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Now is a good time to assess potential year-end
tax-saving opportunities. For instance, it may be
possible to shift
income and deductions to your personal
or business tax advantage. Also, be aware of several
complications due to recent tax law changes.
This brief article outlines several popular tax
strategies
for the end of the year.
Capital gains and losses: Depending on
your economic situation, you may want to realize capital
gains or capital losses at the end of the year.
*Capital losses can offset capital gains realized in
2007.
Any excess capital loss can also offset up to
$3,000 of ordinary income. (The remainder is carried
over to next year.)
*Capital gains may be absorbed by capital losses
realized in 2007. Any net long-term capital gain for the
year is taxed at a maximum rate of 15%. Even better,
this special capital gain rate is only 5% for taxpayers
in the 10% or 15% ordinary income brackets. Note: The 5%
capital gain rate is scheduled to decrease to zero in
2008 for eligible taxpayers. This could affect year-end
sales of assets.
AMT liability: You could face alternative minimum tax
(AMT) liability if a special tax computation involving
certain "tax preference" items exceeds your regular tax
liability. After you estimate your AMT liability for
2007, you might shift tax preferences to 2008 to avoid
or reduce AMT liability. Alternatively, you might
accelerate income into 2007 if the AMT rate is lower
than your top marginal tax rate.
Section 179 deductions: Under Section 179, your business
can elect to currently deduct (or "expense") most or all
of the cost of business assets placed in service during
the year. The Small Business and Work Opportunity Tax
Act of 2007 increased the maximum expensing amount for
this year from $112,000 to $125,000. This enables you to
purchase even more assets at year-end that will be
eligible for fast write-offs.
Charitable gifts: Generally, you can deduct the full
amount of cash donations made this year. If a donation
is made by credit card or online, you can deduct the
gift on your 2007 return, even if the charge is not
actually paid until next year. Note: New rules taking
effect this year require strict substantiation for
monetary contributions, regardless of the amount of the
donation.
Medical expenses: It is well-known that you can deduct
unreimbursed medical and dental expenses to the extent
the annual total exceeds 7.5% of your AGI. Try to group
nonemergency expenses (e.g., new eyeglasses or dental
cleanings) in the tax year that provides the best
opportunity for a deduction.
Estimated tax penalties: If you don't pay enough federal
income tax during the year through withholding or
quarterly installments, you may be liable for an
"estimated tax" penalty. But no penalty is imposed if
annual tax payments equal 90% of the current year's
liability or 100% of the prior year's tax liability.
Note: The 100% safe harbor is increased to 110% if your
AGI for the prior year exceeded $150,000.
Business travel: Travel expenses incurred by
employees-including airfare, lodging and 50% of the cost
of meals-may be deducted if the trips are
business-related. When it is appropriate, you can move
up business trips planned for January into December.
This allows you to write off the travel expenses on your
2007 return instead of waiting until 2008. Caveat:
Unreimbursed travel expenses must be deducted as
miscellaneous expenses subject to the usual 2%-of-AGI
limit.
Family income-splitting: You may be able to reduce the
overall family tax bill by shifting taxable income from
your high tax bracket to family members in lower tax
brackets. For instance, you might transfer
income-producing assets to your young children. However,
be aware of the "kiddie tax." To the extent that
unearned income for a child under age 18 exceeds $1,700
for 2007, the excess is taxed at the top marginal tax
rate of the child's parents.
Note: Beginning in 2008, the kiddie tax applies to
children under age 19 (age 24 for full-time students).
These higher age limits will be triggered if the child's
earned income does not equal or exceed half of his or
her annual support. This change could affect capital
gain planning for 2008 based on the scheduled zero
percent tax rate.
Of course, this is only a brief summary of several ideas
to consider. Obtain professional advice with respect to
your situation.
Securing Protection for Computer Data
Solutions for managing sensitive information
How can you protect your company's computer system from hackers and
other unauthorized users? Surprisingly, the main threat to your
operation is not usually from the outside; it often comes from
within. In other words, employees are the primary sources of the
damage.
For instance, an employee may unknowingly create security problems
by sending e-mail attachments to other users in the office. This
could result in the spread of computer viruses or worms. Another
problem: If an employee unwittingly sends attachments outside the
office to clients or other parties, it could result in a security
breach. Naturally, the situation is magnified for employees who are
carrying a grudge.
One common precaution used in the business sector is to establish
classifications for data based on the permissible use. For example,
data may be labeled as public, internal, restricted and
confidential. By implementing these classifications, employees would
not be able to gain access to data without the requisite clearance.
Similarly, you should take security measures for laptops used by
employees who frequently travel on business. What might happen if an
employee left a laptop at the airport or in a cab? To protect
against a potential disaster, you can restrict access to sensitive
information to the in-house network. Although it might be
inconvenient for employees, limited information would be allowed on
laptops. But this method is not foolproof.
Alternatively, your company may use Basic Input/Output System (BIOS)
passwords on laptops. Although BIOS passwords can still be
circumvented by sophisticated hackers, they are a viable deterrent
to most outsiders.
Another idea is to use full disk encryption in combination with BIOS
passwords and restricting sensitive data on laptops. This would
enable the entire disk to be encrypted (i.e., it is unreadable to
everyone except for authorized users). This is the most effective
solution for many companies.
Finally, if your company is using USB drives, be aware that these
devices can easily transfer data. If an employee loses a USB device,
the information is available for virtually anyone to see and read.
As with laptops, use of encryption may be the best solution.
Final word: Employee training is critical. Your workers must become
aware of how an e-mail can easily be retrieved by a competitor or
another person who means your company harm.
Four Common 401(k) Mistakes to Avoid
Take steps for a comfortable retirement
For most employees, employer-funded pension plans are a thing of
the past. The most popular type of retirement plan today is the
401(k), which requires you to defer part of your regular salary.
