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It's Never Too Late or Too Early to Start Thinking of Tax Saving Measures
By James J. Cunningham, CPA, Tax Shareholder, Alpern Rosenthal
With 2005 coming to a close and a new year on the horizon, now is the
perfect time to start thinking of tax saving strategies. The following
are a few planning measures for individuals and businesses which can
ultimately reduce your tax liability.
Watch out for the AMT
Originally aimed at those sheltering excessive amounts of income, the
alternative minimum tax (AMT) continues to affect more and more middle-class
taxpayers. AMT rates are 26% and 28%, but many deductions allowed in
calculating regular tax liability aren’t allowed for the AMT,
such as state and local income or sales taxes, property taxes, and some
miscellaneous itemized deductions. If your AMT liability exceeds your
regular tax liability, you must pay the AMT. For 2005, the AMT exemption
remains at $58,000 for joint filers, $40,250 for single filers and $29,000
for married persons who file separately. Project whether you’ll
fall under the AMT this year or next, and then time income and deductions
as much as possible to either avoid the tax or to protect your deductions.
Take advantage of tax credits
You may be able to claim the $1,000 child tax credit for each child
under age 17 at the end of the calendar year. And you may be eligible
for the Child and Dependent Care credit, which is worth at least 20%
of qualifying expenses, subject to a cap. If you adopt, you may be able
to take the maximum adoption credit of $10,630 in 2005 or the employer
assistance program income exclusion (also $10,630 per eligible child).
Tax-favored health care accounts
Technically, you don’t get a deduction for contributing to a Flexible
Spending Account (FSA) or a Health Savings Account (HSA). But participation
does reduce your taxable income. FSAs allow you to redirect pretax income
to your account up to an employer-determined limit. The plan then pays
or reimburses you for medical expenses incurred that were not covered
by insurance. HSAs permit you to contribute up to $5,250 annually for
a family plan ($2,650 for individual coverage) to interest bearing accounts
or mutual funds.
Consider a 529 plan
These plans enable parents (or grandparents) to either secure current
tuition rates with a prepaid tuition program or create tax-free savings
accounts to fund college expenses. 529 plans provide estate planning
benefits as well. Your contribution will qualify for the $11,000 annual
gift tax exclusion ($22,000 for gifts by married couples). You even
can elect to use annual exclusions for five years all at once (for example,
a $55,000 contribution or a $110,000 joint gift).
Be creative when selling assets
An installment sale allows you to defer capital gains on most assets
other than publicly traded securities. You can defer your overall tax
burden by spreading the gain over several years as you receive the proceeds.
Or, if you invest in rental real estate, consider a like-kind exchange.
You may be able to defer gain over the time you hold the replacement
property, though you will reduce your depreciation deductions on that
property.
Consider transfer tax exemptions and rates
During your life or at death, you can transfer up to the exemption amount
($1 million for transfers during life and $1.5 million for transfers
at death) free of federal gift and estate taxes. If your taxable estate
is equal to or less than the exemption and you haven’t already
used any of the exemption on lifetime gifts, no federal estate tax will
be due when you die. But, if your estate exceeds this amount, it will
be subject to estate tax. With the gradual phaseout of the estate tax
and then its scheduled return in 2011, gift and estate planning is especially
important.
Set up trusts to preserve assets and control
Trusts can provide significant tax savings while preserving some control
over what happens to the transferred assets. For example, a qualified
terminable interest property trust is good for benefiting first a surviving
spouse and then children from a prior marriage. A qualified personal
residence trust allows you to give your home to your children, removing
it from your taxable estate at a reduced tax cost, while you continue
to live in it for the trust’s term. A grantor-retained annuity
trust works similarly for other investments, except instead of retaining
the right to live in your home over the trust’s term, you receive
payments from the trust for a specified period.
Take advantage of the new manufacturer’s deduction
The cornerstone of the American Jobs Creation Act is the new deduction
for manufacturers. When fully phased in, the deduction will be equal
to 9% of the lesser of qualified production activities income or taxable
income (adjusted gross income for individuals). The deduction is 3%
in 2005 and 2006, 6% in 2007 through 2009, and 9% in 2010 and thereafter.
The deduction is further limited to 50% of wages paid during the calendar
year and can be used against both regular tax and the AMT.
Maximize depreciation with a cost segregation study
A cost segregation study identifies property components, and their related
costs, that can be depreciated over five or seven years using 200% of
the straight-line rate, or over 15 years using 150% of the straight-line
rate. This allows you to depreciate the property much faster and may
dramatically increase your current deductions. Typical assets that qualify
for this faster depreciation include decorative fixtures, cabinets,
shelves, security equipment, parking lots, landscaping and architectural
fees allocated to qualifying property.
James J. Cunningham, CPA, is a Tax Shareholder with Alpern Rosenthal.
He can be reached at 412.281.2533 or at jcunningham@alpern.com.
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