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November
2003 On-line Tax Planning
Plan Now For April 15th
If you
think that the scary time of the year is over,
let us mention one word to you – taxes. If that
word doesn’t strike fear in your heart, we applaud you. For
the rest of the crowd, we thought this month would be the perfect time to remind
you that April 15 need not be the worst day of your financial life.
In fact, if you can’t make it an almost pleasant
day, at least you can minimize your pain with a little planning in the next two
months.
First things first
In a moment, we will discuss a few ways to plan your tax life for the next two
years, but first we want to remind you that the key to the value of this article
is what you do when your finished reading. Every
year we speak to numerous clients about various options they have to minimize
taxes. Every year, we are told what great ideas
we have and every year, many of those same people fail to follow through on the
opportunities they’re given. Unfortunately,
despite their best intentions, life just gets in the way. So,
whatever you do, please do not fail to act if you see an opportunity in this
article to minimize your tax bill.
2003 Tax Law Changes
What we really want to do is focus on how the 2003
changes will affect your tax planning thoughts over the next two months.
The 2003 Act affected many areas of the Internal
Revenue Code from tax rates applicable to ordinary and capital gain income to
the allowance of larger tax credits. The new
laws even provide some relief for simply being married.
Income Shifting
First, you will have to remember that the lower tax rates scheduled for future
years will take effect in 2003 and this is a very good thing. For
example, prior to the new law, the maximum tax rate for 2003 was 38.6 percent.
Now, the maximum rate is 35 percent through
2010. While the best news is we now have lower
rates across the board, a side benefit is we have a fairly static list of tax
rates for the next few years – if Congress doesn’t make changes.
The changes in tax rates to help offset the so-called “marriage penalty” will
also need to be factored into your planning. For
example, the new law expands the amount of income that will be in the 10 percent
bracket by $1,000 for single filers and $2,000 for married taxpayers filing
joint returns. The law also increases the amount
of income subject to the 15 percent bracket to 200 percent of the single filer
amount for married taxpayers filing joint returns. This
will have the effect of immediately reducing a portion of your tax liability
with no action on your part.
Perhaps one of the biggest changes for those with high dividend income is the
reduction in the rates for certain dividend income. Depending
on the tax bracket you fall in, your rate on qualifying dividend income will
drop to either 15 percent or 5 percent for 2003-2008. Again,
this could factor significantly into how much tax you can expect and how other
tax strategies will interplay with the rate reductions.
These are only a few of the ways in which the 2003 act will affect your need to
shift income. Even so, you may well benefit from
income shifting, but now more than ever, a good projection is necessary to help
you make the right decision.
Expense Shifting
Just like income shifting is a good idea, so is expense shifting.
This generally takes the form of accelerating
business and other deductions into the current year if you will be in a higher
tax bracket than next year. The converse is also
true if it looks like you might be in a higher bracket next year.
Again, the new law gives us some great
opportunities for 2003-2004, especially if you earn self-employment income
through an unincorporated business.
For example, prior to the 2003 Act, the maximum Code Section 179 deduction
(immediate expensing of depreciable assets) was $25,000. For
2003-2005, this has increased to a maximum of $100,000. Recognizing
that this level of expenditure might bump up close to the prior law’s maximum of
$200,000 in asset additions before starting to lose the deduction, Congress
doubled the limit to $400,000. If you are in a
growth mode, accelerating your fixed asset purchases may save you big bucks.
At the same time, instead of allowing a bonus
depreciation of 30 percent for assets bought before September 11, 2004, the rate
has now climbed to 50 percent. Since this is an
immediate write-off, you don’t even have to adjust it when computing Alternative
Minimum Taxable Income. Finally, canned software
even qualifies for the 179 deduction now.
While the new changes may help many married taxpayers
move income to lower tax rates, if you are married, you may or may not benefit
from the increase in the standard deduction for married taxpayers filing
jointly. The 2003 Act basically takes the single
taxpayer’s standard deduction and doubles it. This
could make your present tax deductions worth less.
As with income shifting, much of the time, expense shifting will also benefit
taxpayers with the capacity to time their deductions. However,
the new law will have an impact on both the amount and timing of deductions;
therefore, careful projections should be made early to provide the best possible
opportunity to minimize taxes.
Retirement Planning
Maximizing contributions to 401(k) and other qualified
retirement plans is still one of your best ways to minimize income taxes. Here
are a few things you need to remember:
 | If you are under 50, you can generally
contribute up to $3,000 for all types of IRA contributions in 2003.
If you are over 50, you can contribute an
additional $500 in 2003. There are limitations
if you are a participant in an employer’s plan or if your Modified Adjusted
Gross Income exceeds certain levels.
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| If you are involved in a salary reduction
SEP, 401(k), 403(b), or 457 plan, you can defer up to $12,000 if you are less
than 50 and add an additional $2,000 to that if you are over 50.
Even better, in some cases you can defer up to
100% of your income if you make less than the maximum allowable annual
deferral.
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| If your employer has a SIMPLE plan, you can
defer $8,000 if you are less than 50 years old and add $1,000 to that number
if you are 50 years old or older. |
The rules governing retirement plans and
contributions are complicated. If your employer
has a plan established, you will need to know the plan provisions for changing
deferral rates before making any moves. If you
are the employer and wish to set up a new plan, act fast as some plans must be
established prior to December 31, 2003 to allow for a deduction.
The plans don’t necessarily need to be funded by
year-end, but they do need to be in force.
Parting Comments
The changes in the Code over the last few years are enough to make your head
spin. With the changes in 2003, though, the Code has added new levels of
complexity and, frankly, you just have to run the numbers to make sure you make
the best decisions. If you think you or your
business might benefit from one of the many tax savings strategies available, we
urge you to sit down now and plot your tax course for the rest of 2003 and 2004;
two months is enough time, but not by much, to put effective strategies in
place.
Give us a call if you need help.
Tax
Planning Archives
For More Information Contact:
Bucheri McCarty & Metz LLP
2366 W. Boulevard
P.O. Box 2147
Kokomo, IN 46904-2147
Telephone: (765) 236-2300
FAX: (765) 236-2333
Internet:
info@bmmcpas.com
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