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RANDOM WISDOM from around the tax world

by on
in Small Business Tax

IRS won't save you from high gas prices

Despite complaints from taxpayers, the IRS doesn't plan to increase its standard mileage rate this year to reflect rising gas prices, according to reports.

The 2004 rate now stands at 37.5 cents for every business mile traveled (plus tolls and parking fees). But the IRS said it will factor higher prices into the mileage rate used for 2005. So you should be able to bank on a substantially higher rate next year.

Advice: Switch to the 'actual expense' method to deduct your business driving costs. That way, you can deduct the true cost of those extra dollars at the pump. (See 4/19/04 issue.)

Don't let tax tail wag the investment dog

In the past three years, the tax code has been rewritten so much that some investors have sharply modified their portfolios to take advantage of these changes. But if done for the wrong reasons, such moves could be a mistake.

Bottom line: You should take taxes into account when making your investment decisions, but that should only be one of many factors. Changes in the tax code don't change the formula for investing success. You should continue to focus on diversification and making well-researched, sound investment decisions based on long-term goals.

Get dates straight on tax-prep deduction

It takes money to save money, at least when it comes to taxes. You may know that you can write off tax software expenses, tax preparation fees and other related expenses as miscellaneous expenses on your personal return. But be careful to deduct the expenses in the year they're incurred, not in the year for which the return was prepared.

For instance, if you paid a tax preparer this past April to do your 2003 return or you bought tax software in February to complete your 2003 return, you can deduct the expense when you file your return for the 2004 tax year in early 2005.

Don't jump ship on muni bond funds

If you're concerned about the alternative minimum tax (AMT)—and you should be—you may be thinking about switching your municipal bond fund. Main reason: Although interest generated by municipals is exempt from regular income tax, some of the interest may be subject to the AMT. Caution: Think twice before you switch into a "pure" muni bond fund.

First, the income that is taxable for AMT purposes is usually a small percentage of the fund's total income. Second, the return from funds is often higher than a pure fund. Consider these factors—including the cost of the switch—before you bail out of your current fund.

Show some trust in REITs

While most dividends issued by U.S. corporations qualify for the reduced 15 percent federal tax rate, most real estate investment trust (REIT) dividends do not.

Does that make REITs a bad investment? Not at all.

Regular corporations generally pay a 35 percent tax on their earnings and then pass them on to investors as dividends taxed at the 15 percent rate. Most REIT dividends are taxed at ordinary income rates because they don't pay that 35 percent corporate rate. Overall, REIT earnings are taxed less—not more—than the earnings of regular corporations.

Tip: If you hold REIT shares in a Roth IRA, they will never be taxed.

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