November 2007
SUBJECT - YEAR-END INCOME TAX PLANNING
Dear Tax Payer,
I want you to pay less income tax now and forever! My team and I have been studying the tax laws for you. Do not wait until the last minute; we want to make sure your tax bill is cut as much as possible. The amount depends on you.
In our business, it is not often that we can tell our clients that their tax burden will be less. Of course, how much less depends on many things, but most importantly, it depends on knowing where the real savings are. Armed with knowledge of the tax codes, we will be able to help you plan and access the highest reduction available based upon your individual situation. Our tax planning services will help you avoid the traps that could cause serious tax and major personal financial consequences by eliminating, minimizing, deferring and converting taxable to non-taxable income.
I am currently providing my clients with tremendous value by helping them strategize their 2007 income tax returns. Many people simply have their returns “prepared” by someone who takes what you hand them and run it through the tax software. All of my clients are self-employed individuals. I prepare their business and personal tax returns. What that means in tax dollars is at least a 10% federal tax bracket, 15% self-employment tax and 9.3% state income tax rate. If I find an additional $10,000 in deductions, you come out $3,500 ahead by paying less tax.
The U.S. utilizes a progressive tax system and the more you make the more you pay. Imagine how happy my clients are when I strategize an extra $100,000 in deductions. What if we could strategize “tax free” income that did not need deductions to reduce the tax? Another strategy I utilize is having my client reconstruct where “all” their money went during the year. These strategies allow me view all the clients business and personal affairs, and devise strategies for items that might not ordinarily be deductible. The strategy also allows me to spot financial planning opportunities for growing and preserving wealth.
Planning your taxes starts TODAY! Many planning steps must be taken by December 31. Do not wait to start you planning. Take advantage of the new tax reduction laws with professional tax planning advice. Call our office today at (760) 433-5902 to schedule a review of your current tax exposure. We look forward to working together to take advantage of the new tax reduction bills and saving you money.
Sincerely,
Wally G. Saucedo III, CPA
FIVE INCOME TAX PLANNING STRATEGIES
What are the Super Wealthy doing right now? They are reaping the benefits of their Long-Range Tax Planning from last year and meeting with their Tax Advisors to finalize their 2007 Income Tax Planning. In about 50 days, 2007 will be over and done, no more tax planning, just complying with the Tax Code at that point. In just about 125 days, April 15, 2008, personal tax filing deadline will be here. Anyone out there who has not filed for 2006 yet?
It has been said that the three most costly words in the English language are “Do It Yourself.” Sometimes it can be downright dangerous – like in the case of brain surgery, which I’m not even sure would be a possible do it yourself project. Mostly it just costs you a lot of money, like when people try to do their own tax strategies and tax preparation.
Now is the time to do 2007 Tax Planning. Five generalized strategies are outlined below:
1) Accounting Systems
You cannot tell where you are going if you do not know where you have been or where you are at. Financial statements are the windows to your Financial Soul. There are two basic reports ALL YOUR ADVISORS NEED to properly advise you.
The Balance Sheet or Statement of Financial Position lists all your Assets such as cash, investments, jewelry, cars and homes. The balance sheet also lists all your Liabilities such as credit cards, personal loans, auto loans, lines of credit and mortgages. The net result of Assets minus Liabilities is Equity. Has your equity increased or decreased this year?
The Statement of Income and Expense lists all your sources of income and subtracts all your expenses to arrive at a profit or loss. Do you need to increase your income? Are your expenses out of control?
By using accounting systems for business and personal affairs, you are then working in a controlled environment. Have you ever gone to the ATM, pulled out $300 a day on a business trip and not save one receipt? In accounting an ATM transaction reduces the bank account and increases the petty cash account. A large balance in the petty cash account raises a flag that money is being spent and receipts are not being turned in when the petty cash is spent.
2) Income Engineering
The three different types of Taxable Income are 1) Earned like a W-2 from a job 2) Portfolio from security investments and 3) Passive from rental type businesses. Our job is to convert as much of your taxable income as we can to Tax-deferred, which is taxed later, or Tax-free which is never taxed. Changing the character of income dramatically reduces current taxes and provides even greater benefits over the long-range when the money saved in taxes is invested.
