Ralph Bovitz, CPA, PFS

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Surprise! It's Tax Time Again


By Ralph Bovitz, CPA, PFS


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.











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