Tax Tip
Septmeber 2006
Thinking of buying a new Toyota or Lexus Hybrid? Better act quickly!
By IRS rules, the full amount of the hybrid tax credit is allowed up to the end of the first quarter after the quarter in which the manufacturer sells its 60,000 th hybrid vehicle. Toyota (which also makes Lexis) has sold its 60,000 th hybrid, so the credit will phase out for Toyota and Lexus models delivered after Sept 30, 2006. The credit will be reduced to 50% if purchased from Oct. 1, 2006 through March 31, 2007, and reduced to 25% through Sept. 30, 2007. After that date, there is no credit for this manufacturer. The full amount of the credit will be available at least through the end of the year for Ford, Honda, and GM hybrid vehicles. These 2006 and 2007 models have been certified for the credit in the following amounts: Model Year 2007
*2006 Honda Accord Hybrid AT and Navi AT without updated calibration qualify for a credit of $650.
The upcoming sales tax holiday for the state of
To find out what local jurisdictions are not participating in the Sales Tax Holiday click on the following links:
Counties - http://www.dor.mo.gov/tax/business/sales/taxholiday/counties.htm
Districts - http://www.dor.mo.gov/tax/business/sales/taxholiday/districts.htm
Businesses that are filing in a non-participating jurisdiction during the Sales Tax Holiday will receive a long form Sales Tax Return (Form 53-1). This form will replace the normal form for this filing period. If you are filing in a participating jurisdiction you will use your normal form and make a negative adjustment when entering the total gross receipts for all sales made. If you do not sell any qualifying items you should continue to use your normal form.
Tax Tip
July 2006
Telephone Excise Tax Refunds
The Internal Revenue Service announced last May that it will stop collecting federal excise tax on long-distance telephone service. The communications companies that collect this tax must stop by July 31, 2006. The rate charged was 3% of the long-distance charges billed.
Taxpayers will be able to request a refund for the excise taxes paid on long-distance service billed to them after Feb. 28, 2003. All refunds will be claimed on their 2006 tax returns. The IRS has stated that guidance on claiming the refund will be included in the instructions for the various tax forms. They are working on a simplified procedure for individual taxpayers so that a safe harbor amount can be claimed as a refund without providing documentation.
Taxpayers other than individuals ( partnerships, corporations, S-corps) will be permitted a refund of only the amount of actual tax paid on these long-distance services during the period March 1, 2003 through July 31, 2006. There will be no safe harbor amount for entities other than individuals. Therefore it may be a good idea to collect these bills now. Long-distance service includes bundled service where the plan does not separately state the charge for local telephone service. The refund will not apply to any charge for stand alone or separately stated local service.
Please contact us if you have any questions on what information to collect. We will let you know when the IRS issues further guidance on this.
Tax Tip
June 2006
President Signs New Tax Acts
On May 17 th, the President signed the “Tax Increase Prevention and Reconciliation Act” into law. We have outlined below some of the major provisions.
Tax provisions affecting individuals in the Tax Increase Prevention and Reconciliation Act
The Act contains investor tax breaks, alternative minimum tax ( AMT) relief, and several other provisions with immediate and long-term impact on individuals. AMT relief. Originally enacted to make sure that wealthy Americans did not escape paying taxes, the AMT, which is a parallel tax system which does not permit several of the deductions permissible under the regular tax system, such as state, local and property taxes, has started to ensnare more middle-income taxpayers.
This is in part due to the fact that the AMT parameters are not indexed for inflation. In recent years, Congress has provided a measure of relief from the AMT by raising the AMT “exemption amounts”—allowances that reduce the amount of alternative minimum taxable income, reducing or eliminating AMT liability. (However, these exemption amounts are phased out for taxpayers whose alternative minimum taxable income [AMTI] exceeds specified amounts.)
For 2005, the AMT exemption amounts were $58,000 for married couples filing jointly and surviving spouses; $40,250 for single taxpayers; and $29,000 for married individuals filing separately. However, for 2006, those amounts were scheduled to fall back to the amounts that applied in 2000: $45,000, $33,750, and $22,500, respectively.
This would have brought millions of additional middle-income Americans under the AMT system, resulting in higher federal tax bills for many of them, along with higher compliance costs associated with filling out and filing the complicated AMT tax form. To prevent the unintended result of having millions of middle-income taxpayers fall prey to the AMT, Congress has once again relied on a temporary fix to the problem, this time a one-year extension of the 2005 AMT exemption amounts, increased slightly.
Under the new law, for tax years beginning in 2006, the AMT exemption amounts are increased to: (1) $62,550 in the case of married individuals filing a joint return and surviving spouses; (2) $42,500 in the case of unmarried individuals other than surviving spouses; and (3) $31,275 in the case of married individuals filing a separate return. Another provision in the new law provides AMT relief for personal tax credits.
The tax liability limitation rules generally provide that certain nonrefundable personal credits (including dependent care, elderly and disabled, Hope Scholarship and Lifetime Learning, and the D.C. homebuyer) are allowed only to the extent that a taxpayer has regular income tax liability in excess of the tentative minimum tax, which has the effect of disallowing these credits against AMT. Temporary provisions had been enacted which permitted these credits to offset the entire regular and AMT liability through the end of 2005. The new law extends this temporary provision to tax years beginning in 2006.
Investor tax breaks extended.
In 2003, Congress passed a measure to lower the tax rate on most dividends to 15 percent from as high as 38.6 percent and to lower rates on most capital gains from 20 percent to 15 percent. That measure was set to expire at the end of 2008, but the new law extends the favorable rates through 2010.
Income limitations on Roth IRA conversions eliminated, beginning in 2010.
In a regular individual retirement account (IRA), the taxpayer gets a deduction for dollars he puts in and his earnings grow tax free, but he pays ordinary income tax on every dollar he takes out, and withdrawals are subject to significant restrictions. In a Roth IRA, the taxpayer gets no tax deduction for contributions, but his money grows tax free and there's no tax, and few restrictions, on withdrawals.
