It's the time of year once again when we are told that Santa is on his way and he's double checking his list to make sure he gives the right presents to the right people. As the surrogate Santa that many of us are, I rather suspect that there is a lot of list-checking going on this month. Let's see, there's the gift list, the party list, the card list, the list of football games we want to watch and any other lists you may have, but don't forget the most important list - the year-end checklist. That's the list of things you need to do before the end of the year to maximize the money you keep in your pocket. Just in case you forgot what those things are, we thought this month would be a good time to help you remember.


Personal Checklist

Since most people report their income on the cash basis, we're going to assume you do also. We are also going to assume that you have taken a hard look at your taxable income picture and have a plan to minimize your taxes. If you don't, give us a call.

Income Taxes

Income

• If you get paid a bonus, ask if it can be paid in January.


• Make sure you have put as much into an employer-sponsored retirement plan as you can under the plan's governing document.


• If you are a more than 50% shareholder in a corporation, and you want to minimize the corporation's income, make sure you pay all your salary by December 31.


• If you have taken big gains on stock sales this year (don't laugh, it could happen), look at your portfolio for any dogs with losses you may want to sell by December 31 to offset the gains.


• Do you have any stocks that have a paper loss, but have long-term potential? You may want to sell the stock by December 31 and buy it back in 31 days. Be sure to wait the 31 days or the loss will be disallowed. Don't forget you can be burned if the stock takes a sudden up-tick when you are ready to buy it back.


• Sell enough loss stock to take a $3,000 loss against ordinary income.


• If you are over 59 ½ and plan on taking money out of a retirement account, postpone the withdrawal unless doing so will cost you more in the long run.


• If you are selling a piece of property or other asset at a loss, complete the sale before year-end.


• If you are selling a piece of property or other asset at a gain, postpone the sale until January or structure the sale as an installment sale.


• If you do business as a sole proprietor or in a partnership, postpone billing to maximize your chance of receiving the cash in January. Of course, if you need the cash in December, bill fast!


• If it makes sense otherwise, postpone purchasing any dividend paying stocks until after their ex-dividend date.


• If possible, postpone receipt of any taxable litigation awards until January.


• Postpone reporting of employee business expenses to your employer if your total unreimbursed expenses will be over 2% of your adjusted gross income.


• Were possible, don't invest in interest bearing accounts that will pay interest before December 31.

Deductions

• If you are a sole proprietor or do business in a pass-through entity, pay all the deductible expenses you can before December 31. Advertising, rent, supplies, insurance other than health, legal fees, accounting fees, property taxes, wages, etc. are generally deductible. A good place to look is at the Schedule C on your last year's tax return for guidance on what's deductible. If you have any questions, give us a call.


• If you need new equipment and haven't exceeded the $100,000 maximum to immediately expense the equipment, buy it and put it into service by December 31. Even if you have purchased more than $100,000 in equipment this year, the 50% bonus depreciation you get on first use property may still make acquiring the equipment attractive, but do it before December 31.


• If you finance a piece of equipment, where possible, make sure you don't finance by signing a note with the seller. If you are a cash basis taxpayer, the only way to get a deduction for less than the cash paid is to owe a third party.


• If you are considered self-employed, make sure all your health insurance premiums are paid by December 31. Remember, this year, you will get a 100% deduction for health premiums paid if you or your spouse are not covered under an employer's plan.


• If you are in a partnership and withhold from your draw to fund a retirement plan, make sure the withdrawals are deposited, or in the mail, to your plan by December 31.


• If you are less than a 50% shareholder in an accrual basis C Corporation, meet with the other owners and decide if bonuses are to be paid. If so, devise a plan for payments to be made to all less than 50% owners after December 31. As long as a corporation has a defined plan in place before year-end, the corporation can take a deduction in the year accrued and the shareholder can pay the following year, if the cash is paid between January 1 and March 15.


• Pay any deductible medical bills by December 31. Remember, you can't deduct anything unless it goes over 7 ½ % of your adjusted gross income, so make sure paying the bill sooner rather than later is worthwhile.


• Pay all deductible state and local income, property or real estate taxes before December 31.


• Clean out the closets and take the old junk…errr…. highly valuable clothing and miscellaneous items that you no longer use to Goodwill, the local homeless shelter, or other similar charitable organization. Be sure to get a receipt and make a list of the valuable merchandise you take.


• Pay your tax preparation bill from last year, if you haven't already done so.


• Make sure you pay any applicable union dues or deductible employee business expenses by year-end. If cash is tight, payment by credit card is sufficient.


• Pay your charitable donations by December 31. If you are contributing appreciated property, make sure the contribution is complete by December 31.


• Set up your 401(k) plan before December 31 if you want a deduction this year.

Miscellaneous Taxes and Other Items

• If you are making annual gifts to your children for estate tax purposes, be sure to make the gifts of $11,000 per donee by each donor prior to December 31.


• If, as part of an estate plan, you are gifting in excess of the $11,000 per donee amount, make sure the transaction is consummated by December 31. If it looks like the transaction will make you go over your $1 million lifetime exemption in the current year, consider postponing the gift until 2004 when the amount sheltered by the "Unified Credit" will be $1.5 million.


• Thinking of having a medical procedure in the near future and you have met your deductible or are near to it? Have the procedure done in 2003 to maximize your insurance reimbursement.


• Do you have drug coverage, but you have a deductible to meet first and you have met it? If it is a drug that you require often, get as much as the insurance company will allow before you lose your deductible credit.

Businesses

Just about everything we mentioned in the preceding paragraphs for individuals with businesses applies to businesses. This is especially true if you are on a cash basis, but what about those businesses that are on an accrual basis? In general, you will be required to report income when you earn it and deduct expenses when they are incurred. That means, if you want to reduce income, not only should you not bill the sale or service by year end, but you should also avoid making the sale or the providing the service until 2004. If you want a deduction, you better make sure you received the product or service in 2004 to be able to accrue the expense.

With respect to retirement programs like 401(k) plans, you must have the plan in place by the end of the year. You do have a one-time great option with the 401(k), if you wish. There is nothing that will prevent you from having withheld the maximum amount based on your total annual compensation even if you start the plan late in the year. You just need to make sure that your salary is enough to cover the withholdings. Be careful, because what applies to you will also apply to your employees. If you plan on matching contributions or making a profit-sharing or top-heavy contribution, be certain you know what employees will benefit and how much it will cost.
We previously discussed bonuses. Don't forget that bonuses and salaries, along with interest on loans and similar transactions, cannot be deducted until paid if made to a greater than 50% owner. If you record prior to December 31 in your minutes that it is the corporations intent to donate some percentage of taxable income up to 10%, your accrual basis corporation can deduct the contributions accrued even if made after year-end, but before March 15. The same is true of many other accrued expenses.

Final Thoughts

This checklist is, by no means, exhaustive. For every one item mentioned, there may be another hundred not on the list. That's because the number of items that constitute income and deductions is vast. Don't get stumped! If you have a question, give us a call. We exist to help you keep as much money in your own pocket as we legally can.

Don't forget to keep our troops in your prayers and have a very happy holiday season.

The final item on your checklist will be both the easiest and the hardest of all - Have a Great New Year.