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MONTHLY TAX NEWSLETTER
TAX SAVING OPPORTUNITIES FOR
Andrew D. Schwartz, CPA
self-employed or a partner in a small professional practice?
If so, you're probably very familiar with all the different
challenges of running a business. Ultimately, you're
responsible for attracting and retaining patients, clients, or
customers, providing them with quality services or products,
getting paid for your work, and then paying your employees and
vendors - all before ever drawing a dime for yourself.
Then, from the
remaining profits, the government wants their "fair share" of your success.
Fortunately, with some planning, you can take steps to minimize the taxes you
end up paying. Here are five ways that self-employed
individuals and owners of professional practices can cut their
Employ your child
While you get to deduct
the wages you pay to your son or daughter as a business expense, your child doesn't pay any
federal income taxes on the first $5,350 of wages earned (in 2007). Plus,
if your practice is a sole proprietor or a two-person partnership consisting of the child's parents, wages paid to your child under the age of 18 are exempt from
social security and Medicare taxes as well.
Using the wages paid to
your child to fund a Roth IRA is another perk of employing your child .
The maximum IRA contribution is $4,000 in 2007, increasing to $5,000 in 2008.
Imagine 60 years or more of tax-free growth within your child's Roth IRA.
We addressed the topic
of employing a child in our
Newsletter in an article called, "Arbitrage In The Tax Code Equates To Free
Money For Your Family"
Let's say you're
in the top tax bracket, and you pay
your child who is under the age of 18 wages of $5,000 in 2007.
No cost if
you're a sole proprietor. Otherwise, the cost is $765 for social
security and Medicare taxes
savings of $1,895, plus the opportunity to contribute to your child's
2. Employ Your
Spouse of Other Family Member
If your practice has a
401(k) plan or SIMPLE IRA in place, consider paying your spouse
or other family member over the age of 21 enough in wages to max
out their allowable salary deferrals, provided he or she isn't
already doing so through another employer. For 2007 and
2008, a person can contribute up to $15,500 ($20,500 if 50 or
older) into a 401(k) plan, and up to $10,500 ($13,000 if 50 or
older) into a SIMPLE IRA. Remember, money contributed into
these plans grows tax deferred and is usually protected from
your creditors too.
Please be aware that
there are some costs to you. Expect to pay social security
and Medicare taxes at a rate of 15.3 cents for every $1.00 of
wages paid to your
spouse or family member. You'll generally owe unemployment
taxes and workers' compensation insurance on their wages as
Let's say you're in the top tax bracket, pay your spouse $17,000
in wages, from which your spouse
contributes $15,500 into a 401(k) plan through salary deferrals.
$2,601 in social security and
A tax savings of $5,918, plus
$15,500 growing in a tax-advantage, creditor-protector 401(k) account
3. Take A
Look At HSA's
With the rising cost
of health insurance, high-deductible plans are becoming more
attractive to healthy professionals. The rules now allow
you to combine a
high-deductible plan with a tax-advantaged Health Savings
Here are the basics about HSA's:
- Your practice can make pre-tax
contributions into an HSA on behalf of you and your family members.
- Money can be withdrawn
tax-free from your HSA at any time to pay qualifying medical expenses.
- Any money remaining in your
HSA upon your
reaching the age of 65 can be withdrawn penalty-free to help fund your
For 2008, people with family
coverage can contribute up to $5,800 into their HSA, while people with
individual coverage are capped at $2,900. The government really wants HSAs to succeed, so you should be able to find
an adequate high-deductible health
insurance option within your state.
you switch to a
high-deductible health insurance plan and contribute $5,800 into
a Health Savings Account.
Higher out of pocket costs
associated with the high deductible health insurance plan
Tax savings of $2,030, plus
$5,800 growing tax-deferred within your HSA to fund your family's medical expenses now and/or
your retirement later
Incorporate Your Practice
Once the profits in your practice
exceed $230,000 (in 2008) per owner, you could save some taxes by incorporating.
That's because you avoid paying the 2.9% Medicare tax on money withdrawn
from your practice as S-Corp dividends instead of as salary.
Why is $230,000 the magic number?
That's the maximum amount of salary that you can use to calculate your
retirement plan contributions in 2008.
Beware of the costs of incorporating,
however, including having an accountant prepare your
corporate tax return, additional payroll taxes and worker's compensation
insurance now that you'll be on the company's payroll, and
a variety of minimum taxes and filing fees assessed by many states.
you change your
business structure from a sole-proprietor to an
S-Corporation, earn $330,000 in profit, from which you take a
salary of $230,000 and S-Corp distributions of $100,000.
$1,000 or more in additional
fees and taxes
Save $2,900 in Medicare taxes
on your S-Corp distributions
5. Set Up A More
Sophisticated Retirement Plan
From what I've seen,
most practices have relatively basic retirement plans in place,
such as a SIMPLE IRA or a Safe-harbor 401(k) plan. While
these plans are generally more than adequate, you should be
aware that there are more sophisticated plans that you can
establish that allow for increased annual contributions for you and your
partners, without requiring you to contribute more
money into the plan on behalf of your staff. You'll want to find a retirement
plan specialist to help you design the best type of plan to fit
the specific needs of you and your practice.
Potentially higher retirement plan
contributions on behalf of your staff
The ability to contribute more money into your retirement account each year.