Under current law, only taxpayers with $100,000 or less in modified adjusted gross income can convert a regular IRA into a Roth IRA. A taxpayer making the conversion generally must pay tax on money he takes out of his regular IRA, but once it's in his Roth IRA, he won't pay tax on that money or the money it earns. Generally speaking, Roth conversions appeal to taxpayers who either think their tax rate will go up in retirement, or believe that the value of their account will rise significantly, and thus are willing to make an upfront tax payment when they convert in order to reap large tax savings in later years.
Under the new law, beginning in 2010, taxpayers with more than $100,000 of modified adjusted gross income also will be able to convert a regular IRA into a Roth IRA. To make such conversions more attractive in 2010, the new law permits taxpayers who convert in 2010 to spread the income and resulting tax payments on the converted funds over two years—2011 and 2012.
Kiddie tax age limit raised from under 14 to under 18.
At one time, wealthy parents could significantly lower their family's tax bill by transferring investment assets to minor children. This tax technique, called income shifting, worked by taking income out of the parents' higher tax bracket and placing it in the lower tax brackets of their children. To curtail the use of this tax technique, Congress enacted the “kiddie tax” rules, which said that children under 14 who had more than a small amount of unearned (investment) income had to pay tax at their parents' marginal tax rate (the rate of tax on the last dollar earned).
The threshold amount at which the kiddie tax kicks in is two times the amount allowed as a standard deduction for a dependent that has only investment income. For 2006, that amount is $850, so the kiddie tax begins to apply when the child has more than $1,700 in unearned income. Under the new law, the age limit below which a child's income from investments is taxed at the parents' rates is raised from 14 to 18. The new law specifies, however, that the kiddie tax does not apply to a child who is married and files a joint return for the tax year. It also adds an exception to the kiddie tax for distributions from certain qualified disability trusts. The new provisions apply to tax years beginning after Dec. 31, 2005.
Capital gain treatment for self-created musical works.
Under pre-Act law, capital assets do not include copyrights, literary, musical, or artistic compositions, letters or memoranda, or similar property held by a taxpayer whose personal efforts created the property. As a result, when a taxpayer sells copyrights he owns in, for example, books, songs, or paintings that he created, gain from the sale is treated as ordinary income, not capital gain, which is generally taxed at a lower rate. Under the new law, at the election of a taxpayer, the sale or exchange before Jan. 1, 2011 of musical compositions or copyrights in musical works created by the taxpayer's personal efforts is treated as the sale or exchange of a capital asset.
Changes to the foreign earned income exclusion and housing allowance for U.S. citizens working abroad.
The new law makes three changes to the foreign earned income exclusion and housing allowance. First, the income exclusion is indexed for inflation starting in 2006 (rather than 2008 under current law). Second, the base housing amount used in calculating the foreign housing cost exclusion in a taxable year is 16 percent of the amount of the foreign earned income exclusion limitation (instead of the present law 16 percent of the grade GS-14, step 1 amount). Reasonable foreign housing expenses in excess of the base housing amount remain excluded from gross income, but the amount of the exclusion is limited to 30 percent of the taxpayer's foreign earned income exclusion. Third, income excluded as either foreign earned income or as a housing allowance is included for purposes of determining the marginal tax rates applicable to non-excluded income.
Business and corporate changes in the Tax Increase Prevention and Reconciliation Act
The new Act also contains an assortment of business and corporate tax breaks, as well as some revenue raisers affecting business taxpayers.
Extension of increased expensing for small business.
A taxpayer, other than an estate, trust, and certain non-corporate lessors, may elect under Code Sec. 179 to deduct as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in his trade or business.
The maximum dollar amount that may be deducted annually is $100,000 ($108,000 for 2006, as adjusted for inflation). Under pre-Act law, this amount was to drop to $25,000 for property placed in service in tax years beginning after 2007. The taxpayer's maximum annual Code Sec. 179 expensing amount is reduced dollar-for-dollar by the amount of qualified expensing-eligible property that he places in service during the tax year in excess of a phase-out amount. This amount is $400,000 ($430,000 for 2006, as adjusted for inflation).
Under pre-Act law, this amount was to drop to $200,000 for property placed in service in tax years beginning after 2007. Off-the-shelf computer software qualifies as “section 179 property” eligible for the Code Sec. 179 expense election, but under pre-Act law, could not qualify in tax years beginning in 2008 and later. A Code Sec. 179 election or a revocation may be made, without IRS's consent, on an amended federal tax return for the tax year to which the election or revocation applies, but under pre-Act law, could not be so made in tax years beginning after 2007.
The new law extends the $100,000 expense election limit and the $400,000 phase-out ceiling (as inflation adjusted), the inclusion of off-the-shelf computer software in eligible “section 179 property,” and the right to amend or revoke an expense election without IRS's consent for two years, to tax years beginning before 2010.
50% W-2 wage limit on the Code Sec. 199 domestic production deduction modified.
Under present law, the domestic production deduction is limited to 50% of the W-2 wages paid by the taxpayer. Under the Act, the W-2 wages taken into account for purposes of this limitation must be properly allocable to domestic production gross receipts—that is, the gross receipts from the activities that give rise to the deduction. In addition, the Act repeals the special limitation on the amount of W-2 wages that may be taken into account by partners and S corporation shareholders. The changes are effective for tax years beginning after the enactment date.
Amortization of expenses paid for musical works and copyrights.
The new law allows taxpayers to elect to amortize over five years expenses paid or incurred in creating or acquiring certain musical works and copyrights. This five-year amortization method is an alternative to the income forecast method of accounting for these expenses.
Revenue offsets.
The new law pays for the extended and new tax breaks highlighted above with a number of revenue-raising provisions, including the following:
Please keep in mind that we’ve described only the highlights of the most important changes in the new law. Please call for more details on how you may be affected by this important tax legislation.
February 2006
Did you hear the President talk about Health Savings Accounts?
