By John Stylianou – Accountant
If you’re self-employed, you could qualify for a number of special tax breaks.
Depreciation. You can take a depreciation deduction for the business equipment you buy. There are two breaks in addition to regular depreciation. The 2002 tax law created an extra 30% first-year bonus depreciation deduction for most new business assets bought and placed in service after September 10, 2001. Qualifying assets include equipment, furniture, software, and some leasehold improvements — but not real estate. The law also increased the first-year depreciation limit on business vehicles from $3,060 to $7,660.
Then there’s the Section 179 deduction that lets small businesses write off up to $24,000 of equipment purchases made in 2002. This deduction increases this year to $25,000. Unlike the 30% bonus depreciation, the Section 179 deduction may be claimed on purchases of used assets.
Retirement plans. Self-employed taxpayers can set up a retirement plan and deduct the contributions they make. Retirement plan choices include an IRA, Keogh, SEP, SIMPLE, or 401(k) retirement plan. If you have employees, a plan can be a valuable part of your overall compensation package.
Home office. If you conduct business from your home, you may be entitled to a deduction for home office expenses. You may qualify to write off the business portion of your home utility bills, insurance, maintenance, and other expenses.
Other breaks. Health insurance premiums paid by self-employed taxpayers are 70% deductible on 2002 tax returns; they’ll be 100% deductible for 2003. You may be able to plan some vacations to combine business with pleasure, which could allow you to deduct part of your travel costs.
Please call our office if you would like more information on these and other tax-saving strategies.
Minimize the tax bite when you balance your portfolio
The periodic rebalancing of your investments is a good financial habit. You can achieve even better results by considering the tax impact of your decisions.
What are some basic things a tax-wise investor should consider before selling investments?
Capital gains and losses. Net long-term gains for investments held longer than one year are treated more favorably than short-term gains. The top tax rate on long-term gains is 20%, while you could pay as much as 38.6% on short-term gains. Holding investments long enough to qualify for the more favorable rate can have a substantial impact on your financial situation. If you have net capital losses, you can use up to $3,000 per year to shelter other sources of income.
Wash sale rules. Be aware of the wash sale rules. Losses from investments that you sell cannot be used to offset gains if you repurchase a substantially identical security within 30 days from the sale date.
Taxable vs. retirement accounts. In your taxable accounts, consider selling your losers to generate tax losses to offset gains and other income. In your retirement accounts, you can sell winning investments without any tax cost.
Charitable donations. If you want to donate some of your investments to charity, it makes tax sense to first sell losing investments to enjoy the tax savings, and then donate the cash proceeds. If you wish to donate winning investments, it’s generally better to donate the asset. That way you can get a charitable tax deduction for the fair market value of the stock and pay no capital gains tax on the appreciation in your investment.
Proposed dividend changes. President Bush has proposed making most stock dividends nontaxable income to shareholders. This change could significantly alter your investment choices if such legislation becomes law.