Tax Tips

Tax Tips for Investors and Entrepreneurs

• Set up a corporation: The tax rate on the first $25,000 of retained profits is only 22%. You can set up a medical expense reimbursement plan for yourself without including employees. Your corporation can own and claim depreciation deductions on your car. Even if you're in business part-time, you can set up a tax sheltered savings plan.

• Work a swap of products or services at every opportunity. Both you and the other guy will save a lot in taxes. Neither of you will have as much recorded profit on a swap transaction. Hence less tax.

• Avoid employees: Have your work done by self-employed, independent contractors and save on Social Security taxes, unemployment taxes, and Workman s Compensation Insurance.

• If you carry and inventory use the L.I.F.O. (Last-in First-out) method of valuing your inventory. Your non-deductible inventory will consist of the oldest items bought before price increases, and you will be deducting the highest priced materials of merchandise.

• If you are trying to sell stock or are going to invest in a small corporation, ask your tax advisor about the special Section 1224 Election. If the corporation goes under, the investor can deduct up to $50,000 against ordinary income and if it succeeds he gets a capital gain when he sells out.

• To nail down a capital gain you must hold the property more than six months, not just six months. That one extra day can make a big difference.

• Check with the local Federal Unemployment Office about hiring workers under the W.I.N. Program. You can get a tax credit of 20% of a qualified employees first years wages. It's a real steal.

• You can accumulate up to $100,000 of profits (after paying a 22% tax on the first $25,000 per year) in a corporation and pay a tax on only half of the accumulated amount (by capital gains route) if you liquidate instead of paying yourself a salary of dividends. This is a very attractive pitch for investors in short term (5-10 years) ventures.

• When in doubt, DEDUCT. The probability of an audit for small businesses with less than $30,000 is very low. Chances are your deduction will go through and even if it doesn't it will only cost you the tax you would have paid plus 6% of that tax. Just be sure you have a valid reason for the deduction. But, don t get caught on fraud charges, it isn't worth it.

Tax Tips for College Students

If you're in college, doing your taxes feels like one more final exam. But there's one big difference. This grade is measured in cash.

With a little research and time, you can ace this test and maybe even earn a nice check in the process. Here are 12 tips to help you over the rough spots and make this tax exam a little easier.

1. File
Sure, you might make too little money to file, but if you've had money withheld from paychecks, you've got a refund coming.

2. Start early
Even if you haven't received your W-2s, your final pay stub will have the pertinent tax information, such as your income and how much was withheld. You also can go online and download state and federal forms you'll need. Taking an advance look at your tax situation will help you know which issues might apply to your return.

Think you might need a little help? It's probably closer than you think and possibly free. Most college accounting departments have students offering free tax help so they can get some practice with real-life returns. If you haven't seen ads around campus, contact the accounting or business department and find out how you can get some advice. Remember, though, the closer you get to April 15, the longer the wait for help.

3. Give yourself a weekend
No, filling out your forms won't take that long. But if you allow a weekend, you'll have time to take a few breaks when you get tired and still be able to double check the numbers before you mail that return.

4. Practice on paper
Even if you're filing electronically, many students find it's more efficient to fill out the paper forms and work out the bugs before they go online.

5. Take extra credit
These days, college students (or parents paying college tuition) are getting a little help from the government in the form of credits and deductions. While there are three major ones, students (or their parents) get to select only one per student. And whoever claims the student as a dependent is the one who is eligible for the credit. Pick the one that best suits your family and situation:

Hope Scholarship Credit -- Gives you a tax credit for up to 100 percent of your first $1,000 in tuition and fees and up to 50 percent for the second $1,000. The maximum credit is $1,500 and it applies to the first two years of college only.
Lifetime Learning Credit -- Gives you a tax credit equal to 20 percent of your tuition and certain related expenses up to $10,000. The credit maximum is $2,000.
Higher education expenses deduction -- This deduction could be as much as $4,000 for families that meet earning guidelines. If you make too much (in the IRS's eyes), you'll get a reduced deduction. The downside: Deductions usually give you less bang for your buck than credits. You get to subtract a credit amount from the actual tax you owe, whereas a deduction reduces the income you pay tax on. So in this case, even if you have $4,000 in expenses you can claim on your tax return (at the bottom of page 1 of your Form 1040), in reality this deduction would at most produce a $1,000 reduction in your tax bill if you're in the 25 percent tax bracket.

6. Understand your family's financial situation
Talking to mom and dad about money is almost as difficult as talking to them about sex (and just about as much fun). But you need to know a little about their financial picture to plan who should claim you as a dependent and possibly use your education credit or deduction. If your parents are paying more than 50 percent of your expenses, they are entitled to list you as a dependent on their taxes.