There is an increasingly popular healthcare option known as a health savings account (HSA). For eligible individuals, HSAs offer a tax-favorable way to set aside funds (or have their employer do so) to meet future medical needs. Here are the key tax-related elements
Who is eligible? To be eligible for an HSA, you must be covered by a “high deductible health plan”. For 2006, a “high deductible health plan” is a plan with an annual deductible of at least $1,050 for self-only coverage, or at least $2,100 for family coverage. Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits cannot exceed $5,250 for self-only coverage or $10,500 for family coverage. Deduction limits. You can deduct contributions to an HSA subject to limitations. The limitation on deductions for a person with self-only coverage is generally the lesser of the annual deductible or $2,700. For an individual with family coverage, the limitation is generally the lesser of the annual deductible or $5,450. Employer contributions. If you are an eligible individual, and your employer contributes to your HSA, the employer's contribution is treated as employer-provided coverage for medical expenses under an accident or health plan and is excludable from your gross income up to the deduction limitation, as described above. Further, the employer contributions are not subject to withholding from wages for income tax or subject to FICA or FUTA. The eligible individual cannot deduct employer contributions on his federal income tax return as HSA contributions or as medical expense deduction. Earnings. If the HSA is set up properly, it is generally exempt from taxation, and there is no tax on earnings. However, taxes may apply if contribution limitations are exceeded, required reports are not provided, or prohibited transactions occur. Distributions. Distributions from the HSA to cover an eligible individual's qualified medical expenses, or those of his spouse or dependents, are not taxed. Qualified medical expenses for these purposes generally mean those that would qualify for the medical expense itemized deduction. If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 10% tax will apply to the withdrawal, unless it is made after reaching age 65, or in the event of death or disability.
As you can see, HSAs offer a very flexible option for providing health care coverage. Individuals who anticipate being in good health for several years are the most likely candidates. While the amount in the HAS builds up tax free, money is saved on premiums paid for the high–deductible insurance. Some employers are using this as an alternative to their heath plans. The employer enrolls in a high-deductible insurance plan and sets up health savings accounts for the employees to cover expenses not paid by insurance. Please call if you would like to get further information.
January 2006 Tax TipRecordkeeping RequirementsWe are often asked how long records should be kept. The time varies with the type of record, and often with the source of the recommendation. One of the more conservative charts we have seen is attached. It was distributed to us by ADP Inc payroll services, and compiled by CCH publishers.The IRS offers guidelines for individuals and businesses in the publications linked below:http://www.irs.gov/pub/irs-pdf/p552.pdfhttp://www.irs.gov/pub/irs-pdf/p583.pdfThese recommendations are general guidelines. Please contact us if you would like advice on specific document retention.Reconstructing RecordsThe IRS has come out with tips on reconstructing records after a casualty loss or disaster. Luckily, most of us were not affected by the recent hurricanes, but you may find this information useful for any “smaller scale casualty” you may suffer.
http://www.irs.gov/newsroom/article/0,,id=152317,00.html
December 2005 Tax Tip (Part III) Year-End Planning for the Alternative Minimum Tax The alternative minimum tax (AMT) can affect the year-end planning of taxpayers with large amounts of preference items. If the AMT applies, and the taxpayer's regular taxable income is relatively small, year-end tax planning may have to be geared more to reducing the AMT than the regular tax. The amount of AMT a taxpayer must pay is the excess of his tentative minimum tax over his regular income tax. The AMT is calculated on its own form, using a different set of rules than the regular tax. Preference items are added back to regular taxable income to calculate the minimum tax. Examples of common preference items are state income taxes, dependent exemptions, interest from certain municipal bonds, incentive stock options, and interest on home equity loans used for something other than home improvements. If you were subject to AMT in the past, or feel you may be in 2005 because you have substantial amounts of these preference items, there are a few planning opportunities you should consider:
Please contact our office for more information on AMT and ways to manage it for your tax situation.
2005 Year-End Tax Planning (Part II) Tax Planning for IndividualsDeduction Planning Deduction timing is also an important element of year-end tax planning. Deduction planning is complex, however, due to factors such as AGI levels and filing status. If you are a cash-method taxpayer, remember to keep the following in mind: Deduction In Year Paid: An expense is only deductible in the year in which it is actually paid. Payment By Check: Date checks before the end of the year and mail them before January 1, 2006. Promise To Pay: A promise to pay or providing a note does not permit you to deduct the expense. But you can take a deduction if you pay with money borrowed from a third party. Hence, if you pay by credit card in 2005, you can take the deduction even though you won't pay your credit card bill until 2006. AGI Limits : The AGI limits on itemized deductions affect deduction planning. For 2005 returns, overall itemized deductions are reduced by 3% of the AGI exceeding $145,950 ($72,975 if married filing separately). Similarly, certain deductions may be claimed only if they exceed a percentage of AGI: 7.5% for medical expenses, 2% for miscellaneous itemized deductions, and 10% for casualty losses. Hurricane Katrina Relief: Qualified charitable contributions are not subject to the overall itemized deduction limitations. Standard Deduction Planning : Deduction planning is also affected by the standard deduction. For 2005 returns, the standard deduction is $10,000 for married taxpayers filing jointly, $5,000 for single taxpayers, $7,300 for heads of households, and $5,000 for married taxpayers filing separately. If your itemized deductions are relatively constant and are close to the standard deduction amount, you will obtain little or no benefit from itemizing your deductions each year. But simply taking the standard deduction each year means you lose the benefit of your itemized deductions. To maximize the benefits of both the standard deduction and itemized deductions, consider adjusting the timing of your deductible expenses so that they are