There are essentially three things you can do to help reduce your tax burden.

1. First, have tax free income.  This would entail putting as much money into tax free CD’s or bonds as you can.  The mere investment in such instruments would not, in itself, provide any tax savings, but income from them would be tax free.  This is a strategy used by the very wealthy but could be effective if you have the money to invest in such instruments and are willing, at least for now, to accept a relatively low rate of return.
2. Second, take advantage of existing tax deductions and credits allowed in the tax code.  You should be familiar with the deductions and credits you qualify for and take full advantage of them when you file.  Credits can be very advantageous as they are a one-for-one reduction of the income tax you owe, but deductions are valuable as well. 
   1. Taking allowable deductions on your Schedule A is important.  You use Schedule A when your allowable expenses exceed the standard deduction.  This generally means you must own a home.  If you don’t already own a home, you should consider doing so, especially in this extremely good buying environment.  Owning a home allows you to deduct mortgage interest and real estate taxes on Schedule A which in turn allows you to deduct contributions, state sales tax, and medical expenses, if they exceed the threshold.  You can also deduct investment expenses and certain non-reimbursed employee expenses. 
   2. There are a number of other deductions and credits available to you that you should be aware of.  Some are familiar, like the Child tax credit, but there are many more credits and deductions such as education credit, student loan interest, credit for child and dependent care; the list goes on.  Your tax professional can help you understand the credits and deductions available to you.
3. Finally, the third way to reduce taxes is to defer income to future years.  This is done by contributing to retirement plans and other tax deferring vehicles.  Take advantage of any retirement plan available to you where you work by contributing as much as you can.  If you cannot contribute the maximum, contribute enough to qualify for the employer matching.  If you are self-employed, set up a retirement plan in your business.  Except for ROTH IRA’s, money you contribute to a retirement plan is not taxable in the current year and therefore reduces your taxable income.  The same holds true for contributions to and HSA and an IRA and other vehicles. Contributing before tax money to these plans means you don’t pay taxes on that money in the current year, however, as a general rule you do pay tax when you withdraw the money in a later year. 

For those of you who are business owners, there are a number of strategies that you should consider to keep your taxes as low as possible.  I have several articles on my Biznik profile page that address various business strategies to protect your business and reduce taxes.  http://biznik.com/members/bill-bradfield-ea

Keeping excellent business records and selecting the right business entity can make a tremendous difference in your business taxes.  Good record keeping means you won’t miss those expenses you took during the year.  Having the right business entity can make a difference in the taxes you pay and provide other non-tax advantages.  If you have a business, I strongly advise consulting with a tax professional. 

One of my jobs as a tax professional is to keep up with changes in the tax code that affect my clients.  Since 2012 is a presidential election year, I know it will be a very interesting to watch.  Who knows what the future will bring.  Regardless of politics, however, here are some things you should know.

1. The tax cuts, enacted when George Bush was President and extended last year by President Obama are slated to expire at the end of 2012.  If that is allowed to happen, taxes for most of us will go up.
2. As I write this, Congress is arguing (something they seem to do very well) about the extension of the payroll tax cut.  I believe it will be extended, but if not, your payroll taxes will go up about $1,000 in 2012. 
3. There are a number of new taxes in the Patient Protection and Affordable Care Act (ObamaCare).  As you know this is slated to be reviewed by the Supreme Court next year.  If the Supreme Court upholds the law, here are a few of the things to look forward to in the next few years:
   1. Increased Medicare tax for those families with income greater than $250K
   2. Increased Medicare tax (3.8%) imposed on other income sources, not just your wages
   3. For those who can take medical deductions on Schedule A, the threshold will increase to 10%, rather than the current 7 ½%.  All the more reason to have a HSA. 
   4. You will no longer be able to pay for over-the-counter medications through your HSA, MSA or flexible spending account

 Finally, here are a few strategies to consider as 2012 approaches:

