#1 Taxpayer problem identified

There are many ways that you can slash your taxes by making the maximum use of your dependents. Here are a few strategies to consider.

* Put them to work. If you're an unincorporated business owner, consider hiring your kids and putting them on the payroll. This allows you a double-dip tax savings of both income and self-employment taxes. Your kids won't have to pay any social security/Medicare (FICA) taxes on their wages if they're under age 18, and they won't be subject to federal unemployment (FUTA) taxes if they're under age 21. With the 2004 standard deduction for single taxpayers at $4,850, you can pay that amount to your child with no income tax consequences — up to $7,850 if the child fully invests in a deductible IRA. If you're in the 25% tax bracket, the income and self-employment tax savings for your family unit can be as much as $3,160! Even if your business is incorporated, in which case the kids are subject to FICA and FUTA taxes, you'll still have a substantial income tax savings.

* Give appreciated property. Even with the new, lower 15% tax rate on long-term capital gains, giving appreciated property (such as stock) to that college bound student or your low-income parents can save tax dollars. It's likely that your child/parent will be able to sell the asset and pay tax at a maximum rate of 5%. Since you gifted the property to them, you'll have no income tax consequences whatsoever when they sell the property.

* Don't claim the dependent. Many of you with college age children are barred from taking the Hope scholarship credit or the lifetime learning credit because your income is above the allowable limits. So consider not claiming that child as a dependent. If you forgo taking the dependency exemption, the child is allowed to claim the credit on his or her return. It doesn't matter that you're still paying the education expenses, or even if the child is still a dependent. But this strategy works only when the child has taxable income — which is yet another reason to hire your child in your business.

* Have grandparents fund an education savings account for your child. Is your income too high to permit a $2,000 contribution to your child's education savings account? Perhaps your parents' income is low enough to allow them to make the contribution. This is true even if you give the money to your parents to be used to make the contribution.

Popular loan program is discontinued

The Small Business Administration was forced to temporarily discontinue one of its loan programs that helped provide capital to start-up businesses. The 7(a) loan guarantee program provided financing to companies that couldn't get conventional bank loans because they were too new to have established credit histories. The SBA would guarantee up to 85% of a bank's loan to such businesses.

The recovering economy created a surge in demand for SBA loan guarantees, forcing the agency to shut down the program until additional funds are available.

Corporate minutes have tax importance

To preserve the legal benefits of incorporation, corporations should hold regular director/ shareholder meetings. By keeping clear and appropriate records of these meetings in the form of corporate minutes, firms can save taxes and avoid business problems.

Properly documented transactions are more assured of getting favorable tax treatment. For example, compensation to an employee-stockholder is tax-deductible only if it's necessary and reasonable for business operations. When setting corporate officer compensation, consider recording comparable industry salaries, the officer's scope of responsibility, job qualifications and experience, and current economic conditions. Documenting all these factors will show that the compensation was reasonable and, therefore, tax-deductible.

Other business matters with potential tax consequences should also be carefully recorded in the minutes. These include dividends, bonuses, deferred compensation arrangements, and loans, leases, or other transactions between officers/shareholders and the company. Your goal should be to clearly document the business intent behind each decision.

Keeping complete and accurate minutes of your corporate meetings may seem like a bothersome task. But the time spent now can save your corporation a great deal of money later on.

Get with your attorney and bring your corporate minutes up to date.

Car loans add to heavy debt load

It appears that cars are partly responsible for the ever-increasing debt load American households are taking on. Consumers are making smaller down payments and stretching car loans out for longer periods.

The average down payment on a new car is currently in the 3% to 5% range compared to 15% in 1995. Today's average loan term is 63 months compared with 48 months in 1999. Some of today's car loans even stretch out to 80 months. According to the Consumer Bankers Association, last year banks financed an average 101% of a new vehicle's cost compared to 89% in 1997. The reason? Consumers were taking loans that covered not only the new car but also the amount still owed on the old car.

Historically low interest rates have led to a boom in home buying — and a corresponding leap in home prices — in many markets throughout the country. As a result, many people are considering real estate as a possible investment alternative. But before you decide to become a landlord, consider the tax implications.

* Tax breaks. Property owners can deduct certain expenses directly related to the maintenance of rental property. These include advertising, legal fees, and the salary of a caretaker. As a landlord, you can also deduct the value of the building itself over a 27.5 year period, via depreciation. When you're ready to sell the rental property, you can swap it using a "like-kind" or Section 1031 exchange. In a like-kind exchange, the IRS allows you to roll the gains from one investment property to another similar property without a current tax bill. Be careful, however. For this type of transaction, you definitely need to follow the IRS rules to the letter.

* Tax pitfalls. Real estate investing does carry some potential risks. Besides the headaches involved in being a landlord (finding tenants, collecting rents, repairing buildings), the tax rules are not always favorable. When you sell the property, the depreciation portion of your capital gain, for example, will be taxed at a higher rate than the balance of the gain. In addition, if you sell within a year of purchasing a rental property, you could face higher short-term capital gain tax rates. Also, losses on real estate rentals could be considered passive losses. If so, they would only be offset on your tax return against gains from other passive activities.

* Another option. For many people, investing in a real estate investment trust (REIT) presents a better option. With a REIT you get the advantages of a portfolio of real estate, without the added work of being a landlord. However, REITs focus on one sector of the economy (real estate), so they tend to be less diversified than more broad-based mutual funds. In addition, owning a REIT also carries some tax consequences. REITs are required to pay out 90% of their income in the form of dividends or return of capital, so a portion of any distribution may be taxable.