified deferred compensation plans. Beginning in 2005, deferred compensation programs that are not in compliance with the new rules may be taxed as wages, slapped with a 20% excise tax, plus charged an interest penalty.

Given the potentially huge tax consequences for non-compliance with the rules, you should consult with your organization?s benefit specialist and your tax professionals to figure how your compensation might be affected by these new rules.

Deferred compensation plans are often used to provide for the deferral of salary, incentive compensation (i.e., commissions or bonuses), or supplemental compensation for top executives, independent corporate directors, and individual board members. The new rules apply to nonqualified deferred compensation plans at taxable and tax-exempt organizations.

An option for independent corporate directors and individual board members who receive 1099 income for their services may consider is to freeze their nonqualified plan and adopt a qualified plan such as the ?one person defined benefit plan?, called the Solo-DB Plan. Qualified retirement plans are exempt from the requirements of the American Jobs Creation Act.

The Solo-DB plan allows the highest deductible contributions possible in a qualified retirement plan. For example in 2005 one can contribute up to $170,000 of compensation into a tax-deferred Solo-DB plan.

Defined benefits plans have been around for Read more…

Everyone has some kind of home office, if you happen to run a business from that home office, it?s deductible. But? There are a few important things you need to do to make certain your deduction is provable.

Clear a specific room or space for your office. Give it a square footage, something you can actually determine with measurements. Take everything out of your space that is not directly related to your business. Measure your space, and if it doesn?t already have four walls, set up specific perimeters with room dividers or temporary walls.

Create a name for your business. Get a tax license, and register your business name, along with your ID. Announce your business to the local papers, send out press releases, and be identifiable as a business.

Purchase office equipment and furniture for your office. Keep the receipts; this equipment and furniture is deductible. (Including any room dividers or temporary walls you set up to disguise your office.) This furniture probably includes your desk, a computer desk, shelves, file cabinets, printer cabinets, storage containers, computer, adding machine, fax machine, filing supplies, etc., lamps, chairs, and a telephone with voice mail capabilities.

Install a separate phone line for your office. Call it a kid?s line or second phone, dedicated computer or fax line, but get a separate phone line for your business. Put a professional response on your voicemail ? save the ?Hey Granny, I?ve gone fishing ? leave a message at the beep.? For your private line. Use your professional voice and manners on your business voice mail. Your customers will appreciate you for it.

Set up a schedule. Give yourself hours/work days and some time off. Plan your work around your business schedule. Even if you include some evening and weekend hours, you will benefit from scheduling some time off. If you work late in the evening, take some time off in the morning to run, laugh, get together with friends, read a book or enjoy life. It will help you focus on what you Read more…

The taxes that are withheld from paychecks amount to about 25% of your gross pay (including federal tax, state tax, social security tax and medicare tax). But these taxes that are withheld could be working for you as investments if you employ what I call the ultimate tax strategy. This tax strategy consists of how you plan to pay no taxes just like all of the large corporations. Large businesses have teams of accountants and lawyers going over the tax code to make maximum use of legitimate deductions.

In my opinion, there is a distinct difference between an individual and a business in the U.S. tax code (others have called it the difference between the rich and the poor). Such as businesses are rewarded with tax deductions because they create jobs and engage in entrepreneurial activities that support individuals and government. But individuals are awarded few tax breaks because they don?t create jobs and don?t take risks that add substantial value to the economy. This is simply the fact and we just need to find a way to make the most of the few tax deductions that are available to wage earners as well.

When tax time comes around, the only substantial tax break most individuals have is a deduction for their home mortgage. This deduction is a social policy benefit to many people, but instead of helping people, it can motivate them to buy a larger home or higher mortgage than they would ordinarily afford. And unless you live in a neighborhood that continually appreciates, this is not a great strategy for you to target.

First, I need to make some big disclaimers about minimizing your taxes. There are many people in jail that have written books, tapes, websites and held seminars on how to never pay taxes. You can spot these people due to their focus on concepts that the IRS says are invalid; strained interpretations that haven?t held up in court, constitutional nonsense and a lot of straight fraud. Once the IRS audits these ?patriotic educators?, the result is an invoice for back taxes, interest, penalties, and a jail or prison sentence. And illegal tax avoidance isn?t limited to wage earners. Nearly every month there is someone who tried to avoid taxes from a giant windfall (sold a company for millions, exercised stock options, received a large bonus) and paid some small shady offshore consulting company to create a fictitious tax loss to offset the big gain. The same thing happens; IRS files suit for back taxes, interest, penalties and possibly jail depending on the circumstances.

The ultimate tax planning strategy works when you buy investments that have a positive cash flow (before any tax consequences), and give you a legitimate tax deduction as an added bonus. Now it is just a matter of buying enough of these investments to reduce your tax Read more…

Americans contributed $248 billion to charity last year.

As your wealth grows and the tax burden increases, you have probably thought about how making a charitable donation could best be used to benefit others ? and yourself. Charitable trusts can help you increase the value of your donation by reducing your costs in capital gains, income, and estate taxes.

Charitable Remainder Trusts

A charitable remainder trust (CRT) is an irrevocable trust whose beneficiary is a charitable organization. Throughout the donor’s lifetime, they receive regular payments (fixed or variable) from the trust. When the donor dies, the charity receives any remaining principal.

Assets donated to a CRT are not subject to capital gains taxes and will not be included in the donor?s taxable estate. In addition, the donor may take an income tax deduction on the value of the assets during the year in which the trust is created.