1. If you are an employee who routinely gets a sizable refund each year, consider increasing the number of dependents you claim on your W-4.  This will increase the amount of money you receive in your paycheck and reduce the interest free loan you are giving the government each year.
2. Don’t get blindsided with taxes in April or later.  Know what you will owe and make sure you set enough aside to cover those taxes.  Unusual circumstances can lead to big surprises come tax time.  Examples include:
   1. An early distribution from an IRA
   2. Receipt of unemployment compensation with no tax withholding
   3. Sale of appreciated property or investments
   4. Foreclosure of a home or forgiveness of debt
   5. Review your portfolio.  If you have substantial gains, consider selling some of your losers to offset the gains.
   6. If you own a business and need capital equipment, consider buying and using Code Section 179 depreciation to take the full cost in the year of purchase.
   7. Start a Medical Savings or Health Savings Account if you don’t already have one and fully fund it.  This allows you to pay for out-of-pocket health expense with pre-tax dollars.
   8. If you don’t have a retirement plan at work, set up and contribute to an IRA.
   9. Consider restructuring your business.  The type of business entity you have can have both tax and non-tax consequences.  The best time to do this is on Jan 1. 
   10. Finally, don’t forget those charitable donations.  Remember, any donation over $250 requires acknowledgement from the non-profit organization. 

 Have a prosperous New Year.

Bill Bradfield, EA

206-295-2291

http://www.professionaltaxservicesinc.net/

Well, my friends, it’s right under your noses.  More to the point, you are using it right now.  I’m talking about Biznik.  Yes, Biznik, and you need to be taking advantage of it to grow your business.

I joined Biznik 1 ½ years ago on the recommendation of a business colleague.  I must admit I was a bit skeptical, thinking I might get a few contacts, but probably not much more.  Man, was I wrong.  I quickly learned it is a potpourri of business expertise, potential contacts, and very educational.  If you have not learned that by now you have really missed the boat.  Biznik provides solopreneurs with so much that it’s hard to know where to begin.  Let me give you my take on some of the most important ingredients of this magic elixir called Biznik. 

In my humble opinion the most important ingredient is you, and me and all of us at Biznik.  Biznikers are a font of information and most are willing to help you in any way they can.  I really mean that; I see it every day.  All you need to do is reach out.  Get to know others through networking functions and by connecting electronically on the Biznik.  I’ve done this and as my network grows, so does my business.  You will soon discover key people in the Biznik community that you need to connect with.  You will develop referral partners, mentors and other beneficial relationships.  A very special solopreneur culture has developed within Biznik, one that you will not see anywhere else.  Who could ask for anything more?

Another important ingredient is your profile page.  This is where you get to shamelessly promote your business, which for the most part, is you.   Through the other resources on Biznik, which I will mention shortly, you will draw people to your profile page.  Make sure it really does promote your business, as succinctly as possible, and I guarantee you will bring in more business.  Treat your profile as you do your website.  Make sure it presents a professional and inviting image and actually explains what sets you apart from others. 

Another important ingredient is archived articles.   I would wager to say that for any business related topic you might be interested in, there are Biznikers out there who have already written about it or are willing to, if asked.   I know firsthand that many of you have been reading articles.  This is my first article in over a year.  In 2009 I wrote six articles which were reasonably well read when they were published.  Those six articles continue to be read on a daily basis.  Just last week I had almost 100 hits on those six articles.  I’m not saying that to pat myself on the back.  What I want you to take from this is that you can benefit greatly from writing articles and from reading them as well.  Writing articles is an excellent way to give back to Biznik.  It is my belief that you get out of Biznik what you put into it, actually, a lot more.   You have certain talents and information that other Biznikers would love to have and learn.  Share that expertise by writing articles.  Polish the articles and make them interesting.  There are consequences of doing so.  You will have readers from within and outside the Biznik community.  In time, your Biznik profile will move up in Google rankings. And you know that means more business.  I live on the U.S. side of the Canadian border.  An unintended consequence of my articles and improved Google ranking is that I am now contacted frequently by Americans living in British Columbia needing to have their U.S. taxes done.  I never thought of that when I started writing articles.  Go ahead and Google <tax professional, Blaine, WA> and see who pops up as the first two listings on page one, after the paid listing.  That’s what I’m talking about. 

Yet another ingredient of Biznik is Biz Talk.  Here’s where you can ask a question, provide an answer to other Biznikers or just take part in a conversation to make a connection.  Lately I’ve been very active on Biznik.  It’s easy to do.  As a result, I get many hits on my profile page, including people who have found me on Google or other sources; potentially leading to more new business. 

