The much-touted “simplified” tax laws force everyone to plan all the time.
It’s no different this year for attorneys. Let’s look at some ideas that,
if employed before December 31, 2001, could reduce your Federal tax
liability this coming April 15.
If you have your own corporation or are an employee, now is the time to
catch-up on estimated income tax payments or withheld taxes that are
inadequate, to avoid tax penalties. Ordinarily, if your tax liability for
2001 is likely to be the same as it was for 2000, your quarterly estimated
tax deposits plus income tax withholding from your paychecks should equal
your liability for year 2000. To avoid underestimation penalties, any
shortfall can be made up by December 31, 2001, but only through extra
withholding from your paychecks. If you are having a very successful 2001,
you need not pay the tax on this “extra” income until April 15, 2002, as
long as taxes paid-in for 2001 equal your 2000 tax liability. However, if
your 2000 adjusted gross income (AGI) exceeded $150,000, your tax payments
for 2001 must equal 110% of your 2000 liability, to avoid an underestimation
penalty.
Benefiting from itemized deductions on an attorney’s personal tax return
takes planning because of the floors imposed on all taxpayers, before
dollar-one is deductible against income. In lieu of itemizing deductions,
single taxpayers are allowed a standard deduction of $4,550, married
taxpayers filing jointly are allowed $7,600 and a head of household is
allowed $6,650. So if your itemized deductions, as a total, don’t exceed
those levels, stick with the standard deduction. Usually, home mortgage
interest and property tax or state income taxes exceed the standard
deduction and you are better off itemizing.
Attorneys working for a firm that does not pay for their employee’s
professional dues and license fees or for professional publications can
claim an itemized deduction for those expenses. Some other itemized
deductions that can be claimed by all taxpayers are tax planning and return
preparation fees, financial planning advisor fees, job search costs, IRA
custodial fees if not deducted from the plan itself, and safe deposit box
fees if income producing assets are stored there. Comparable employment
related fees and expenses incurred by a spouse may also be claimed, in
addition to those the attorney claims. However, only the amount in excess of
2% of AGI is deductible. Thus, if your AGI is $80,000, these other expenses
must total more than $1,600 and only the amount in excess of $1,600 is
deductible. For the self-employed attorney, many expenses, including
professional dues, licenses and publications, become fully deductible when
claimed on their business tax returns. Medical expenses are another
itemized deduction that requires planning if any tax benefit is to be
realized. Medical expenses must exceed 7.5 % of your AGI and only the excess
is deductible.
Now is the time for attorneys to think about paying expenses before December
31, 2001 and deferring receipt of income to next year. Attorneys should
consider paying business expenses ordinarily due in January 2002, by
December 31, 2001. For instance, pay dues, subscriptions, malpractice and
other insurance premiums, pay for office supplies, printing and restocking
postage before December 31st. You can charge purchases on your
credit card in 2001 and take a year 2001 deduction, even if payment is not
made until 2002. It’s the same as if you borrowed money from a lender to
pay for a purchase. A special tax provision allows you to take an immediate
tax deduction, for as much as $24,000, as opposed to depreciation over a
period of years, for equipment purchased for your practice and placed in
service by December 31, 2001.
Where your fee collections are exceptional this year, consider not sending
bills again until January, 2002. The purpose of this strategy is to defer
the tax due on such income if it’s received in 2001. Client’s who pay
poorly, however, should be invoiced timely. Rather than run the risk of not
collecting at all from such clients, it is preferable to collect and pay the
tax.
If you have been thinking about establishing a retirement plan, Keogh for
example, you must set it up by December 31, 2001, if you want to take a year
2001 deduction for a retirement plan contribution. You don’t have to
actually make the total contribution by December 31, 2001; it is payable by
the due date (plus extensions) of your 2001 income tax return. If you are
not sure about establishing a Keogh plan, consider establishing a SEP-IRA
plan. It is usually less complicated than a Keogh and can be established
next year and provide a deduction for 2001.
Harvesting tax losses this year, by selling stocks or mutual funds is
probably going to be very popular. Care needs to be taken if you have
purchased several batches of the same security and plan to sell only part of
your total holdings in that stock or mutual fund. Assume you purchased 100
shares of XYZ Stock for $7,000 in 1998 and 100 shares in 2000 for $10,000
and sell 100 shares between now and December 31, 2001, for $5,000. Is your
loss $2,000 ($5,000 - $7,000) or $5,000 ($5,000 - $10,000)? Unless you tell
your broker in writing and the broker confirms in writing that you are
“selling” the year 2000 batch, your loss will be $2,000.
First-in-first-out governs the cost basis for security sales, unless you
specify and receive written confirmation from the broker for a specific
batch. Some brokers may balk at this request, but be persistent. However,
to secure a loss on a security sale, you may not re-buy that security until
30 days have elapsed; otherwise you have made a “wash sale” and the loss is
not deductible. In any one year, a maximum of $3,000 in losses from the
sale of capital assets that exceed gains may be deducted against ordinary
income (wages, business income, interest, dividends, etc.). Net capital
losses in excess of $3,000 may be carried over to succeeding years.
