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Tax Tips
The art of self-defense
If you’re self-employed, there are many moves you can make before year end to reduce your 2008 tax bill. Here are a few ideas:
Contribute to a retirement plan. For 2008, you can contribute up to 25% of your net compensation (20% of self-employment income if you’re a sole proprietor), or $46,000, whichever is less, to a SEP-IRA or a profit-sharing plan. The contribution limit for a solo 401(k) plan is $15,500 ($20,500 for individuals age 50 or older) plus a profit-sharing contribution of $30,500. You have until your tax return due date (including extensions) to establish and make tax-deductible contributions to a SEP-IRA. Solo 401(k) and profit-sharing plans also allow you to make contributions as late as your extended tax-filing deadline, but these plans must be set up by year end.
Take a Section 199 deduction. Internal Revenue Code Sec. 199 allows qualifying businesses — including sole proprietorships — to deduct 6% of their income from qualified domestic production activities. Although the deduction is usually associated with manufacturing, many other types of businesses qualify (including construction, engineering, architecture and film production).
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A great time for a GRAT
If you’ve graduated beyond making annual exclusion gifts and are looking to do more, perhaps a grantor retained annuity trust (GRAT) would fit your needs. Although it’s a relatively sophisticated strategy, when carefully planned and executed, the GRAT could allow you to transfer substantial amounts of wealth to your children or other heirs while minimizing — or even eliminating — gift and estate taxes. And, by establishing a long-term GRAT while interest rates are low, you can enhance the GRAT’s tax-saving potential. This article explains how a GRAT works and its tax-saving advantages.
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Don’t “wage” war with the IRS
The payment of reasonable compensation to S corporation shareholders is high on the IRS’s list of audit concerns. That’s because S corporations that make distributions of profits in lieu of salaries to employee shareholders enjoy significant savings on employment taxes. In recent years, auditors have been scrutinizing S corporation salaries and recharacterizing distributions of profits as wages when they feel that shareholder compensation is unreasonably low. The result: Affected businesses receive an unpleasant surprise in the form of a bill for unpaid employment taxes, plus penalties and interest. This article offers advice on how to determine reasonable compensation.
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Is tax-free investing really tax free?
Investing in tax-exempt securities such as municipal bonds can be a great strategy, especially if you’re in a high tax bracket. But this strategy can backfire if you’re not careful. Sometimes “tax free” isn’t as free as it seems. This article explains how to evaluate the tax-effectiveness of municipal bonds and tax traps to watch out for.
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Tax Tips
This article briefly reviews tenancy-in-common interest, year end tax tips for the self-employed, and how the IRS classifies hobbies and second businesses.
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