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The end of the year is rapidly approaching. If you haven’t started strategizing to reduce your tax liability, now is the time to start. This article is meant as a guide to help get you started in the right direction, not to replace the invaluable advise of your tax professional.
All adult taxpayers are entitled to a “Standard Deduction.” For 2004 the standard deduction is $4,850 for single filers or married couples filing separately, $9,700 for married couples filing jointly and for qualifying widow(er)s, and to $7,150 for head-of-household filers. The standard deduction is higher for blind taxpayers and those age 65 or older.
If you have itemized deductions, such as mortgage interest, state income taxes, property taxes, charitable contributions, etc. that are in excess of the standard deduction, your tax professional will take this into consideration and take the type of deduction that will minimize your tax liability.
If you do itemize, here are some ways to further reduce your 2004 tax liability.
Keep all of your receipts for charitable contributions and provide them to your tax professional. This includes contributions made to your church or any other non-profit organization. Unfortunately giving money to a friend in financial straights does not qualify as a charitable contribution in the eyes of the Internal Revenue Service. However, cleaning out your closet and garage and donating the items to Goodwill or another charitable organization does. Don’t forget to get a receipt and make a detailed listing of what you donated. On the detailed sheet, write what you feel the fair market value of the item is and your tax professional will do the rest.
Another way to increase your itemized deductions is to pay your January, 2005 mortgage payment in December, 2004. Make sure that you mail it in time to be posted before the end of the year. You’ll pick up an extra month of interest to deduct in 2004.
If you pay your first quarter 2005 property taxes on or before December 31st you can also deduct this amount in 2004.
If you pay someone to care for your dependents under the age of 13, make sure that you get a receipt for the payments. You will also need their name, address and social security or Federal Identification Number to take the credit. For 2004, the dollar limit on the expenses toward which you can apply the credit percentage is $3,000 for the care of one person and $6,000 for two or more.
If you’re a sole proprietor or one-member Limited Liability Company, you can shift income by hiring your children to help in your business. In addition to providing valuable work experience for your child, this arrangement offers significant tax savings to the business. As long as the work your children do is legitimate and they receive reasonable wages, you can deduct their wages from your income and shift the money to your children in lower tax brackets. As an added bonus, if your son or daughter is under 18, you don’t have to pay Social Security or Medicare taxes on the wages you pay. Because of the standard deduction, in 2004, the first $4,850 earned by each child is not taxed, and since its earned income, it is not subject to the kiddie tax.
If you’ve paid tuition in 2004 you may be entitled to the Hope Scholarship Credit or the Lifetime Learning Credit. The Hope Scholarship Credit is worth up to a maximum $1,500 credit per qualifying student, but can only be claimed for the first two years of college for each student. Or you may claim a Lifetime Learning Credit, which provides a credit of up to $2,000 per year. There are income limits on both of these credits. If you exceed the income limits on these credits, you may want to look at the Tuition Deduction. Your tax professional will be able to advise you on the best strategy for you.
Don’t forget your student loan interest. In 2004 you can deduct up to $2,500 in interest you paid on student loans.
Even though you’re self-employed, saving for retirement is critical. You should consider at a minimum, contributing to a traditional or Roth IRA. A single taxpayer can contribute up to $3,000 and married couples can contribute up to $6,000 of earned income. If you’re age 50 or older, you can make an extra $500 catch-up contribution. Contributions made to a traditional IRS reduce your adjusted gross income. For example, if you’re in the 25% tax bracket, a $3,000 contribution to a traditional IRS will reduce your Federal tax liability by $750. With a Roth IRA, contributions are not deductible, but investment earnings accumulate on a tax-deferred basis and may be withdrawn tax free, as long as you meet certain requirements.
Don’t forget to set up your home office. If you have to park your delivery truck someplace other than your home office, you can deduct the round trip mileage on your personal vehicle to travel back and forth from your truck. Additionally, if you go to the office supply, post office, etc., as long as there is a business purpose, you can deduct the mileage. This can add up fast at the current IRS published rate of .375 per mile. You should also keep up with rent and utility receipts, as these also help reduce your tax liability. I recommend talking to your tax professional regarding other pros and cons in regards to taking the home office deduction.
Now take all of this newly gained knowledge and put it to work to reduce your 2004 income tax liability!
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