We’ve entered the last quarter of 2012; however, there is still plenty of time for real estate pros and other small business owners to take steps to lower their taxes for the year.
Here are 5 things you can do now to lower your 2012 tax bill:
1. Buy business equipment
If you’ve been thinking about buying equipment to use in your real estate business — whether it be a car, computers, software or anything else — do so by the end of the year.
In all likelihood you’ll be able to deduct the entire amount you paid for the item in a single year, instead of having to depreciate it over several years (this is not true for passenger cars, however, for which annual deductions are capped). The 2012 first-year tax deductions for business property purchases are extremely generous.
First, IRC Code Section 179 allows you to deduct in one year most tangible personal property you purchase and use over 51 percent of time for your business. The annual limit for this deduction in 2012 is $139,000. However, this deduction is limited to your net taxable business income for the year.
Also available is 50 percent bonus first year depreciation for most purchases of new equipment and software during 2012.
2. Establish and fund retirement plans
One area where successful self-employed people are often better off than employee is retirement plans. The government allows the self-employed to set up retirement accounts specifically designed for small business owners. These accounts provide enormous tax benefits — tax deductions for plan contributions and tax deferral on investment earnings until retirement. There are an array of retirement accounts available — solo 401(k)s, IRAs, SEP-IRAs, Simple IRAs, and Keogh plans.
How much your can contribute each year depends on the type of plan you have and the amount of your net earnings from self-employment. For example, the maximum contribution for a solo 401(k) plan is 20 percent of your net self employment earnings plus an elective deferral contribution of up to $17,000. The maximum total contribution for 2012 is $50,000 ($55,000 if you’re age 50 or older). That’s up to $50,000 you can deduct from your taxable income for income tax purposes.
You can contribute to these plans and take a deduction for 2012 up until the time your tax return for the year is due — April 15, 2013 or Oct. 15, 2013 if you file an extension. However, you must establish a solo 401(k) by Dec. 31, 2012 to take 2012 deductions for your contributions.
3. Sell losing stocks
If, like many investors, you have stocks that have gone down in value since you purchased them, sell enough before the end of the year to have at least $3,000 in losses. If your total capital losses exceed all your capital gains for the year you may deduct up to $3,000 of these losses from your ordinary income for 2012–that is, the income you make from your business. If your overall capital loss is more than $3,000, the excess carries over to the next year.
4. Open an HSA
If, like most self-employed people, you pay for your own health insurance, consider opening a Health Savings Account (HSA). An HSA is like a health IRA that is coupled with a health insurance policy with a high deductible. You can deduct contributions to your HSA and then use the money to pay almost any uninsured health-related expense. And you don’t have to pay any taxes on these withdrawals.
For 2012, singles can contribute up to $3,100 and marrieds $6,250 to their HSAs (people over 50 can contribute $1,000 extra). If you set up your HSA and contribute by Dec. 31, 2012, you can make a full year’s worth of deductible HSA contributions for 2012.
5. Donate to Charity
If you itemize your deductions, you’ll lower your 2012 income taxes by donating to charity by the end of the year. You can donate money, property, or both, to any qualified charity and take a deduction.
If a charity has obtained a determination letter from the IRS recognizing its status as a 501(c)(3) public charity, then it is qualified for tax purposes and donations to it are deductible. Many nonprofits include copies of their IRS determination letter on their website and their taxpayer identification number on fundraising solicitations so donors know they can deduct donations to their organization.
The only 501(c)(3) organizations that are automatically considered qualified organizations (without a determination letter from the IRS) are churches and other religious organizations.
The IRS maintains an on-line search tool, Exempt Organizations Select Check, that allows users to select an exempt organization and check certain information about its federal tax status and filings — including whether the organization is eligible to receive tax-deductible charitable contributions. This service replaces a list of qualified organizations, called Publication 78, formerly published by the IRS. Other organizations maintain extensive lists of nonprofits. For example, the website www.guidestar.org lists over 1.5 million nonprofits.
Make sure to keep records of all your donations.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.
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