Cut Taxes, Build Wealth

Cut Taxes, Build Wealth

Money management by Janet Leiser | Senior Editor

Who doesn't want to hold on to hard-earned dollars? Financial experts, from Naples to Tampa, offer tips to reduce taxes and protect wealth.

Little can be done in January to lower last year's tax bill, but financial advisers, accountants and tax lawyers on the Gulf Coast offer numerous tips to save on taxes in 2007 and beyond.

Some are obvious: Seek financial planning advice in January and then follow the expert's suggestions throughout the year. Don't wait until the last minute to try to reduce your tax bill.

Michael Zmistowski, a Tampa certified financial planner, says: "Business owners should take the time to identify what their wealth goals are in the long term and why. The IRS really encourages entrepreneurialism. There are lots of tax breaks for small businesses."

Another simple but ignored suggestion is to routinely organize receipts and documentation to support deductions. Don't throw them away and don't just put them in a box or drawer and then dump them on the accountant's desk when it's tax time.

Without documentation, the Internal Revenue Service will disallow claimed expenses in an audit. And by organizing paperwork, the tax preparation bill will be lower. Charitable contributions not supported by documentation will be thrown out.

Naples tax lawyer Joe Cox says a lack of documentation for business expenses is one of the top reasons companies face penalties and higher taxes after an IRS audit.

Another serious problem for businesses and individuals is non-reported income, he says, adding, "Salary, dividends and interest income are double-reported. But in transactions where you make a profit and there's not another party reporting, there's a tendency not to disclose that."

Banks didn't previously report all wire transfers from foreign countries to the United States. That changed after the 9/11 terrorist attacks.

"Don't fudge," Cox says. "Under the Bank Secrecy Act and Patriot Act, all international wires can be monitored and reported, therefore you have to be more circumspect and honest in your dealings."

Shift in power

There were few substantive changes to federal tax laws in 2006, but this year might prove more daunting with the Democratic Party in control of the U.S. Congress.

St. Petersburg tax/business lawyer Joel Bronstein says investors are concerned that the capital gains rate of 15% will shoot up now that Democrats control Congress. If that happens, the really bad news is that the changes are usually retroactive to Jan. 1.

Others, however, say capital gains rates aren't likely to go up while George W. Bush is still president.

Bruce Udell, a Sarasota certified financial planner, says: "I don't think you have to worry about that until 2008, if we get a Democratic president."

Bush is expected to veto any tax hikes over the next two years. But the issue is on people's minds.

Randy Wright, a certified public accountant in Fort Myers, says he regularly receives calls from clients concerned about what's going to happen to the capital gains rate now that the Democrats control Congress.

What about the estate tax?

While changes to the state and federal tax laws in 2006 weren't earth-shattering, Bronstein says, "One thing to watch in 2007 is whether Congress will fix the estate tax problem."

The Republicans and President Bush passed a bill that phases out the estate tax in 2010, but the law also expires at the end of that year. That means the rate is scheduled to return to its 2001 level of as much as 55% in 2011.

"So if a taxpayer dies in 2010, their estate will pay no tax," Bronstein says. "But if they die after that, their estate may be taxed as high as 55%."

That is not a good situation.

"That has some elderly taxpayers considering suicide in December 2010," he says. "Likewise, any wealthy person who is dying in the fall of 2009 is likely to be put on life support until Jan. 1, 2010. The ridiculous results of the current estate tax law need to be fixed."

There's some good news for Florida's wealthy: The state Legislature repealed the intangibles tax, which forces high net worth individuals to pay a yearly tax on the value of their multimillion-dollar stock and bond portfolio.

The change was effective Jan. 1 of this year so the rate of 50 cents for every $1,000 applies to 2006 taxes. It doesn't sound like much, but the tax was a disincentive for wealthy retirees considering a move to the Sunshine State, says Randy Wright, a certified public account with Markham Norton Mosteller Wright & Co. in Fort Myers.

For example, under the law, a retired couple with a $10 million portfolio would pay $50,000 annually just for owning the investments, Wright says.

One change that will affect families is the federal so-called "kiddy tax" law. A teenager, between the ages of 14 and 18, with income is now taxed at the same rate as his parents. That change is retroactive to Jan. 1, 2006.

Cox, the Naples attorney, says it's important for taxpayers to remember that tax preparers, often accountants, don't share the privilege of client-attorney confidentiality. They may be forced to repeat to the IRS what a client told them.

It's best to call a tax attorney when a tax controversy arises that involves a gray area of the law.

REVIEW SUMMARY

Issue. Annual tax changes

Industry. Financial planning

Key. Tips to reduce taxes, build wealth and avoid trouble with Uncle Sam.

PROTECT YOUR MONEY

• Most people don't like to think about dying. But you should obtain estate-planning advice to avoid a tax rate of as much as 48% (according to current laws) for your heirs.

• Lower your tax bill. Taxpayers with a Roth IRA have until April 15 to maximize contributions for 2006. Those with a 401(k) plans should maximize contributions in 2007. The individual maximum annual contribution is $15,500 for those under 50 and $20,500 for those older than 50.

• Ensure personal and business assets are protected in the event of disability. Don't wait until it's too late and don't over insure.

• Individuals over the age of 70½ can now give as much as $100,000 directly to a public charity from an IRA and take a deduction.

• Defer as much income as possible. If you expect a bonus at year's end, delay it until January.

• Offset capital gains by selling poor performing stocks at a loss near year's end.

• In 2007, business owners can deduct up to $112,000 spent on first-year equipment purchases. A few years ago, the maximum deduction was only $15,000.

• Money left in flexible spending accounts is no longer lost at year's end. It can now be rolled over into a health savings account and used for medical expenses.

• If you want to use your 401(k) to retire prior to age 59½, you can avoid penalties by setting up substantial equal payments (such as $1,000 monthly).