Q:

Subject: 401k Contributions (After-the-Fact)

 

Kerry,

 

I have just finished our tax return for 2005.  We owe $1,500 to the feds and $2,300 to the state (CA.).  I did notice (on our W2s) that both (my wife and I) are below the limit ($14,000) in our 401k contributions for the period.

Are we allowed to send these institutions additional funds in order to reduce our tax liability?  Or can we contribute to our IRA’s at our Bank in order to reduce our liability?

Please advise.

Regards,

A:

You should be working with a tax pro on matters such as this.

401k contributions are only allowed during the year in which you are being paid because they are intended to be made directly from your paychecks and reduce the taxable income for that particular year. The time to increase your 2005 contributions was before 12/31/05 through your employer’s payroll department.  Your 2005 W-2, where 401k contributions have their effects is locked in and you have to live with it.

Deductions for conventional IRAs are very small or nonexistent for people who have an employer sponsored retirement plan (including 401k) who are considered to be evil rich by our rulers in DC.  For 2005, the IRA deduction starts being phased out for couples when their Modified Adjusted Gross Income (MAGI) is $70,000 and is completely gone when MAGI reaches $80,000.  You didn’t say what your AGI is, but there’s a good chance that you are over those limits.

You also have the possible options of making nondeductible contributions to traditional or Roth IRAs; but neither of those would reduce your tax bills.

You can see more specific details in IRS’s Pub 590.

Good luck.

Kerry Kerstetter

 

Q:

Kerry,

The article you posted at your site was very helpful and educational… and I wanted to thank you for taking the time to post it. I need some clarification on something. I am about to sell my primary residence in Dallas. My profit is around $20K. I’ve only lived in this house for 8 months. Do I have to pay captical gains on this $20K even if I roll it into the purchase of a new house? Any other suggestions to avoid the capital gains tax? Thanks.

A:

It looks like you need to work with a professional tax advisor because I thought I had both of those issues explained fairly clearly on my website.

What you do with the money from your sale has absolutely no bearing on the taxability of the sale.

The only way you will be able to exclude the gain is if the reason for your sale so soon after its purchase is due to a health or employment reason or other unforeseen circumstance.

You should do a thorough accounting of your cost basis in the home, including all capital improvements.  The higher the cost basis, the lower your profit, which is also reduced by selling costs.

None of this is very complicated, so pretty much any tax pro should be able to help you.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Filing as a “S” Corporation

Good morning!

I just completed my tax filing for 2005 as a sole propriotor.  My accountant suggested I become a “S” Corporation.  I made $70,000 last year but after expenses made $20,000.  I am paying $3899 to the Federal Government and $78 to the State.

 

My accountant said “not” to file as a “C” Corporation.  Can you give me more information?

 

Thanks,

A:

There is no one size fits all for deciding which entity type is best for a particular situation. 

Your accountant should be able to explain why s/he decided that an S corp is best for you, including addressing the various issues that I mentioned in my article on the differences between C and S corps.

If your accountant just blindly decided that an S was right for you because s/he always chooses S corps (as some tax pros do), it’s time to find a new tax advisor who will take the time to properly analyze your situation before reaching a decision.  Such an analysis should not be done unilaterally by the accountant and should include a lot of questions of you and any other people involved in your business.  In a way, it’s similar to a doctor prescribing medication.  That can’t be done without a thorough diagnosis of the patient.  Same thing for structuring a business.

Good luck.

Kerry Kerstetter