November 30, 2011 
TMatters 
Season’s Greetings!
Tax season is right around the corner, and some strategic planning done before year’s end can amount to significant savings. I often meet with clients during the last few months of the year with an eye toward projecting their tax liability and developing a plan to reduce their tax liability.
A self-employed individual can expect to pay approximately forty-five percent tax on income that reaches into a higher tax bracket. Income taxed in a lower tax bracket is taxed at approximately thirty-five percent. The key to managing a tax liability is to know when you have income that goes into a higher tax bracket. Single taxpayers pay a higher (25% versus 15%) rate of tax when taxable income exceeds $34,500. The tax rate for married taxpayers changes at $69,000. This means that taxable income that exceeds these amounts is subject to a higher rate of federal income tax. Income below this threshold is taxed at a lower rate. Self-employed individuals pay an additional self-employment tax of 15%. So, with a combined federal income tax rate of 25%, self-employment rate of 15% plus a MA state tax rate a self-employed individual can expect to pay about 45% tax on income in a higher bracket. So, almost half of the additional money earned in the higher bracket will be sent off to pay federal and state taxes. Ouch!
Once provided with this information, however, an opportunity for some strategic planning exists. The key is to reduce taxable income thereby lowering the tax liability. Additional business expenses will reduce all three federal, state and self-employment tax liabilities. Taxpayers can also purchase equipment or vehicles before the end of the year that can net huge tax savings. For example, a$2,000 computer purchase will end up costing only $1,100 when the tax savings is factored into the purchase. At tax time we review business assets purchased during the year and make the decision to either “expense” the asset (deduct in full) or depreciate the asset over a period of years. Some taxpayers will make the decision to simply not work as hard before the end of the year knowing that almost half of their earnings will go to pay taxes. There are also tax deductions, retirement funding for example, that we utilize that will reduce the federal tax but not the self-employment tax. Planning and projecting a tax liability is an integral segment of the tax preparation process. Clients that take advantage of this opportunity feel very empowered when they make decisions that result in lowering their tax liability.
In addition to tax deductions there are some tax credits that have been reauthorized and some credits set to expire have been extended for two years. Tax credits are beneficial because they directly reduce the tax while a tax deduction reduces the amount of money being taxed. Once again I particularly like the energy credits, particularly the solar credit, and the education credits. Credits for windows and doors still exist, but are capped at 10% up to $500 (windows are capped at $200). The credit for high-efficiency boilers and furnace is $150. The modified education credit is now referred to as the American Opportunity Tax Credit. This credit has been expanded to include expenses for course books, supplies, and equipment. The credit is equal to 100% of the first $2,000 spent and twenty-five percent of the next $2,000 per student each year. Therefore, the full credit amount of $2,500 may be available to a taxpayer who pays $4,000 or more in qualifying expenses. With two daughters in college this is one credit that I really enjoy!
Remember that I am here throughout the year to answer any questions you might have, and I am looking forward to helping you maximize those tax deductions and credits in the upcoming tax season!
Happy Holidays!
