"Bunching" or Itemizing Every Other Year - Tax Savings in Certain Situations!

This is a brief memo regarding itemizing deductions on Schedule A in alternating years. This is commonly referred to as “bunching”.

The concept is to arrange your itemized deductions so that they are all paid in one year. Thus one year you would have enough to surpass the standard deduction threshold and in the following year you would have none or only minimal amounts. Therefore, one year you itemize and the next year you utilize the standard deduction!

The best time in your life to do this is either before you buy a home or after your mortgage is paid off. Interest is generally paid monthly and, therefore, it is difficult to arrange this technique when you have a large mortgage outstanding, but in some cases it may still apply!

Most taxpayers are familiar with doing this with their real estate taxes. However, they are not aware you can also do the same thing with donations and even with Wisconsin income taxes!

You need to look at your situation and the amounts and types of deductions. As long as the time value of money is surpassed and there are no other tax implications (although you may loose the WI Real Estate Tax Credit of a maximum $300), this idea should save tax dollars every other year! It is particularly valuable when your income is going to take a noticeable down turn in the next year.

Wisconsin Department of Revenue has devised an estimated tax form for this specific use! When the state receives it, they will send you a letter confirming their acceptance. Take this letter to your employer(s) and they should stop withholding Wisconsin income taxes on your paychecks in that next year! That’s right! Your net check will go up by the amount of the Wisconsin withholding which you’ve already paid in advance. This means effectively, you’ve prepaid it by less than a year and increases the available cash in the next year from your paycheck. Put the extra money to work for you, don’t get used to spending it. The next year your employer will start withholding again!

Although this methodology is relatively simple when learned, it is still best to seek competent professional help to help you fully utilize the tax savings possible. A competent professional may also see problems with utilizing this technique you did not foresee.

Put your social security numbers and “Form 1ES Year 2011” on the check in the memo field. You must mail it prior to December 31 to qualify the deduction for this year’s return. Also, mail it early enough to get the letter to take to your employer before the first pay day after 1/1.

When you use this technique (“bunching”) you want to prepay as much of your itemized deduction items as possible. Basically, you want to remove any deductions in the year you do not want to itemize. The types or deductions would include real estate taxes, WI estimated income taxes, charitable donations, medical expenses, employee business expenses, etc.

Often, clients will prepay a portion of the donations they intended to make next year in December and then pay the balance in January a year from this coming January. Since most charities use a June 30 fiscal year, the donation still falls in the proper budget year and you get the advantage of maximizing your deductions and minimizing your taxes! Render unto Caesar only what is Caesar’s! A note with the check could explain that you are making the payments in this manner for tax reasons.

Every Business Owner I Meet Could Use These Tips to Stay Out of the Red!

Here are a few ways of managing what you have to keep you out of the RED! Many of these ideas you may already know and are using. Others you may have heard of and need to know more before you can implement them. Still others you may have heard of and decided not to pursue them at the time. It may be just the time to reconsider them! Others are new to you and will need some time to percolate into your management skill set!

1) Read! Truly read your financial statements!
Look closely at financial statements instead of just filing away. Your interest in your business results is sharper than anyone else’s in the world! Use that interest to spark a learning curve in reading the financials from QuickBooks, your accountant or bookkeeper. Areas of special interest should include your profit margins, payroll levels and related expenses. Of course, your cost of goods sold needs to have been properly set up to reflect the variable and allocable expenses to be truly effective. Cutting payroll is one of the surest ways of reducing costs when sales are dropping. Further, costs related to payroll such as payroll taxes, worker’s compensation insurance, health insurance, automobile costs, etc. should also be decreased as a result of staff cutbacks.

2) Manage your receivables and payables
Keep a keen eye on the aging of your accounts receivables. Great management skills require you to adjust to the times you are experiencing. Clients who used to pay your invoices in 30 days or less are probably drifting into the 45 to 90 day categories. You should be proactive and contact clients after 45 days to remind them that you are taking an active role in the health of their business as exhibited by their ability to pay you. Also, inform them that you can’t continue to provide services or shipments if they aren’t going to show a good faith effort to keep you in business! I would highly recommend looking into a policy of service charges after a reasonable time to pay…even as short as 10 days. Don’t get hung up on forcing clients to pay it if they are close to the deadline…just be satisfied they paid!

Just as you manage your receivables you must watch your accounts payables. Obviously, you don’t want to miss discounts. The interest rates on discounts are astronomical at times. Take them whenever they are offered unless there are mitigating circumstances such as performance or returns, etc. However, just as your customers have slowed down paying you, you should slow your pace of paying vendors. This should be done carefully so as not to disrupt your existing relationship…just be open and honest and ask for extended terms to ease your own cash flow crunch. Remember a partial payment reminds vendors that you have the intent on paying and have not forgotten them!

