Dollars & Sense

Mid-Year Tax Planning

By PBS Tax & Bookkeeping
Posted May 6th 2004 11:47AM

pbs_tax___bookkeeping_service_016.jpgIncome tax projection
A tax projection is a "crystal ball" for the self-employed.  When doing a tax projection, your tax professional utilizes your actual income and expense figures, as well as current tax information, to calculate and project your tax liability for the year. Having this information before the end of the year can really help with tax planning.

As a business person, you need to know before the end of the year where you stand with the IRS.  You need answers in order to make year-end business decisions and to do some retirement planning. 

Your tax position can be determined by your tax preparer between June and September so that quarterly estimated tax payments can be adjusted and potential problems can be spotted. An early projection based on your actual operations year-to-date can leave you plenty of time before the end of the year to do some proper tax planning.

Retirement savings
How much of a nest egg do you need to remain financially secure for the rest of your life? How do you figure out how much money you need each year to live comfortably?

As most of you already know, contributing to a retirement plan is one of the best ways to keep more of what you earn. Money invested in retirement accounts can grow faster than other investments because earnings are not taxed until you withdraw the money. There are plenty of retirement saving plans to choose from and thanks to increases in the contribution limits, you can put away more than ever before.  Here are some options:

SEP
A SEP is a qualified retirement plan that allows employers to make tax deductible contributions for owners and their employees. Self-employed individuals can set up a SEP even if they have no employees. SEPs allow flexible contributions.

So if your company isn't having a great year, you can contribute less than the maximum amount allowed, or you can even skip contributing altogether. Contributions must be made by the due date of the tax return, including extensions. 

Simple IRA
A SIMPLE IRA plan is available to self-employed individuals and to businesses with 100 or less employees and no other retirement plan. SIMPLEs let employees contribute pretax wages to their SIMPLE IRAs, up to $9,000 for 2004 ($10,500 for those over 50). Employers must make a limited contribution for each eligible employee. This plan must be opened by October 1. If you have not opened an account already, you can now do this for next year.

IRA's and Roth IRA's
Maximum contribution limits are now up to $3,000, for married couples that means you can put away $6,000 in an IRA account. Contributions must be made by April 15, no extensions. Contribution limit is $3,500 for age 50 or older.

401(k) and 403(k) Accounts
If eligible, you can put away $13,000 per year in these employer sponsored retirement plans. The limit increases $1,000 each year until 2006 when the limit reaches $15,000. Employee contributions are due by December 31, for employer contributions, due date of the tax return including extensions. Contribution limit is $16,000 for employees age 50 or older.   

There are other retirement plans available in addition to the ones listed here, check with your financial advisor for a review of all your retirement plan options.  If you're 50 or older you can take advantage of the maximum retirement savings benefits due to catch-up provisions which allow you to put away more than your under 50 counterparts.

Social Security
Social Security Statements are mailed each year and contain a complete earnings history, estimate of benefits for early retirement, full retirement and benefits at age 70, and an estimate of disability benefits. Statements will also show an estimate of benefits payable to spouse and children due to worker's retirement, disability or death.

If you are not receiving your Social Security Statement (Form SSA-7005) submit a request for Earnings and Benefits Estimate Statement (Form SSA-7004) by calling (800) 772-1213. Recorded information is available 24 hours per day. Representatives are available 7 a.m. to 7 p.m. on regular business days.

Saving? How much? How long?
Financial planners recommend saving 10% of your pre-tax income or profit each year for retirement. Taxpayers who do not start saving until their forties should plan on putting away 15-20% each year.

If you want to retire at age 67, figure you can spend about 4% of your retirement portfolio each year without running out of money. To maintain your present lifestyle after retirement, it is estimated that 60-80% of your current pre-tax income or profit will be required.

How does your retirement portfolio stack up? Lets say you will need $40,000 a year to live on and Social Security will supply $14,000 of your total needs. Now that leaves $26,000 still required and ($26,000 divided by 0.04) means you will need $650,000 saved by age 65 to meet your retirement goal. This can be an overwhelming number unless you start planning now and do your best to get on track.   

How much do you have to put away each month to accumulate $250,000? Lets say you're going to make 12 equal monthly payments to a saving plan earning 8% interest compounded monthly.

Time                Investment                        Saving Goal
  5 Years    $3,402 per month…………… $250,000
10 Years    $1,367 per month…………… $250,000
20 Years    $  424 per month……………. $250,000
30 Years    $  168 per month……………. $250,000

It's never to late to start savings! Good Luck and many happy returns on your investments.

This article has been presented by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. If you would like further information, please contact us at 800-697-5153.  See our Web Site at www.pbstax.com.

Please remember everyone's financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional." 

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