Tax Reduction Tips
In the rush to get tax returns prepared and
filed by April 15th, many overpay their taxes. Following are a few
tax reduction tips that could help you save a bundle.
Tax Credit For Starting A Small Business Pension
Establishing a pension plan can help you retain important
employees. What many business owners don't realize is a tax credit can be
claimed if the business has 100 or fewer employees. Meet this requirement and
you can take a tax credit of up to $500 in each of the first three years of the
plan. Tax credits are extremely valuable because they are deducted directly from
the taxes you owe, not gross revenues.
The credit is 50% of certain start up costs you incur in
each of the first three years. The costs include the expenses incurred in
establishing and maintaining the plan. They also include the cost of any
educational retirement planning programs you provide for employees.
For example, first assume that you spent $1,500 starting a
pension plan for your employees in 2004. Next assume that you will spend $1,200
in both 2005 and 2006 for maintaining the program and educating your employees.
In this scenario, you would be eligible to claim a tax credit of $500 in 2004,
2005 and 2006.
Personal Loans To Business
Many business owners lose track of loans they make to their
business. As a result, they incorrectly classify the proceeds of the loan as
part of their gross revenues. This artificially raises the gross revenues of the
business and adds to the tax liability. Closely review your records for 2004 to
make sure you are not making this mistake. Pay particular attention to charges
on personal credit cards. You will be surprised how quickly the numbers add up.
SUV Deduction Wounded, But Still Alive
Much has been made about the "SUV Tax Deduction" that
allowed purchasers of SUVs over 6,000 pounds to immediately deduct up to
$100,000 of the cost. Many mistakenly believe that the American Jobs Creation
Act of 2004 eliminated this deduction. It did not. Instead, it reduced the
deduction to $25,000 with the remaining amount allocated to depreciation. This
is still a significant immediate deduction. If you purchased a non-SUV truck
that weighed over 6,000 pounds in 2004, you are not restricted to a "mere"
Tsunami Relief Contributions Paid in 2005
Millions of Americans contributed to charitable
organizations providing relief to Tsunami victims. Typically, charitable
contributions are deducted in the year they are made. New legislation, however,
allows you to deduct Tsunami contributions you made in January 2005 on your 2004
tax returns. Alternatively, you can wait and deduct the donation on 2005
returns. Unfortunately, you cannot deduct the contribution on both!
Sales Tax Deduction
If you itemize deductions, you have a choice of deducting
your state and local income taxes OR your state and local sales tax. This option
is available for the 2004 and 2005 tax years. If you live in a state that does
not collect income tax, the optional sales tax deduction should be claimed for
significant tax savings. See IRS Publication 600 for more information.
Deduction for Discrimination Lawsuit Costs
If you were required to pay attorney's fees and court costs
associated with a discrimination lawsuit, you may be able to claim a tax
deduction. The deduction is available only for costs and fees incurred after
October 22, 2004 in relation to a judgment and settlement. The deduction is not
limited by the alternative minimum tax. Realistically, this deduction will be
more viable for the 2005 tax year, but a few taxpayers may be eligible this
There are numerous deductions and credits available if you
take the time to look for them. Taxes can be confusing, but the savings justify
the time and effort of finding all available deductions and credits.
Author: Richard Chapo