higher in one year and lower in the following year. Medical Expenses: Medical expenses, including amounts paid as health insurance premiums, are deductible only to the extent that they exceed 7.5% of AGI. Consider bunching medical expenses into years when your AGI is lower, by paying off medical or dental bills, buying glasses or having orthodontic work done. If you furnish more than half of the support for your parent, you can deduct the medical expenses you pay for them even if you do not claim them as your dependent because they have more than $3200 in income or file a joint return. State Taxes: If you anticipate a state income tax liability for 2005 and plan to make an estimated payment, consider making the payment before the end of 2005. Note that in 2005, you can choose to deduct as an itemized deduction state and local sales taxes instead of state and local income taxes. If you choose to do this, you can deduct your actual sales and use taxes, or use tables published by the IRS and add to the table amount your actual sales tax for “big-ticket” items like motor vehicles and boats. At the present time, the sales tax option is scheduled to expire after 2005. If you are considering buying a “big-ticket” item, you may consider doing so before the end of the year to take advantage of this option, depending on the amount of state income tax you have paid in 2005. Charitable Contributions: Consider making your charitable contributions at the end of the year. This will give you use of the money during the year and simultaneously permit you to claim a deduction for that year. You can use a credit card to charge donations in 2005 even though you will not pay the bill until 2006. A mere pledge to make a donation is not deductible, however, unless it is paid by the end of the year. Note, however, for claimed donations of cars, boats and airplanes of more than $500, the amount available as a deduction will significantly depend on what the charity does with the donated property, not just the fair market value of the donated property. If the organization sells the property without any significant intervening use or material improvement to the property, the amount of the charitable contribution deduction cannot exceed the gross proceeds received from the sale. To avoid capital gains, you may want to consider giving appreciated property to charity. Hurricane Katrina Relief: For qualified charitable contributions made by individuals between August 28, 2005, and December 31, 2005, for Katrina relief efforts, the 50-percent-of-income limitation and the phaseout of itemized deductions provisions are suspended. Although enacted under the guise of Hurricane Katrina relief, this provision applies to qualified contributions made for any purpose, not just those for relief efforts related to Katrina, but the recipient organizations are limited to certain public charities, private foundations other than private non-operating foundations, and governmental units. Also, individual taxpayers may claim a $500 deduction against taxable income for each "Hurricane Katrina displaced individual" that the taxpayer houses for free in the taxpayer's principal residence for a period of at least 60 days that ends in the taxable year. The deduction is available only in 2005 and 2006. The aggregate total for both years cannot exceed $2,000. Miscellaneous Deductions . Miscellaneous itemized deductions for any year are allowed only to the extent they exceed 2% of your AGI. The most common miscellaneous deductions are for unreimbursed employee business expense, investment advisory fees, subscriptions to investment advisory publications or professional journals, safe deposit box fees, and tax preparation costs. If you are close to meeting the 2% threshold, you may consider bunching these deductions by extending subscriptions, paying dues, enrolling in and paying for job-related courses. Educator Expense Deduction . The $250 above-the–line deduction for unreimbursed books, supplies, and computer equipment is scheduled to expire after 2005. Business Deductions Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses and dependents as an above-the-line deduction, without regard to the 7.5% of AGI floor. Equipment Purchases: If you are in business and purchase equipment, you may make a "Section 179 Election," which allows you to expense (i.e., currently deduct) otherwise depreciable business property. In general, you may elect to expense up to $105,000 of equipment costs (with a phase-out for purchases in excess of $420,000) if the asset was placed in service during 2005. In addition, careful timing of equipment purchases can result in favorable depreciation deductions in 2005. In general, under the "half-year convention," you may deduct six months worth of depreciation for equipment that is placed in service on or before the last day of the tax year. (If more than 40% of the cost of all personal property placed in service occurs during the last quarter of the year, however, a "mid-quarter convention" applies, which lowers your depreciation deduction.) A popular strategy in recent years is to purchase a vehicle (usually an SUV) for business purposes that exceeds the depreciation limits set by statute (i.e., a vehicle rated over 6,000 pounds). Doing so would not subject the purchase to the statutory dollar limit, $2,960 for 2005; $3,260 in the case of vans and trucks. Therefore, the vehicle would qualify for the full equipment expensing dollar amount. However, for SUVs (rated between 6,000 and 14,000 pounds gross vehicle weight) placed in service in 2005, the expensing amount is limited to $25,000. NOL Carryback Period: If your business suffers net operating losses in 2005, you may apply those losses against taxable income going back two tax years. Thus, for example, the loss could be used to reduce taxable income—and thus generate tax refunds—for tax years as far back as 2003. This information may also of interest… Tax-Free Disability Benefits - The IRS has ruled in a recent revenue ruling and in private letter rulings that employees that elect to receive disability coverage on an after-tax basis in a certain year, may exclude from income any disability benefits that they receive in that year. It does not matter if the employee received those benefits tax-free in previous years.It may be necessary for employers to amend their plans that provide disability insurance for their employees in order to give the employee the option of electing to be taxed on the premiums paid by the employer. The election must be made before the beginning of the plan year in which it becomes effective, and is irrevocable once the plan year begins.
This election may be beneficial for an employee whose health is deteriorating or for an older employee. If he would become disabled and start receiving benefits, they would be tax-free. One thing to keep in mind is that if the employee elects to be covered on an after-tax basis, he will also be subject to payroll taxes in the amount of the premiums paid by the employer.