I highly recommend you upgrade to Pro or Pro VIP status if you can at all afford it.  It will be money well spent.  Biznik Co-founder Lara Feltin has written several articles on how to take advantage of Biznik.  Here’s one of them.  http://biznik.com/articles/what-does-your-google-pagerank-mean-and-how-does-it-matter  Read it and the others she has written; there is a wealth of information in them, all of which will help you and your business.   

Review the advantages of becoming a paid member of Biznik.  http://biznik.com/about/benefits.  I joined as a Pro VIP and have never regretted it.  I have been repaid many times over and so will you.

I credit Biznik for much of the success of my business.  I’ve worked hard, of course.  Who hasn’t as they are struggling to start up a business?   I’ve used other resources to grow my business as well, but I can unequivocally state that Biznik has been a major source of information, a source for my referral partners, a catalyst for the growth of my business and the reason behind my excellent rating in Google. 

Thank you Biznik for being here and doing what you do.  You provide an unmatched service to all of us.  And thank you fellow Biznikers for being members of the Biznik community and for being there for the rest of us. For those of you who have not discovered the magic of Biznik, all I can say is you have no idea what you are missing.  Try it, you’ll like it!

As the end of 2009 approaches, a significant opportunity awaits many individuals.  Beginning in 2010, taxpayers will be able to convert their traditional IRA (and funds that have been rolled over from a qualified plan) to a Roth IRA, regardless of their income level or filing status.  What’s more, the tax on the taxable income generated from a 2010 conversion may be deferred until 2011 and 2012.  This new conversion option presents both tax planning opportunities and challenges for 2009, 2010 and 2011. 

Before 2010, only individuals with modified adjusted gross incomes (AGI) of $100,000 or less can convert amounts in the traditional IRA to a Roth IRA.  Moreover, married taxpayers filing separate returns have also been prohibited from converting their traditional IRA to a Roth IRA as well.  However, beginning in 2010, the $100,000 AGI limit on conversions of traditional IRAs to Roth IRAs is eliminated completely.  This special treatment gives everyone, regardless of his or her income level the opportunity to convert a traditional IRA to a Roth IRA.  Additionally, filing status restrictions are also lifted, allowing married taxpayers filing a separate return to convert a traditional IRA to a Roth IRA.

It is important to understand that an IRA conversion is treated as a taxable distribution, taxed as ordinary income at your marginal tax rate.  This, in effect, accelerates that taxable income that you would eventually pay on distributions from a traditional IRA once you retire, but does so in exchange for never taxing any future appreciation in the value of your account from what it is today.  That is often a significant tax advantage.  You should also note that unlike a withdrawal from an IRA, a conversion does not trigger any 10 percent early withdrawal penalties. 

Although conversion to a Roth IRA does trigger immediate taxable income, Congress provided a special incentive in 2010 to jump-start Roth conversions.  In 2010 (and 2010 only), individuals will have the choice of recognizing their conversion income in 2010 or averaging it over 2011 and 2012.  The latter option, which the taxpayer must elect to put into effect, allows you to pay taxes on the converted amounts ratably over two years, instead of recognizing it all as income in one ear.  You will be taxed at the rates in effect for 2011 and 2012. 

For some taxpayers, their tax rate may rise after 2010 even if their income does not.  President Obama has proposed, and Congress is expected to enact, legislation to restore the top two pre-2001 marginal income tax rates after 2010.  This means that the top two brackets will be 39.6 percent and 36 percent after 2010.  Consequently, if you do not want to take the chance that your income tax rate will be higher in 2011 and 2012 than in 2010, you may want to elect to pay the full tax on the Roth conversion on your 2010 income tax return, at 2010 income tax rates.

Higher-income individuals, who plan to pay the entire conversion tax in 2010 instead of ratably in 2011 and 2012 because of the anticipated increase in the top marginal tax rates, may want to avoid, for year-end 2009, the traditional year-end-planning techniques of accelerating deductions and deferring income.  Alternatively, consider doing the opposite this year to avoid being pushed into the highest brackets by a large IRA to Roth IRA conversion. 