Five Ways To Save
As the year winds
down, see if it makes sense to institute any of these five
prior to December 31st, or early in 2008. By investing
some time now, you could earn substantial dividends in the form
of reduced taxes down the road.
"TAX BREAK" WEEKLY RADIO SHOW
Andrew D Schwartz CPA has agreed to
host a weekly, one-hour radio show on taxes through WorldTalkRadio.com. The show
can be heard live each Wednesday at 7 pm ET (4 pm PT) at
starting on December 5th. Each week, Andrew will interview various guests who
can add information and insight to that week's topics, as well as take questions
directly from the listeners.
Please join Andrew and his guests to discuss the following topics during December:
- December 5th - Benefits of
Being Your Own Boss
- December 12th - Year end Tax
- December 19th - Save Taxes By
- December 26th - Last
Minute Tax Planning & Saving For Retirement
CHECKLIST TO CUT YOUR 2007 TAXES
Andrew D. Schwartz, CPA
It's not too late to cut
your 2007 tax bill. Prior to December 31st:
Finalize the purchase
of energy efficient improvements on your principal residence, since
the $500 tax credit expires at the end of 2007. The credit is
equal to 10% of the money spent on the installation of certain energy
efficient improvements to your home, including insulation and exterior
windows, doors, and skylights. You can also take a tax credit for
"qualified energy property" including up to $50 spent per circulating
fan, $150 on furnaces or hot water boilers, and $300 on heat pumps,
water heaters, and central air conditioning.
Avoid the new 2008 "Kiddie
Tax" rules by reviewing your child's investment accounts and
selling enough of your
child's investments to take advantage of the reduced tax rates available
this year only to children who are 18 or older by December 31st. For
2007, the tax rate on the first $31,850 of long-term capital gains is
just 5%, provided your child has no other income. (See our
July 2007 newsletter.)
Increase your 401(k)
and 403(b) contributions if you haven't been contributing at the
maximum rate all year. This year you can put up to $15,500 into
your 401(k) or 403(b) plan. Anyone 50 or older by December 31st
can put away an additional $5,000. If you’re self-employed,
consider setting up a Solo 401(k) by 12/31. Contributing to a
401(k) or 403(b) plan at work is one of the best tax shelters available
to you during your working years.
Consider selling your
investments held in non-retirement accounts that have decreased in value
since your capital losses can offset other capital gains realized during
the year (including from your mutual funds). Excess losses can
then be used to offset up to $3,000 of wages and other income.
Make sure to wait at least 31 days before buying back a security sold at
a loss, or the IRS will disallow the loss under the "wash sale" rules.
Send in your January,
2008 mortgage payment early enough so it will be processed prior to
12/31/07. By sending in your payment a few weeks early, you can
deduct the interest portion of that payment a full year earlier.
Clean out your closets
and donate your clothing and household items to a charitable
since "non-cash" contributions are deductible if you itemize.
Don’t forget to get a receipt. And you should make a list of each
item donated, along with its condition. Starting last year, only
donations of clothing and household items in "good condition or better"
qualify for a deduction. (We addressed this rule in our
For gifts of money,
making your donation by credit card before December 31st allows you to
deduct the donation on this year's return, even if you don't pay your
credit card bill until 2008. And you always have the option of
donating appreciated investments to charities. You get to claim your
donation based on the value of the assets donated, without paying any
capital gains taxes on the appreciation.
TAX AND FINANCIAL PLANNING CALENDAR FOR
Saving and Investing
4th quarter state estimates should be paid by 12/31 for
people who itemize their deductions and won't be hit by
Purchase your energy efficient home improvements before
the credit expires on 12/31/07
Take steps to minimize the impact of the new
Tax rules affecting children 18 or older starting in
Keogh plans and Solo 401(k)'s must be established by 12/31
529 Plans must be funded by 12/31 to take full advantage
of this year's gift limit of $12,000.
Last chance to maximize annual contributions to your
401(k) or 403(b) plan of up to $15,500, ($20,500 if 50
2007 & 2008 TAX FACTS
- For 2007, the standard deduction for a single individual is $5,350 and
for a married couple is $10,700. A person will benefit by itemizing once
allowable deductions exceed the applicable standard deduction. Itemized
deductions include state and local income taxes (or sales taxes), real estate
taxes, mortgage interest, charitable contributions, and unreimbursed employee
- For 2007, the personal exemption is $3,400.
Individuals will claim a personal deduction for themselves, their spouse, and
- The maximum earnings subject to social security taxes is $97,500
for 2007, increasing to $102,000 in 2008.
- The standard mileage rate is $.485 per business mile for 2007,
increasing to $.505 per mile in 2008.
- The maximum annual contribution into a 401(k) plan or a
403(b) plan is $15,500 in 2007 and 2008. And if you'll be 50 or
older by December 31st, you can contribute an extra $5,000 into your 401(k) or
403(b) account that year.
- The maximum annual contribution to your IRA is $4,000 for
2007. And if you turn 50 by December 31st, you can contribute an extra
$1,000 that year. You have until April 15, 2008 to make your 2007 IRA
You're Invited to Attend Our
Tax and Basic Financial Planning
Issues Applicable to Young Healthcare Professionals
Here is a list of cities
where the presentation will be held:
Boston - 1/29/08
For more information, click on the name
of the city.