November 2005 Tax Tip Year End Planning (Part 1) 2005 Year-End Tax Planning for Individuals As 2005 draws to a close, there is still time to reduce your 2005 tax bill and plan ahead for 2006. The approach we usually take is to suggest ways to defer income and accelerate deductions. Everyone’s situation is different and for some the opposite approach may save taxes (for example if you know you will be in a higher tax bracket in 2006). In the next few weeks we will highlight a few of the strategies, and hope you see something that you would like to explore further for your particular circumstances. Basic Numbers You Need To Know Because many tax benefits are tied to or limited by adjusted gross income (AGI)—IRA deductions, for example—a key aspect of tax planning is to estimate both your 2005 and 2006 AGI. Also, when considering whether to accelerate or defer income or deductions, you should be aware of the impact this action may have on your AGI and your ability to maximize itemized deductions that are tied to AGI. Your 2004 tax return and your 2005 pay stubs and other income- and deduction-related materials are a good starting point for estimating your AGI. Another important number is your "tax bracket," i.e., the rate at which your last dollar of income is taxed. The tax rates for 2005 are 10%, 15%, 25%, 28%, 33%, and 35%. Although tax brackets are indexed for inflation, if your income increases faster than the inflation adjustment, you may be pushed into a higher bracket. If so, your potential benefit from any tax-saving opportunity is increased. Reducing AGI for 2005 If you expect your AGI to be higher in 2005 than in 2006, or if you anticipate being in the same or a higher tax bracket in 2005, you may benefit by deferring income into 2006. Deferring income will be advantageous so long as the deferral does not bump your income to the next bracket. Some ways to defer income include: Delay Billing : If you are self-employed, delay year-end billing to clients so that payments will not be received until 2006. Interest and Dividends : Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not includible in income until received. To defer interest income, consider buying short-term bonds or certificates that will not mature until next year. If you will recognize little or no gain on the disposition of a taxable investment, you might consider investing in a tax-exempt fund. The tax-exempt interest will not be included in AGI. For some individuals the after-tax amount received from the tax-exempt interest will be at least as much as the after-tax amount from the taxable investment especially if the tax-exempt fund is also exempt from state taxes. Paying Off Debts . If you have debt on which you are paying interest, you might consider selling part of your income-generating investments to pay off the debt. You will reduce your AGI, and in many instances, the interest you save is greater than what you would have earned on the investment. Increase contributions to retirement plans. You may be able to decrease your AGI by increasing contributions to a retirement plan such as a 401(k), SIMPLE or pension plan. Taxpayers who will be 50 before the end of 2005 should take advantage of the “catch-up” contributions limits. We have included a chart showing the retirement plan limits for 2005 and 2006. The 2006 amounts may be useful if you are planning your salary deferral amount for next year. Take capital losses in 2005 . If you have investments with unrecognized capital losses, you might consider selling the investment in 2005. You will realize the most benefit is you can offset up to $3,000 of those losses against ordinary income instead of long-term capital gain. In addition to lowering your income subject to taxes, Items that are affected by lowering your AGI include -overall itemized deduction reduction -phaseout of personal and dependency exemption -miscellaneous itemized deduction -taxation of social security benefits -education expense deduction and credits -child tax credit and adoption credit -passive loss on active real estate limitation Please call if you would like to discuss how these strategies apply to your particular circumstances. We will look at deduction planning next week.
If possible, most of us want to put away as much as we can for our retirement years. The following dollar limits for retirement plans have been increased for 2006 by cost of living adjustments or legislative changes. The 2005 amounts are shown for comparison purposes.
|
2006 |
2005 |
|
|
|
Traditional and Roth IRAs |
$4,000 |
$4,000 |
IRA Catch-up contribution* |
$1000 |
$500 |
401(k) and 403(b) Deferral Limit |
$15,000 |
$14,000 |
401(k), 403(b) 457 Catch-up Contribution Limit* |
$5,000 |
$4,000 |
SIMPLE Deferral Limit |
$10,000 |
$10,000 |
SIMPLE Catch-up Contribution Limit* |
$2,500 |
$2,000 |
Ann ual Compensation Limit for Qualified Plans |
$220,000 |
$210,000 |
Defined Benefit Plan Annual Benefit Limit |
$175,000 |
$170,000 |
Defined Contribution Plan Annual Addition Limit |
$44,000 |
$42,000 |
Dollar Limit for Highly Compensated Employees |
$100,000 |
$95,000 |
Dollar Limit for Key Employees |
$140,000 |
$135,000 |
457 Deferral Limit |
$15,000 |
$14,000 |
Social Security Wage Base |
$94,200 |
$90,000 |
*Catch-up contributions available to individuals age 50 and older.
October 2005 Tax Tip 2005 Year-End Tax Planning for Individuals As 2005 draws to a close, there is still time to reduce your 2005 tax bill and plan ahead for 2006. The approach we usually take is to suggest ways to defer income and accelerate deductions. Everyone’s situation is different and for some the opposite approach may save taxes (for example if you know you will be in a higher tax bracket in 2006). In the next few weeks we will highlight a few of the strategies, and hope you see something that you would like to explore further for your particular circumstances. Basic Numbers You Need To Know Because many tax benefits are tied to or limited by adjusted gross income (AGI)—IRA deductions, for example—a key aspect of tax planning is to estimate both your 2005 and 2006 AGI. Also, when considering whether to accelerate or defer income or deductions, you should be aware of the impact this action may have on your AGI and your ability to maximize itemized deductions that are tied to AGI. Your 2004 tax return and your 2005 pay stubs and other income- and deduction-related materials are a good starting point for estimating your AGI. Another important number is your "tax bracket," i.e., the rate at which your last dollar of income is taxed. The tax rates for 2005 are 10%, 15%, 25%, 28%, 33%, and 35%. Although tax brackets are indexed for inflation, if your income increases faster than the inflation adjustment, you may be pushed into a higher bracket. If so, your potential benefit from any tax-saving opportunity is increased. Reducing AGI for 2005 If you expect your AGI to be higher in 2005 than in 2006, or if you anticipate being in the same or a higher tax bracket in 2005, you may benefit by deferring income into 2006. Deferring income will be advantageous so long as the deferral does not bump your income to the next bracket. Some ways to defer income include: Delay Billing : If you are self-employed, delay year-end billing to clients so that payments will not be received until 2006. Interest and Dividends : Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not includible in income until received. To defer interest income, consider buying short-term bonds or certificates that will not mature until next year. If you will recognize little or no gain on the disposition of a taxable investment, you might consider investing in a tax-exempt fund. The tax-exempt interest will not be included in AGI. For some individuals the after-tax amount received from the tax-exempt interest will be at least as much as the after-tax amount from the taxable investment especially if the tax-exempt fund is also exempt from state taxes. Paying Off Debts . If you have debt on which you are paying interest, you might consider selling part of your income-generating investments to pay off the debt. You will reduce your AGI, and in many instances, the interest you save is greater than what you would have earned on the investment. Increase contributions to retirement plans. You may be able to decrease your AGI by increasing contributions to a retirement plan such as a 401(k), SIMPLE or pension plan. Taxpayers who will be 50 before the end of 2005 should take advantage of the “catch-up” contributions limits. We have included a chart showing the retirement plan limits for 2005 and 2006. The 2006 amounts may be useful if you are planning your salary deferral amount for next year. Take capital losses in 2005 . If you have investments with unrecognized capital losses, you might consider selling the investment in 2005. You will realize the most benefit is you can offset up to $3,000 of those losses against ordinary income instead of long-term capital gain. In addition to lowering your income subject to taxes, Items that are affected by lowering your AGI include -overall itemized deduction reduction -phaseout of personal and dependency exemption -miscellaneous itemized deduction -taxation of social security benefits -education expense deduction and credits -child tax credit and adoption credit -passive loss on active real estate limitation
Please call if you would like to discuss how these strategies apply to your particular circumstances. We will look at deduction planning next week.
