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If you're used to pulling "all-nighters" when April 15 (the current tax filing deadline) rolls around, then you are probably not getting the most out of your tax planning efforts. Tax planning should be viewed as a year-round process - not just a once-a-year headache. Unfortunately, most people don't know how or where to start.

The good news is that there are some excellent (and we might add, user friendly) software programs on the market that can take some of the frustration out of the process. Quicken has two packages that are highly recommended.

For planning, organizing, and managing your day-to-day financial affairs, we recommend Intuit's fabled financial management software:

Quicken (for individuals) and Quick Books Pro (for small businesses)

At Tax time, Intuit again comes to the rescue with its massively popular tax filing program:

Turbo-Tax

The beauty of these two programs is that they are designed to be used in concert with one another. In other words, if you use Quicken or Quick Books to manage your personal or business finances, at the end of the year it is a simple and very painless process to efile your financial data into Turbo-tax and complete the filing process. And of course, with the advent of the internet, returns can be sent electronically for speedier refunds.

Of course tax laws are constantly changing. It is always good to solicit the advice of a professional tax planner before making final decisions. However, to help you optimize your tax planning efforts consider the following ideas:

Timing

Even though the deadline (for most of us) for filing a current year tax return is April 15 of next year, most of the deadlines for completing financial transactions that can be deducted from current year taxes is December 31 of the current year. The notable exception being contributions to IRA's and certain retirement accounts which can be made anytime prior to the filing deadline.

Most other deductions will need to be completed before the end of the year to generate current year tax benefits.

Year-end Tax Deductions

1.   Make necessary equipment purchases. If you are a small business owner or are an independent contractor you should consider making any necessary equipment purchases by the end of the year. As long as the purchase is made by the end of the year it will be deductible (expensed or depreciated - depending on the asset) in the current year - even if you don't actually pay for it until the following year.

2.  Make a contribution to a tax-deferred retirement plan. If you work for a company that offers a 401K plan you should consider making your contributions on a pre-tax basis to ensure that you get the full benefit of the tax deduction. It should always go without saying that you should take full advantage of any employer matching contributions to your 401K or pension plan. This is basically free money - which in this case is also tax-deferred. If you have a small business consider setting up a Keogh plan to allow for tax-deferred contributions.

3.  Make charitable contributions. By making charitable contributions or engaging in other tax-deductible holiday gift giving you will generate a nice deduction for youself at tax time.

4.  Prepay expenses. Taxes and other tax-deductible business expenses can be prepaid in December - even if they are not due till after the first of the year. If you own a home you may want to consider making your January payment at the end of December so that you can add an additional month's worth of interest to your annual interest expense.

5.  Defer Income. Find ways to defer income until after the first of the year. You may be able to talk with your employer or your customers to negotiate some selective delays in current year income - effectively postponing your tax hit for that income. If you have a business you may delay sending certain invoices out until the end of December to ensure that you do not receive payments until the following year.

6.  Manage your capital gains and losses. If you have investments in stocks or other marketable securities you may want to consider holding onto those stocks which have appreciated in value and selling the losers in order to recognize that loss on this year's taxes. Currently you can use capital losses to offset other ordinary income (subject to some limitations). Alternatively, you may choose to offset gains in some investments with losses from others. Of course, if you truly believe that a stock is positioned for continued rapid appreciation you may want to hold onto it - even if it has been a loser.

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Home Office Deduction

One of the most common tax deductions for independent contractors and small business owners, is the home office deduction. Recent changes in the tax law have made it easier to claim this deduction. Be aware that the rules governing home office deductions are still quite complex. You would be well advised to read the a couple of rules of thumb to get you started:

Required Forms

If you're a sole proprietor, you must fill out IRS Form 8829 and include it with your annual tax return. Be sure to read the directions carefully. You may also be required to fill out IRS Form 4562.

For information on obtaining these and other tax forms, go to the IRS home page at IRS.USTreas.gov or follow our link to the TurboTax web site shown above.

Qualifying for the Deduction

The primary condition that must be met in order for a small business owner to qualify for the home office deduction is as follows:

The home office space must be your principal place of business and it must be used regularly and exclusivley for business management tasks and activities.

The normal interpretation of the law is that as long as you have a designated home office space or area where you attend to your business activities and the home office space is reserved exclusively for those activities and you do not have another permanent office where you normally conduct those activities, then you may claim the deduction.

Even if the home office is not your principal place of business, if you use it regularly to meet with clients and it is used exclusively for that purpose, then it may still qualify as a deduction. Check with your accountant.

A major change in the deduction occurred in 1999. The new provisions suggest that even if you are performing most of your actual labor outside of the home, for example, as in the case of a plumber, electrician, janitorial contractor, etc., but your home office is designated as the primary and exclusive location where you attend to administrative tasks, such as billing, customer service, payroll, and the like, then you may claim the deduction.

Note: If you are an employee of a company working from home, the deduction can only be claimed if you are required to work at home by the employer for the convenience of the employer.

How the Deduction Works

The home office deduction is based on the size of the home office relative to the size of your entire home. For example, if your home is 1,500 square feet in size and your home office is 300 square feet in size, then you may claim 20% of your home expenses as a home office deduction. If your office consisted of a single 150 square foot room then you would be able to deduct 10% (1,500 divided by 150) of your home expenses.

Typical home expenses which may be included in the home office deduction include mortgage interest, homeowners insurance, property taxes, utilities, garbage collection, and general maintenance and repairs. Of course any expense related directly to your home office, such as having it rewired or remodeled, are 100% deductible. Be aware that certain remodeling and repair deductions must be depreciated over time rather than expensed in a single year.

Caveat

Be aware that if you are a homeowner, the deduction of home office expenses and depreciation may trigger additional taxes if and when you sell your home. This must be weighed out in your decision of whether to take advantage of this deduction or not. Consult a tax professional for full details on potential tax ramifications given your personal circumstances.

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