Nevertheless, you can still fund a comfortable retirement if you
avoid some common mistakes.
Everyone's situation is different, but here are four prime examples
of what we mean.
1. Failure to participate: Can you imagine turning down a pay raise?
Probably not. Nevertheless, many employees fail to take advantage of
the match that an employer provides for elective deferrals to a
401(k) plan.
For instance, suppose your employer offers to provide a matching
contribution of 50 cents on the dollar. If you are able to defer
$10,000 to your 401(k) this year, your employer must kick in $5,000
more. That's an extra $5,000 for not doing anything more than your
regular job.
What's more, these contributions can grow substantially, due to the
power of tax-deferred compounding. Let's say you contribute $10,000
annually, so your employer provides a matching contribution of
$5,000 each year. If you earn 7% annually on the funds, you will
have accumulated $593,780 after 25 years.
Note: The maximum dollar amount that may be deferred to a 401(k)
plan for 2007 is $15,500 ($20,500 if age 50 or over).
2. Errors in diversification: The most obvious type of
diversification mistake is the failure to do it at all. Just as you
would be advised to diversify within your personal portfolio, the
same holds true for your retirement plan holdings.
Other mistakes include "over-diversification" such as spreading out
401(k) dollars in every possible mutual fund or other investment
option and "under-diversification" where a disproportionate portion
of the pie is devoted to a single investment or type of investment.
It is important to find the proper balance.
In the end, an allocation among stocks, bonds and cash should be
based on your age, your expected retirement age, the amount you are
contributing each year and your tolerance for risk.
3. Early distributions: Your 401(k) plan is meant to be a savings
vehicle for retirement. However, participants often cannot resist
taking out distributions, especially if they are changing jobs. As a
general rule, a distribution made prior to age 591/2 is subject to a
10% penalty tax on top of the regular income tax that is owed.
If you switch jobs and roll over funds from your 401(k) to an IRA or
another qualified plan, the rollover is exempt from current income
tax if completed in a timely fashion.
4. Borrowing from your plan: Along the same lines, you should be
discouraged from taking a loan from your 401(k). Even though you
will effectively be paying yourself back, it will be more difficult
to meet your objectives for retirement. You will not have access to
the funds you could have earned if the principal had remained
intact. Of course, borrowing may be necessary in an emergency, but
this should be viewed as a last resort.
Best approach: This doesn't have to be a do-it-yourself proposition.
Seek advice for managing your assets when it is appropriate.
Etiquette for Checking E-mail
Do you constantly check your e-mail in business meetings? Although
there may be extenuating circumstances, this is generally disruptive
to others. Here are a few helpful tips to follow concerning this
practice.
*If you must bring your mobile device to the meeting, use it with
discretion. Set it on "vibrate" to minimize disturbances.
*Consider the other attendees. Staff members may be more tolerant of
distractions than clients or customers.
*Respond only when it is absolutely necessary. If a response can
wait, let it.
*Step out of the room to send or receive urgent messages. Don't make
a big deal out of it.
Finally, if you expect to keep checking your e-mail during a
meeting, you might simply choose not to attend.
Putting a Halt to Business Interruptions
Use insurance to provide necessary protection
Are you the owner of a successful business? Without you, there
might not even be a business to talk about. So what would happen if
you should suddenly fall ill or suffer a disabling accident? Or
suppose a natural disaster strikes and puts the business temporarily
out of commission.
Typical answer: In all likelihood, the business would struggle until
normal activities could be resumed. In the worst case scenario, the
business might even go under. Yet this doesn't have to happen if you
have taken the proper precautions.
How can you keep your business from running aground? One possibility
is to use "business interruption" insurance. It can generally be
added to a property insurance policy or included in a business
policy package.
This type of insurance pays many of the normal and customary
operating expenses of your business during the down time. It
generally covers such items as rent, electricity, telephone, heat,
water, laundry, depreciation, salaries of employees and other fixed
expenses.
Certain other types of expenses, however, may not be covered by
business interruption insurance. For instance, it is not likely that
the costs of goods, wares or other merchandise will be included in
the coverage. Also, the policy may not cover compensation (e.g.,
salary, bonuses, commissions or other fees) that is payable to the
owners.
Furthermore, the total amount of benefits generally is limited to
the lesser of (1) the qualified expenses actually incurred (provided
that you were liable for these expenses six months prior to the
disability) or (2) the maximum benefits that are payable under the
coverage.
How long does business interruption insurance pay out benefits? It
depends. Although the length of the term may differ from policy to
policy, benefits usually are paid for a period of one or two years.
That should be enough time for you to decide whether it's worthwhile
to keep the business going or not.
Naturally, there are numerous variations in the form of business
interruption insurance. If you decide to opt for coverage, choose
the package that "fits right" with your business.
Note: Business interruption insurance is not for everyone. But it
often is a sensible choice for a sole proprietor or the owner of a
small- to medium-sized business operation.
Facts
and Figures
Timely points of particular interest
→ Random Audits
-- The IRS is launching a new compliance study concerning individual taxpayers. The study, which will initially focus on 13,000 randomly selected returns for the 2006 tax year, is expected to provide valuable data for reducing the nation's tax gap. The majority of individuals tapped for an audit will have specific lines of their returns confirmed through in-person examinations with IRS staffers.
→
Emotional Issue
-- Normally, legal damages are exempt from income tax only if they are related to physical injuries. New case: A taxpayer claimed that her ex- employer blacklisted her for disclosing environmental hazards. She was awarded damages for emotional distress. Initially, the D.C. Court of Appeals ruled that it was unconstitutional to limit the tax exclusion to physical injuries, but now it has reversed itself.
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