September 2005 Tax Tip
Highlights of the New Energy Bill
The 2005 Energy Tax Act contains a series of tax breaks aimed at encouraging conservation and fuel efficiency by individuals and manufacturers. Broadly speaking, the Act provides tax incentives for consumers to buy energy efficient assets and for manufacturers and builders to provide them. Here's a summary:
Please keep in mind that we’ve described only the highlights of the most important changes in the new law. Please contact us for more details on how you may be affected by this important tax legislation.
August 2005 Tax TipAlert – Preserve Your Right To a Refund of Telephone Excise Tax Unless you carefully scrutinize your phone bills, you may not be aware that your telephone service provider adds a 3% excise tax to your bill, which it turns over to the Internal Revenue Service. Several large businesses have challenged the imposition of the telephone tax on flat-rate long distance service, suing the IRS to recover these taxes. To date they have been very successful; virtually all of the courts that have heard these cases agree that the tax does not apply to flat-rate long distance service, i.e., service for which charges are computed on a per minute basis regardless of the location in the U.S. being called. In order to join these taxpayers in collecting refunds, it is not necessary for you to litigate the matter in court. But you do have to file a protective refund claim in order to preserve your right to recover a refund. There is a three-year statute of limitations on the filing of refund claims. As a result of the statute of limitations, every month that goes by without filing a protective refund claim means that a month in which you paid tax that courts have said that you don't owe has been eliminated from your potential refund claim. So it does not pay to wait for the final resolution of this matter. A review of your phone bills for the last three years would be required in order to do an analysis as to whether a refund claim should be filed. A charge of a few thousand dollars a month for flat-rate long distance service would probably have to be incurred in order to justify the cost of filing the refund claim, but if it turns out that filing a refund claim is worthwhile, you can file your claim now to preserve your refund while litigation is finalized. Please contact our office if you are interested in further information.
July 2005Appreciated Stock Options
Appreciated Stocks offer many options. Giving them to teenagers can be a great benefit. If you give stock owned for more than one year to a child 14 or older, their gains on security sales are taxed at 5% as opposed to the 15% you would likely pay if you sold the stock yourself. This is a great and economical way to save for your child’s college fund. Also, donating appreciated securities to charity is very tax favored. If you owned the stock for more than one year, you can deduct the full value and avoid paying tax on the gain. Just don’t give stock that has decreased in value since you purchased it because the donee can’t turn around and sell the stock to claim the loss. In this situation, sell the stock yourself and give the charity the cash.
Tax Tip - October 2004
Time Expiring to Take Advantage of Bonus Depreciation
The Job Creation and Worker Assistance Act of 2002 provided for 30% extra first year depreciation for qualified property acquired after
There is an extended place in service date for qualified leasehold improvements placed in service before January 1, 2006, but only for costs paid or incurred before January 1, 2005 and only if the improvements are estimated to take more than two years to complete, or cost more than 1,000,000 and are estimated to take more than one year to complete. In general, however, the window of opportunity to take advantage of a large first year write off on the cost of most business machinery, furniture, equipment, and autos is scheduled to close soon.
Tax Tip ArchivesSeptember 2004 “FairPay” Rule Changes Overtime Rules
On August 23, 2004, changes to the federal overtime regulations in the Fair Labor Standards Act (FLSA) took effect. Under the FLSA, most employees in the US must be paid at least the minimum wage for all hours worked, and time and one-half for all hours worked over 40 in a work week. There is an exemption from
minimum wage and overtime pay for employees who are executive, administrative, professional, computer, or outside sales employees.The FairPay rule increases the salary threshold for overtime protection from
$8,060 to $23,660 per year (or $455 per week). Any worker making less than this amount will automatically be covered by the FLSA and will be eligible to receive overtime pay for any hours worked over 40 in each week.The Department of Labor has updated the FairPay Overtime Initiative section of
its Web site with several new sections to help employers and employees understand the new regulations. The Web site can be found at
www.dol.gov/fairpay
August 2004 Tax Tip
Time For Exchanging Series EE/E Bonds to Series HH ExpiringMany taxpayers find owning Series EE/E bonds attractive because not only is the interest state tax exempt, but reporting the interest earned each year to the IRS can be deferred until the bond is cashed in or matures. Currently an owner or surviving beneficiary of a Series EE/E bond can defer interest reporting further by exchanging it for a Series HH bond if the EE/E bond is at least 12 months old, worth $500 or more, and hasn’t matured for longer than a year. The amount of interest deferred on the old bond does not have to be reported until the new bond is cashed in, matures, or is reissued in some type of tax reportable event. This can mean another 20 years before the deferred interest is reportable. (The current interest that is paid every six months on the new HH bond is currently taxable.)The Treasury will stop issuing HH bonds after August 31, 2004 so this exchange option will no longer be available after that date. Whether it would be to your advantage to exchange any EE/E bonds you might hold at this time depends on a number of factors including the following:
- The amount of interest that has been deferred. If only a small amount of
interest is involved, deferral may not be warranted.
- The maturity date of the EE/E bonds. If the bonds are close to reaching
maturity, an exchange might be more desirable.
- The interest rate on the EE/E bonds. If the interest rate on the old bonds
is much higher than the 1.5% paid on the HH bonds, than the exchange
might not be desirable.
- Taxpayer’s tax bracket. If you expect to be in a much lower bracket at time
the HH bonds mature or are cashed in, it would be to your advantage to
exchange.
- Ability to make alternative investments. You may wish to cash in the bonds and
use the funds to purchase an investment that will yield a higher after tax return,
such as stock that pays dividends that is now taxed at the maximum 15% rate.
- Ability for tax planning. Exchanging the bonds allows more flexibility to control
the timing of the interest reporting to years when additional income does not
effect taxing of social security benefits, the medical expense deductions, or
other tax breaks calculated using adjusted gross income.