Charitable Lead Trusts

A charitable lead trust (CLT) is nearly the opposite of a CRT. With a CLT, the charity receives regular income generated by the trust throughout the donor?s lifetime. When the donor dies, their heirs will receive the assets in the trust.

Pooled Income Funds

A pooled income fund is an irrevocable trust to which several donors may contribute. Funds Read more…

If you’ve been eyeing those sleek new iPods, but you didn’t like the price tag, Uncle Same wants to help you buy one.

Before I go on, here’s the standard CYA…

I’m providing this as information only. It’s up to you and your tax professional to figure out if this is indeed a legitimate tax strategy for you. Now on with the show…

There are two principles at work here:

1) You have the right to deduct reasonable and necessary business expenses from your income before calculating tax on that income.

2) Continuing education to improve your business results has long been recognized as a reasonable and necessary expense.

So where does that shiny new iPod fit in?

If you’re like me, you have many hours of mp3 recordings on your hard drive– recorded conference calls, teleseminars, webcasts and other educational materials. I know I have well over 100 hours of such material on my hard drive.

There are also an increasing number of podcasts available dealing with business topics. Listening to those relevant to your business contributes to your ongoing business education.

There are also similar offerings on subjects like investing, tax planning, and so on.

Purchase your iPod through your business, and you can expense the total cost the year you buy it.

How’s this for leverage?

You (meaning your business) spends $200 for a Read more…

Statutory Stock Option Plans.

Generally, property transferred to an employee in connection with services performed by the employee, results in ordinary income to the employee and a deduction to the employer. The Code does provide for special tax treatment for statutory stock options. The transfer of a statutory stock option to an employee has no tax consequence until the employee sells the stock. At that time, the employee pays capital gains tax (generally 15%) on the difference between the option price and the amount received. However, if the option price was less than the fair market value at the time the option was granted, the employee must recognize ordinary income (taxed up to 35%) on the difference between the option price and the fair market value at the time the option was granted.

As this is extremely confusing, an example is appropriate:

In year one, Employer (GM) gives Employee a five year statutory stock option to purchase one share of GM for $100. At the time, shares of GM have a fair market value of $100. In year 3, when shares of GM have a fair market value of $150, Employee exercises the option by paying GM $100 for the share of stock. In year five, Employee sells stock to a 3rd party for $200.

There is no tax consequence to any party in year one. In year three, Employee does not recognize any income. GM may have capital gain income equal to the $100 received minus GM?s basis in the share. In year five, employee will have a $100 capital gain. GM does not receive a deduction.

Numerous requirements must be met to qualify as a statutory stock option. They provide a tax advantage for the employee in that tax on the appreciation is deferred until sale and the appreciation is taxed at a capital gains rate. There is no tax advantage for the employer, however, because no deduction is allowed.

If the employer?s marginal tax rate is as high as the employees? marginal tax rate, there may be no overall advantage in utilizing a statutory stock option.

Non-statutory Stock Option Plans.

A non-statutory stock option plan is simply one that does not meet the requirements of a statutory plan. Generally, the employee will realize ordinary income at the time that the option is granted. Income recognition is deferred, however, if the employees? rights to the stock are not vested or if the stock does not have a readily ascertainable fair market value. Although income recognition deferral is a general goal of tax planning, in this case, the advantage of deferral must be weighed against the disadvantage that the appreciation in the stock is taxed as ordinary income Read more…

Tax deductions are granted to an individual or a business entity to encourage positive initiatives such as charity and donations, investments, education, and environmental protection. The United States is known for its large number of federal tax deductions. Apart from these federal tax deductions, the citizens can enjoy the benefits of additional deductions implemented by their state governments. Apart from the standard tax deduction, a person may be eligible for additional deduction in case of age or blindness. Married couples having joint tax filing are not eligible for tax deductions if their income crosses a certain amount ($145,000 in 2005).

An individual wishing to take advantage of the federal tax deductions may choose from standard deduction or itemized deductions. The itemized deductions are applicable on expenses such as household utilities, vehicles, and computers; education expenses; work-related expenses; and medical and nursing care expenses. Contributions for charitable purposes attract special federal tax deductions. Deductions on investments and money transactions are applicable in instances of bad debts, alimony, legal fees, and loans. Interestingly, federal tax deductions are granted even to a person who has lost in gambling. All the itemized deductions are dependent on factors such as tax filing status and income. They have Read more…

Tax deductions signify the amount deducted from a person?s gross income so as to reduce the taxable income. The basic standard deduction depends on the individual?s tax return filing status. The taxpayer need not pay income tax on expenses termed tax deductible. Expenses such as legal fees, medical expenses, donations, and investments are sometimes listed as tax-deductible expenses. Although investments are tax deductible, the brokerage fees and commissions paid are not considered so. Apart from the basic standard deduction, additional tax deductions can be filed, after taking conditions such as age and blindness into consideration.

Tax deductions are aimed at encouraging positive initiatives such as philanthropic spending, entrepreneurship, home ownership, education, and environmental protection. However, these deductions may at times be utilized for tax evasion. There are instances of wealthy persons and big firms manipulating the deduction structure in their favor. They often escape paying large amounts of tax by projecting their operational expenses as being spent on tax-deductible purposes. Companies usually enjoy a wide range of tax deductions. Since only their incomes are taxed, companies separate their expenses from the revenues in the accounts. The expenses which have been proved to be made purely for business purposes are then considered for tax Read more…