3) Plan on replacing depreciated items
Plan on replacing depreciated items, as they may be wearing out. Planning on when to replace assets can be a multifaceted decision. Most people realize that computers, printers, and most electronic devices have useful lives that are often cut short due to innovations and improvements more than being worn out! Computers continue to increase in speed and productivity, and have even become less expensive! Review your depreciation schedules and you can often find assets that you should start planning on replacing in the next six months to a year, because they’ve been around for 3 years or more and you didn’t even notice time flying!

4) Increase cash flow with catch-up depreciation by breaking down buildings
Tax laws have often confused various areas of business. Depreciation of buildings and their components is one of those areas. You shouldn’t depend on “normal” handling of your new building to maximize the depreciation. Most accountants are not trained as engineers and possess modest ability to allocate costs beyond the more obvious areas: Carpeting, fixtures, equipment, etc. However, a well planned out and executed engineering review of the building can find many areas which will have a shorter life span than 39 years! Moreover, it isn’t too late if you’ve owned the building for a few years already! In fact, the tax laws allow for deduction of “catch-up” depreciation in the current year if the proper forms and documentation is handled. A building with a cost of approximately $300,000 can have economic benefits exceeding the costs of the engineering study, filing the forms required for changes and adjusting your accounting records.

5) Plan for Unemployment Compensation tax increases
Due to lay-offs in your business, and in fact, other businesses as well, you should plan and expect your unemployment rates or wages subject to taxation to go up over the next year or two. The way in which Wisconsin and other states calculate unemployment tax rates has a tendency to impact the business the year or even two years after the layoffs actually occurred. This is partially due to the fiscal year of June 30th that the Department of Workforce Development uses in comparing your account balance to the taxable wages. In addition, if government cannot fund the number of people on unemployment based on their current reserves, they must use one of the methods at their disposal to increase funds. They have historically either increased the base wage subject to taxes, as they did in 2009 again, or they have what amounts to a “special assessment” of some type to provide the needed dollars.

6) New & Expanding Businesses need to watch out for workers compensation insurance!
One area of expense that often catches business owners unaware is the area of growing workers compensation insurance. This type of insurance is usually computed based on gross wages of employees and even independent contractors. As the number of employees grows and exceeds the initial expectations that the premiums were based on, the next year can hold quite a surprise. First, there is a catch up of the premiums for the prior year for the excess of actual wages versus anticipated wages times the applicable rate. Then at virtually the same time, the next year’s deposit premium is due! A double whammy! Therefore, put aside funds by periodically checking your wages actually paid versus estimated…as always, cash is king.

7) Scrutinize your spending habits for missed deductions
Business owners often have expenses they pay personally (cell phones, subscriptions, etc.) which are related to their operations. They overlook these somewhat smaller items that after awhile add up! If you consider the “marginal tax rate” plus the “social security/Medicare tax rate” you’ll see that even small expenses can add up to noticeable savings in a full year!

John Brandt is a Certified Public Accountant and President of John Brandt SC, as well as a member of National Accounting and Business Solutions, LLC. His desire is to help business owners manage and run their business more efficiently, productively while finding more leisure time!

John can be reached directly at (262) 789-1400. Call to introduce yourself and schedule a complimentary Focus Analysis™. Visit John’s website at nabsllc.com

How to Choose an Accountant or Tax Preparer

• Look for professional credential(s)
  
  
  
  • CPA
  • Masters in taxation
  • Enrolled agent


• Look for membership in professional organization(s)
  
  
  
  • AICPA
  • WICPA
  • NATP
  • NSTP


• Look for someone with a permanent office - nothing worse than trying to track down a nomad.


• Look for someone with a year round office
  
  
  
  • IRS & WDR notices rarely come 1/1 - 4/15!
  • You'll come across times you need Q's answered all year long!
  • Tax planning is best done in May-Dec!


• Choose an office size where you are going to deal with only a few people and not someone new each year.


• Look for a firm that's hourly charges are neither the highest nor the lowest.
  
  
  
  • Too high and you'll be afraid to incur fees.
  • Too low and you'll probably get what you pay for - limited time and/or effort.


• If you don't know someone personally - ask several business associates who they use. Then ask why!


• Sometimes the best way to choose a professional is the way you choose a friend or stay in business - gut feel - talk to them - Do they sound intelligent? Up to date? Well rounded? Friendly?


• Your efforts are best spent doing what you are best at and hiring professionals for those areas in which you lack expertise. Even if you are charging $45/hour and they are charging $90/hour, if they can cut your time in half you get two major benefits.
  
  
  
  • It's done professionally. Your mind should be put at ease and you should get a better result. If your mind is weighed down by fear or preoccupation, you can't concentrate on those areas of your life you need to be giving your all to.
  • You didn't have to do it. If your extra time was spent productively by obtaining additional clients your investment will pay off in repeat business!!!


• Finally, even though you should have a professional, don't divorce yourself from the project. Be involved - choose someone who will teach you how to:
  
  
  
  • Be a better taxpayer - pay less taxes.
  • Be a good client - pay less fees or get more for the same fees.