If you would like further information or to discuss if an exchange would be
favorable for you, please contact us.
December 2003 Tax Tip
Last month we talked about how lower interest rates could make borrowing from one's C corporation a good financial strategy. Lower interest rates can also affect estate planning. The value of annuities, life estates, term interests, remainders and reversions are determined by tables issued by the IRS under Code Sec. 7520. The Code Section 7520 interest rate hit an all-time low in July at 3%, and is starting to creep up. The rate for November is 4%, but this is still historically low as the value has been as high as 11.6% in 1989. Anyone who is considering an estate planning strategy that is benefited by lower rates should act quickly to maximize their savings.The following are strategies benefited by lower rates:Private Annuity - In a typical private annuity, a parent transfers property to his child in return for that child's unsecured promise to pay the parent a fixed periodic income for life. If the fair market value of the property transferred equals the present value of the annuity under the IRS valuation table, there is no gift tax due. Setting up the private annuity when interest rates are low results in a lower annual payment that the younger family member will have to make to avoid the gift tax.Grantor Retained Annuity Trust (GRAT) - When an individual establishes a GRAT, he retains an annuity interest for a specified term. At the expiration of the term, the trust property passes to a child or other individual named when the trust was set up (the remainder interest). Gift tax is payable only on the value of the remainder interest, which is calculated by subtracting the value of the annuity interest from the value of the property transferred. This way any appreciation in the property after the gift escapes the gift tax. A lower interest rate increases the value of the annuity retained by the grantor and therefore reduces the gift tax value of the remainder.Charitable Lead Annuity Trust - In this type of transfer, the charity receives an annuity interest and the remainder goes to a private beneficiary. A lower interest rate produces a larger gift or estate tax deduction for the annuity interest given to the charity, and a smaller value for any gift of the remainder interest.There are some strategies that are hurt by lower interest rates such as Grantor Retained Income Trusts and Charitable Remainder Annuity Trusts.Before any action is taken using one of these strategies, you would want to discuss how the tax changes in the Economic Growth and Tax Reconciliation Act of 2001 effect your estate planning situation. This Act reduced the estate and gift tax rates and increased the estate tax and generation tax exemption over a span of years from 2002 to 2009. This year the exemption is $1 million and will increase to $ 3.5 million by 2009.
Avoiding estate planning based on these numbers, however, may not be advisable as the 2001 rules are scheduled to go back in effect in 2011!
November Tax TipPOINTS OF INTEREST RE INTEREST
Remember the “good ol’ days” when all interest you paid was deductible? Besides home mortgage interest, the only interest deduction we are left with now is investment interest. It looks like the IRS will limit that also in the case of margin interest paid when the taxpayer also owns municipal bonds. There is an exception, however, if the cost of municipal bonds in your portfolio doesn’t exceed 2% of the cost of your total portfolio.If you take out a loan to buy municipals directly or use the muni’s as collateral for a loan, the exception doesn’t apply, and the interest is not deductible.
Speaking of interest, the low rates right now make borrowing by a shareholder of a C corporation from his corporation a good financial strategy. As long as the shareholder follows the rules to create a bona fide loan, it can be a way for him to get cash out of the corporation without paying income tax. One of those rules is to charge interest at a rate that is at least equal to what the IRS prescribes each month, called the applicable federal rate (AFR). For November these rates are 1.49% for short-term loans (less than 3 years), 3.27% for mid-term (at least 3 years but less than 9), and 4.88% for long-term (over 9 years) if compounded monthly. Other steps that should be followed to prevent the IRS from recharacterizing the loan as wages or dividends are as follows:
-there should be a written note containing the shareholder’s unconditional promise
to pay a fixed sum either over a repayment schedule (term loan) or on demand by
the corporation (demand loan). The term loan is probably the more favorable
right now since it locks in the rate for the entire term of the loan. -the note should give the corporation the legal right to enforce payment of
principal and interest. -scheduled payments should be made timely and records kept of all payments. -the balance sheet of the corporation should show a loan receivable from the
shareholder. -corporate minutes should be kept authorizing the lending, stating the terms of
the loan, and showing the shareholder was capable of repaying.
If the shareholder has old loans outstanding that are charging higher interest rates, now is a good time to pay off these loans, and replace them with new loans charging the lower rates in effect currently. Note that if the total amount of loans the shareholder has from the corporation doesn’t exceed $10,000, no interest needs to be charged under a de minimis exception.
October 2003Tax Tip2004 Retirement Plan Limits
In their news release issued October 16, 2003, the Internal Revenue Service announced the following cost of living adjustments and other changes to retirement plan limits. The 2003 amounts are shown for comparison purposes.
2004 |
2003 |
| 401(k) and 403(b) Deferral Limit
$13,000
|
$12,000 |
| 401(k), 403(b) 457 Catch-up Contribution Limit
$3,000
|
$2,000 |
| SIMPLE Deferral Limit
$9,000
|
$8,000 |
| SIMPLE 401(k) and IRA Catch-up Contribution Limit
$1,500
|
$1,000 |
| Annual Compensation Limit for Qualified Plans
$205,000
|
$200,000 |
| Defined Benefit Plan Annual Benefit Limit
$165,000
|
$160,000 |
| Defined Contribution Plan Annual Addition Limit
$41,000
|
$40,000 |
| Dollar Limit for Highly Compensated Employees
$90,000
|
$90,000 |
| Dollar Limit for Key Employees
$130,000
|
$130,000 |
| 457 Deferral Limit
$13,000
|
$12,000 |
| Social Security Wage Base
$87,900
|
$87,000 |
Tax Planning in August?
