Although summer is officially right around the corner, there’s no vacation from tax planning. If you’re dedicated, you’ll be able to bask in tax savings as the weather heats up. Here are seven prime examples:
1. Cut back quarterly small biz payments. Self-employed taxpayers must pay income tax in quarterly installments to avoid an “estimated tax” interest rate penalty. The next installment is due June 15.
Normally, no penalty will be assessed if your annual payments equal at least 90% of your current year tax liability or 100% of last year’s liability (110% if your AGI for the prior year exceeded $150,000). But the new economic stimulus law (the American Recovery and Reinvestment Act of 2009) cuts you more slack.
If your AGI is less than $500,000 and more than 50% of last year’s income came from small business activities, you can base this year’s payments on 90% of your 2008 tax liability instead of the usual 100% (or 110%) figure.
Tip: For this purpose, a “small business” is one with an average number of 500 or fewer employees over the past three years.
2. Cool down with an energy credit. The new economic stimulus law also includes tax incentives for making your home more energy-efficient. Key change: The credit is raised from 10 to 30% for energy-saving improvements installed after 2008. Also, instead of a lifetime $500 cap, you can claim a maximum credit of $1,500 in 2009 and 2010 combined.
Among other expenditures, the credit is available for installing central air conditioning, exterior doors, exterior windows and insulation materials that can help keep your home cooler this summer.
3. Hire a crew of summer workers. If you employ workers from certain disadvantaged groups, your business is entitled to the Work Opportunity Tax Credit (WOTC). The regular credit is 40% of the first $6,000 of wages paid to a qualified worker during the year.
But you can also claim a special summertime credit for hiring youths age 16 or 17 who work between May 1 and Sept. 15. The youths must reside in an Empowerment Zone, Enterprise Community or Renewal Community. The WOTC for these workers is 40% of the first $3,000 of wages.
Tip: A summer worker may also qualify as a member of another group. Claim the regular WOTC if it produces a bigger credit.
4. Combine business with pleasure. When you travel on business, you can deduct your travel expenses—including air fare, meals and lodging—as long as the primary purpose of the trip is business-related. So you can tack on a few days of relaxation as long as you spend more time on business than pleasure.
Tip: If your spouse comes along, you generally can’t deduct his or her travel expenses. But you still can deduct what it would cost to travel alone.
5. Switch to the actual expense method. Although gas prices have been creeping up again lately, the standard mileage rate for business driving remains at 55 cents per business mile (plus tolls and parking fees) for 2009 (down from 58.5 cents per mile for the last six months of 2008). If you started using the standard mileage rate this year, it’s not too late to switch to the actual expense method. Hunt down records for gasoline, oil and repairs. Even if you can’t substantiate all your costs from earlier in the year, a midyear switch can still increase your deductions.
Tip: Generally, you can’t do the opposite—switch to the standard rate method—if you’ve claimed accelerated depreciation for the vehicle in the past.
6. Swing for tax breaks on the links. You can’t claim the top-dollar deductions for country club dues you were able to years ago, but that doesn’t mean you’re completely shut out on the course. If you treat a client to a round of golf before or after a substantial business discussion, you can write off 50% of the entertainment expenses. That includes the cost of guest greens fees, club rentals—even drinks and dinner at the 19th hole.
Tip: If the client is from out-of-town, you can hold the business discussion the day before or after your golf outing.
7. Throw a summer barbecue. Usually, your business entertainment deductions are limited to 50% of the cost (see above). But there are a few exceptions to this general rule. For example, if you hold a company get-together—such as a Fourth of July or Labor Day barbecue—your business can write off 100% of the expense as long as you invite the entire workforce.
Tip: Feel free to include a handful of business and social guests without any tax repercussions.
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