Mid-Year Maneuvers

With these astute approaches, the second half of 2004 can be less taxing than the first half

be used regularly and exclusively for business. You can’t use it for other purposes.” Your home office must be your principal place of business, meaning that’s where you perform the most important part of your work not at another location. Assuming you arrange your affairs so you meet those criteria and you use, say, 10% of your home as an office, you can deduct 10% of your homeowner’s insurance, 10% of your roof repairs, etc.

Business equipment deductions. Besides outfitting his home office, Williams says that he also intends to buy vans for his expanding business and, perhaps, other equipment as well. “This is a good time to buy equipment that you need, as long as you can afford it,” says Grant. “Under Section 179 of the tax code, you can take an immediate deduction for up to $100,000 worth of purchases this year,” says Grant.

However, not all equipment will qualify for this deduction, according to Grant. “Some purchases may have to be depreciated over several years,” he says, “but the 2003 tax law includes a provision that allows 50% bonus depreciation for business equipment. That provision expires soon, so it might pay to act this year.” Mid-year, then, can be a good time to plan what business equipment you intend to purchase at the end of 2004.

Investors May Dote on Dividends
Mid-year also can be a good time for a portfolio review, with an eye toward cutting taxes on investment income. “I’ve increased the amount of dividend-paying stocks I own,” says Andre, naming IBM, GE, and Bank of America among his holdings. “I also own some utilities stocks. The new 15% tax rate on dividend income makes those kinds of investments more appealing.” Dividends are now taxed as lightly as long-term capital gains are taxed, while interest income may be taxed up to 35%.

Investment interest expense. “I buy these stocks on margin,” says Andre. “If they go up in price, the leverage will increase my profits.” Buying stocks with borrowed funds boosts the risks as well as the potential returns, but today’s low interest rates make such a strategy more attractive.

The tax treatment of margin investing is tricky, though. “The interest on margin loans may be tax-deductible,” says Jerry Lerman, managing director, American Express Tax and Business Services in New York. “Such loans can produce investment interest expense, which is deductible up to the amount of net investment income.”

The catch? Dividends that qualify for the 15% maximum rate don’t count as investment income for the investment interest-expense deduction. If your only investment income comes from dividends, you won’t get to deduct the margin interest you pay. On the other hand, if you also have interest income and short-term capital gains, you can deduct margin interest against that income while still getting the bargain 15% tax rate on dividend income and long-term capital gains.

Tax shelters. Other tax-saving investment opportunities might be investigated now, well before year-end. “Some of my clients have done well with low-income housing partnerships as well as oil

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