3) Deductions
Deductions are used to reduce taxable income. Our goal is to 1) find missed deductions, 2) organize your affairs to create deductions, 3) accelerate deductions into the current year, 4) etc.
Common Mistake – Election - Section 179
Sometimes you can amend past tax returns to recover from tax return filing mistakes. However, there is one thing you cannot recover from: a missed tax election. Typically there is a “default” tax position that the IRS takes and in some cases, you are allowed to do something differently, but only if you file a tax election along with your return.
A common tax election is something called a Section 179. If you buy furniture, equipment and the like for your business typically you have to capitalize the expense (treat it as an asset) and then over time depreciate it. Code Section 179 permits the taxpayer to take a deduction of the whole cost of the business property in year one, thereby accelerating the deduction. You must make an election to do so. If you file your return without making the election, you cannot go back and change it. You are stuck. This missed election could cost you $35,000 in taxes if you had about $100,000 in qualifying expenses.
4) Business Entities
Proprietorships, Partnerships, S Corporations, C Corporations, Limited Liability Companies, Limited Liability Partnerships, Trusts, etc. all have different tax codes to comply with. Some of the key considerations to selecting an entity type are 1) tax benefits 2) liability protection 3) capitalization structure 4) compensation 5) etc. Depending on your personal situation, certain entities will serve you better.
Common Mistake - Too Much Salary - S Corporation
If you have an S Corporation, there are two ways that you can receive income. One is through salary. It is income to you and an expense for the company, which is a flow through item to you anyway. Therefore, it is tax neutral except for the payroll taxes. The taxable income that is left within the S Corporation is taxable to you, is reported via K-1, and is not subject to payroll tax or self-employment taxation.
Generally, most people want to minimize the salary they take from the S Corporation because that money is subject to payroll taxes. Ever so often, I run into someone who wants to maximize his or her salary for other reasons, such as funding a pension. However, if you do this, make sure you do it right!
I know of another CPA’s client that had made a major mistake regarding salary. In their case, they had taken a salary that was much larger than the income of the S Corporation. That meant that the salary had to be reported as income on their personal income tax return. It created an expense in the S Corporation. Typically, that would not be a problem. However, in their case it was. You see they did not have enough basis in the S Corporation to claim the loss. They had actually created PHANTOM income and then had to pay tax on it! The cost to them for this mistake: $35,000 in taxes that they should not have had to pay.
If you had a choice of investing $10,000 and either 1) make $10,000 per year in income or 2) save $10,000 per year in taxes, which would you choose? Tax savings will always put more money in your pocket. Now, what if it would only cost you a few thousand dollars to get that return?
5) Advanced Financial Planning Strategies
Our goal is to take your current financial affairs, blend them with your Dreams and Aspirations and Create the Life of Your Dreams. More on this strategy in December.
Warmly,
Wally Saucedo
Financial Strategist
Risk Free-No Obligation - Contact Us Now to Get Started
Gain control of your life and live in abundance doing what you want when you want.
Wally Saucedo CPA – Accounting, Business Advisory & Taxation
Wally Saucedo International Inc – Abundant Life Advisor & Financial Strategist
Wally Saucedo Financial Services – Insurance, Investments, Mortgage & Real Estate
Dial (760) 433-5902, and request your Free Consultation!
http://www.wallycpa.com/ WSCFO@Cox.net Fax: (760) 231-5055
Legal If you no longer wish to receive my e-newsletter, or you need to update your current email address, please email me at
wscpa@cox.net with your request. To ensure compliance with requirements imposed by the IRS, we inform you that any US federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and it cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. If you are not the original addressee of this communication, you should seek advice based on your particular circumstances from an independent advisor. This message (including any attachments) contains confidential information intended for a specific individual and purpose, and is protected by law. If you are not the intended recipient, you should delete this message. Any disclosure, copying, or distribution of this message, or the taking of any action based on it, is strictly prohibited.
