Financial and Tax Planning

    Web Year End Tax Tips 

SO, IT’S DECEMBER, BUT, JUST LIKE CHRISTMAS SHOPPING, YOU CAN STILL DO SOME LAST MINUTE TAX PLANNING 

Just as you might want to spend a year planning an exotic vacation to some far-flung locale, occasionally you may want to just game something out for next weekend. The same applies to your taxes. Every family or individual should have an understanding of our tax code (The IRC) or have a relationship with a financial planner who does. And, it goes without saying (but I’ll say it anyway) that each taxpayer should also have a good handle on their own finances and how those are impacted by the IRC (Internal Revenue Code) and any state income taxes. 

This site will endeavor to provide you with basic knowledge for on-going Tax Planning, perhaps the most important of the six (6) facets of Financial Planning. I feel it is the most important because all five other facets of Financial Planning are directly impacted, positively or negatively, by the tax codes and, hence, your tax planning or lack thereof. 

As this is December, the emphasis now should be on anything you can do these last moments of 2003 to impact your tax situation for this year or next. While it is too late for some issues, there are several you can employ either now or immediately set into motion after January 1^st. 

First, for general information, but little near-term impact planning-wise, the possibility of your being subjected to AMT (Alternative Minimum Tax) has changed somewhat with recent tax law revisions. Realizing that a number of high gross income taxpayers were paying lower taxes than lower earning taxpayers due to “excessively high” deductions, Congress back in 1969 created the AMT. Once one’s income reaches a certain level, they stand to lose certain deductions. This has the net effect of subjecting more of their income to taxes than lower income taxpayers would encounter. 

Tax rates have been lowered which could subject a lot more taxpayers to AMT. However, in the JGTRRA (Jobs & Growth Tax Relief Reconciliation Act of 2003) AMT exemption levels have also been raised by roughly 12.5% for singles, 18.4% for Married Filing Separate or Jointly. This change is effective for both 2003 and 2004.

Now, let’s look at some issues you can yet consider for year end tax planning. 

If your job requires you to wear a “uniform” make sure you don’t attempt to “stretch” the definition of uniform the way your Thanksgiving dinner may’ve stretched the uniform itself. Business suits, for example, do not meet the IRS definition of uniform for, while you might be required to wear it to work, thereby meeting one IRS rule, the other rule says it cannot be adapted for general use and, of course, a suit can. So, as your kids might say….”NOT!” 

So, the question that arises is, “Did you purchase a uniform or safety equipment (also eligible for deduction) already this year?” If so, I trust you kept or can obtain receipts should you be required to ultimately prove your purchases. (Always set up a file and keep such receipts and keep them for 3 years minimum [I recommend 5-7 years]) 

Now, if you presently need such equipment (such as safety boots, gloves, or glasses, hard hat or true uniform), look at how often you need to purchase replacements. If roughly once a year, consider delaying any such purchases until the first of next year. Then purchase your next replacements late next year. Why? 

Unless you are self-employed taking these under business expenses on your Schedule C, they are most likely classed as “Non-reimbursed Employee Expenses”. As such, they are grouped with other deductions such as cost of Tax Preparation under “Miscellaneous Deductions” and, as such their deduction is limited to the excess of 2% of your Adjusted Gross Income. As such, many employees while technically entitled to the deduction are not able to realistically take it, due to income. Let’s take a quick example. 

Before I continue I need to inform you of one other pertinent detail. If you don’t itemize your deductions, you can forget thinking about this. You don’t get it. If you take the “Standard Deduction” these specific deductions do not apply unless all deductions, including these, exceed your Standard Deduction. If so, the IRS permits you to take the higher of the two. Now, to the example. 

You have an Adjusted Gross Income (AGI)of $ 30,000. (This is the last figure on the bottom of the front of your 1040 and the top figure on the back of the same form.) 2% of $ 30,000 is $ 600. Let’s say that each year for the past several years, you have purchased approximately $ 400 of safety equipment and uniforms and paid $ 100 for your tax preparation. If you check those past returns you may or may not see these listed on your Schedule A (where you itemize). If shown, you will note a 2% of AGI calculation next to them and a big 0 carried to the appropriate Deduction Line. That essentially means: “Sorry, you lose”. 
 

I say it may not be listed because if your tax preparer knows that your total Miscellaneous Deductions is less than 2% of your AGI, there is no need to list other than to show you that they didn’t forget those items, they just didn’t qualify. I take a different approach when doing taxes. I prefer to list them to establish with the IRS a pattern showing that your profession does require such equipment. Then it’s less an “attention-getter” the year you actually have enough to qualify for the deduction. So, you might suggest that approach to your tax preparer. 

So, going back to the example, you see your dilemma. Each year you have $ 500 of qualified deductions but have gotten no credit for them because their total is short of the 2% “threshold”. So, here’s my recommendation for year end tax planning on this uniform/ safety equipment issue: 

If you already bought equipment earlier this year, go ahead and purchase another set early, before year end. Now you will have $ 800 in safety equipment and your $ 100 for tax prep for $ 900 in Misc Deductions with your $ 600 2% threshold and you will realize a net additional deduction for this year of the $ 300 excess over 2%. That will impact your bottom line when you file by April 15^th or any extensions and, if you’re in the 27% tax bracket, you’ll receive an additional $ 81 refund (or a similar reduction of any tax due) from that return. Better in your pocket than theirs and purely legitimate. The only people upset will be your children when you show them your extra set of equipment instead of that train set they had their selfish little eyes on. (Do NOT, under any circumstances, allow your child to read this paragraph particularly if they are at all prone to violence). Just kidding. RIGHT! 

Now, you do know, of course, that next year you won’t have to purchase any equipment and the $ 100 tax prep fee even with your normal equipment purchase wouldn’t be deductible in our example, so no Misc Deduction for 2004. But, in 2005, time your purchases for two sets and take the deduction again, or hire me to do your taxes and instruct me to charge you at least $ 900 so you can get the $ 300 deduction. I’m not going to wait up for that call. Of course in ’04 you can get that train set even if your child has graduated by then. That’s still a plus as a train set costs a whole lot less than a Corvette for that whole graduation thing. See, it all works out. 

Now, if you haven’t purchased equipment this year and need to, delay the purchase until January and then plan your next replacement purchase in December next year so as to take both deductions for the 2004 tax year. OK???? 

My last last-minute tax tip for now concerns your giving. If you had to cut back your giving due to financial circumstances earlier and those have improved, consider what you might give these last weeks to your church or charity. Ask them as to any special needs or short falls they may be encountering and pray as to how you might address those needs with your resources. If you tithe, check your latest pay check and see how you’re doing relative to the amount or percentage you agreed to give. An extra thousand dollars in December will pay you much faster tax relief than $ 20/week next year. Of course, you should always give freely and willingly from a “glad heart” not expecting to receive. God wants a cheerful giver, not a grudging one, but there is no sin in taking the deduction some Godly men and women in government once determined would be proper.

That’s all for now. Make certain to keep checking this website for new last minute tax planning tips and for general information for on-going tax planning.