The end of the year is fast approaching, but there is still plenty of time to take steps to reduce your taxes for the year.
Here are four simple ideas:
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).
There are some generous first-year tax deductions for business property purchases in 2011 that are unprecedented. First, there is 100 percent bonus first-year depreciation for purchases of most new equipment and software during 2011. There’s also an extraordinarily high $500,000 expensing limitation, including up to $250,000 of expensing for qualified real property.
2. Establish and fund retirement plans
One area where successful self-employed people are often better off than employees 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, including tax deductions for plan contributions and tax deferral on investment earnings until retirement. There is an array of retirement accounts available: solo 401(k)s, IRAs, SEP-IRAs, Simple IRAs, and Keogh plans.
How much you 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 $16,500. The maximum total contribution for 2011 is $49,000, which you can deduct from your taxable income for income tax purposes.
You can contribute to these plans and take a deduction for 2011 up until the time your tax return for the year is due: April 15, 2012, or Oct. 15, 2012, if you file an extension. However, you must establish a solo 401(k) by Dec. 31, 2011, to take 2011 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 2011 — 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 2011, singles can contribute up to $3,050 and marrieds $6,150 to their HSAs (people over 50 can contribute $1,000 extra). If you set up your HSA and contribute by Dec. 31, 2011, you can make a full year’s worth of deductible HSA contributions for 2011.
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.