Taxpayers are expected to convert their traditional IRAs to Roth IRAs for a variety of reasons.  Roth IRAs have two major advantages over traditional IRA’s:

• Roth IRA distributions are tax-free if they are qualified distributions.  To be qualified, they must be made after a five-year holding period has passed and after the accountholder reaches ate 59 ½ or on account of death, disability, or the qualified purchase of a first home. 
• Roth IRAs are not subject to the required minimum distribution (RMD) rules that apply to tradition IRAs (as well as individual qualified plans).  Therefore, a Roth IRA accountholder who reaches age 70 ½ does not need to begin taking distributions; instead, the funds can continue to grow tax free until they are needed or are passed on to heirs. 

The tax-free nature of qualified Roth IRA distributions may prevent individuals from being taxed in a higher tax bracket that would otherwise apply if he or she were withdrawing taxable distributions from a traditional IRA.  Moreover, these distributions—unlike those from traditional IRAs—do not affect the calculation of tax owed on Social Security payments and do not affect AGI-based deductions. 

An IRA to Roth IRA conversion should be considered by individuals who:

• Can afford the tax on the converted amounts;
• Anticipate being in a higher tax bracket in the future than they are currently in; and
• Have a significant amount of time before reaching retirement to allow assets to grow tax-free and recoup dollars that may have been lost due to the conversion tax. 

If you are planning on taking advantage of the Roth IRA conversion opportunity next year, consider some of the following strategies this year: 

• Because of the economic slowdown, many individuals are postponing retirement.  Roth IRAs, unlike traditional IRAs, generally have no age limitation on contributions from earned income or on mandatory payouts.  This is an advantage for individuals who are extending their careers beyond traditional retirement age. 
• If you are able to make deductible traditional IRA contributions this year, do so. This can help you reduce you 2009 tax bill and, if you convert to a Roth IRA in 2010, you will not have to pay back the tax savings until 2011 and 2012, if you elect to ratably pay the tax over the two-year period.
• If you anticipate being below the $100,000 AGI level this year, consider converting to a Roth IRA right away while your traditional IRA account balance is still low because of stock market declines.  If your situation is different from what you anticipated before you filed your 2009 return, you might consider “recharacterizing” your 2009 Roth conversion back to a traditional IRA and then converting to a Roth IRA in 2010 instead.

There are a significant number of tax and financial considerations that come into play when determining whether to convert your traditional IRA to a Roth IRA.  If you have any questions about traditional IRA to Roth IRA conversions and the new 2010 planning opportunity, please contact me.

Someone posted the following question the other day.  “How do I decide what business to go into?”

For many of you considering going into business the answer will seem obvious.  Do what you love and have experience in.  Or maybe you have been working in a field for a period of time and have discovered what you believe to be a niche area of the market that has not been filed. 

For others, what business to go into is not so easy.  What if you want to go into business but have never had any experience in that field.  How does one go about learning enough about it to be able to successfully start a business?

•  If you have the ability and the job market is favorable, I highly recommend you spend time in the business, working for someone else for a period of time to gain valuable experience.  While working in the field, try to get a big picture understanding of the operation of the business.  Learn as much as you can.  Do more than your job description calls for.  Volunteer for other tasks.  Become a sponge for information about the busienss.
• Study, study, study.  Take business courses at the local business college, read books on the subject and read anything else you can get your hands on.
• There is a tremendous amount of knowledge available on line, on virtually every subject.  Carefully cull through that information.
• Through your courses and readings, attempt to gain a good foundation to run a business.  Find out what it takes to run a business, and http://biznik.com/articles/ive-got-your-six not just the operations.  Look at bookkeeping, taxes, financial reporting, financing, etc.
• Find a mentor.  Someone else in the same business who will be willing to become your advisor.  Pick their brain.
• Develop a business plan before you ever start your business operation. 
• Establish a team of advisors.  People, paid and unpaid, who you trust to give you solid advice and council.
• Consider your level of passion and drive.  Do you have what it takes to do this on your own, or are you better off working for someone else.  Starting and operating a business is hard work.
• Do a self assessment.  Are you a self starter?  Do you have initiative and the drive to do what it takes to build your business?

When you are ready, dive in.  Don’t be afraid to make mistakes.  Often, successful businesses are built out of the ashes of unsuccessful ones.