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If you're inclined to let your accountant do all the worrying about your professional and personal income taxes, you could be making a costly mistake.
"Your accountant may be the tax expert, but no one knows the fine details of your finances as well as you do," said Tom Normoyle, CPA, Huntingdon Valley, PA. "That's why your accountant needs your help to hold your income taxes to a minimum."
Although filing deadlines for your 2005 tax returns are still months away, you have only until Dec. 31 to do everything you can to keep as much of your money as possible out of Uncle Sam's pocket. Here are eight steps to slash your 2005 tax bill:
Tax experts agree that accelerating payment of bills and deferring income are among the most effective ways to reduce current year taxes.
"Pre-pay as many of your business-related bills as possible by December 31," said Paul Rich, CPA, Siegel Rich Division of Rothstein Kass, Roseland, NJ. "Prepaying your rent and anticipating supply needs are effective ways to reduce current year's taxes."
Also, consider your capital equipment purchases. Are you planning to buy any new equipment next year? If so, consider buying it before year-end to save on your 2005 taxes.
You may also want to pay any outstanding bills before year-end. Even if you use credit cards, the IRS allows you to take the deduction in the year of the charge; you don't have to wait until you pay the bill to take the deduction.
If 2005 is looking like a good year for income and your accounting is on a cash basis, you can reduce this year's taxes by delaying collecting of monies due you until after Dec. 31. For example, you could consider giving patients an extra month or two to pay for services performed between now and the end of the year.
2. Take advantage of the new tax laws.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) created some significant business tax breaks. Whether your practice is a PC, LLC, or a partnership, JGTRRA's incentives affect you.
"JGTRRA opened up a number of tax savings possibilities," said Cheryl Pimlott, CPA, and Tax Manager for Rothstein Kass. "But the biggest tax break is the Section 179 deduction, which allows you to deduct the full cost of capital assets in the year of purchase up to a defined limit."
The new law increases the Section 179 Deduction from $25,000 to $100,000. Purchases made right up to Dec. 31 qualify for this huge tax break.
"Bonus depreciation, introduced in 2002, allows first-year depreciation on the purchase of automobiles of $10,610 for 2005," said Ginita Wall, CPA, San Diego. "Purchases up to December 31 qualify for bonus depreciation, but only if you use the car 50% or more for practice-related business."