The new tax law passed in May lowered the tax rates retroactively, and withholding tables were adjusted July 1st. Now may be a good time to reassess your W-4 information. Your pay stub should have your year-to-date withholding. If you project the additional amount that will be withheld through year-end using the new amounts in the current period column, you can calculate what your total for 2003 will be. Of course if you feel you will be substantially over-withheld, you can file a new W-4 to have less taken out.Do not overlook the situation where you have calculated your withholding to cover last year’s tax in order to meet the exception for paying a penalty on any tax you owe next April 15th. Make sure the new withholding tables don’t reduce your total below the amount you need. Remember it is 110% of the prior year’s federal tax if your Adjusted Gross Income for the 2002 was over $150,000.Investors have a lot to think about with regard to the new law that reduces the tax rate for dividends and long-term capital gains to 15% for most taxpayers. If they had increased their withholding to cover taxes on dividends, they might want to adjust it now. In addition to withholding considerations, some investors are looking at the mix they have in their portfolio. Some are opting to move their interest-bearing investments into retirement or tax deferred accounts, and keeping dividend producing assets in a taxable investment in order to take advantage of the new rates. However, there are two things to watch out for, make sure the dividend-producing investment qualifies for the new tax rate and keep in mind the lower rate is set to expire in 2009.What are some other things that can be done now? Usually we think about deductions in December, but it doesn’t hurt to start early. If you are considering giving to a charity that
has a MO credit available (e.g., Credit for a Donation to a Shelter for Domestic Violence or Maternity Home Credit), do it now so the paperwork can be completed before year-end. Don’t forget to keep records on non-cash donations such as clothes to Goodwill or charitable mileage.Another popular form of giving is making a contribution to Missouri’s Qualified Tuition Program for your child or grandchild. This involves setting up an account to meet the child’s future higher education expenses. Contributions aren’t deductible on the Federal return and are taxable gifts (eligible for the $11,000 per year annual exclusion), but the earnings accumulate tax-free. Distributions used to pay qualified higher education expenses are also tax-free. In addition, contributions to Missouri’s “MOST” program can be deducted on your MO income tax return (up to $8000 per taxpayer per year).Interest rates are still low, so you might consider converting nondeductible consumer debt into a deduction by taking out a home equity loan. The earlier you do this, the more deductible mortgage interest and less nondeductible consumer interest you will have in 2003. Don’t forget about investment interest. If you borrow money to buy stock, the interest on that loan is deductible to the extent of your investment income.Many taxpayers ignore medical expenses because of the 7.5% of adjusted gross income threshold, but there are some expenses that are often overlooked: insurance payments including long-term care within limits based on your age; travel expenses to medical
appointments; the cost of eyeglasses, false teeth, hearing aids, and other special needs equipment; the cost of the air conditioner needed for your allergies. The IRS has recently issued regulations clarifying the deductibility of certain stop-smoking and weight loss programs prescribed by physicians.
Taking a few minutes now might make a difference next April. Please call with any questions.
May 2003Tax Tip
With their focus turning away from the war in Iraq, the President and Congress are turning their attention back to tax plan proposals. This week should see a “flurry” of activity, with Treasury Secretary John Snow hitting the sales path hard. On Thursday, the Senate Finance Committee approved a plan cutting taxes by $433 billion. Its proposals include more generous child tax credits, reductions in taxes paid by small businesses, and a measure to allow shareholders to receive at least $500 yearly in tax-free dividends from U.S. companies.On Friday, the House approved a $550 billion tax cut bill. Highlights include lower dividend and capital gain rates (15% for most taxpayers); increased child credits; marriage penalty reduction; increased bonus depreciation and expensing deduction, and accelerated tax rate reductions.
The Senate bill is expected to be adopted mid-May, and then President Bush and Secretary Snow are expected to step up the pressure on lawmakers to negotiate a compromise by Memorial Day. We will keep you informed.
February 2003
Donation Tax Tip
The record keeping requirements for charitable contributions vary with the amount and type of the donation. The chart below helps to summarize what must be kept to substantiate your deduction.
| Value of Donation | What to Retain | Where it’s Reported |
| Cash | ||
| Less than $250A cancelled check or any legible statement showing the name of the charity and the amount given. | Form 1040, Schedule A | |
| $250 or moreSame as above plus an acknowledgment from the qualified charity. | Form 1040, Schedule A | |
| Non-cash | ||
| Less than $250A receipt from the charity, showing their name and address as well as the date and a description of the gift. | Form 1040, Schedule A | |
| $250-$500An acknowledgment from the charity showing the above information. | Form 1040, Schedule A | |
| $501-$5000 Same as above plus documentation of the information on Form 8283 (date, manner, and cost of original acquisition, and fair market value). | Form 1040, Schedule A and Form 8283, Section A | |
| Over $5000 Same as above plus a written appraisal, (except for publicly traded stock). | Form 1040, Schedule A and Form 8283, Section B |
Substantiation for contributions made by payroll deduction is required only if $250 or more is deducted from a single paycheck. A paystub or W-2 showing the amount contributed and a statement from the charity stating that no goods or services were provided by them in consideration of the contribution is required.
January 2003Cashing Out Poorly Performing IRA's
Some investors are finding that their IRA accounts are decreasing so much that
their value today is less than the total of the contributions made to them. Where the taxpayer has “basis” in the IRA, that is, if it is a Roth IRA or if nondeductible contributions have been made to a traditional IRA, he may want to close it down. He can deduct the loss (the difference between the amount of the distribution and his basis) on Schedule A as a miscellaneous itemized deduction subject to the 2% of AGI limit. Two items to note however; penalties on withdrawals before age 59 ½ still apply and if a taxpayer has more than one traditional IRA account, all will have to be closed out before the loss can be taken.
Example: An individual has one traditional IRA. He has made annual contributions of $2000 each of the last 5 years, none of which have been deductible. The value of his account at the end of 2002 is $8000. If he withdraws the entire $8000, he recognizes a loss of $2000 ($10, 000 basis - $8,000 distributed).
December 16-31, 2002Tax Tip of the Month
Year-end planning allows you to make decisions and possibly implement new tax strategies. One key to year-end planning is shifting deductions and deciding whether you are better off deducting an item this year or next.3 itemized deductions are the most flexible from year to year1. State and local taxes. Prepayment of the January 2003 estimate of State and local taxes in late December 2002. So you can deduct it in your 2002 return. 2. Charitable Donations. Deduct them in the year you mail the check not in the year you make a pledge. Also deduct $0.14 per mile if you use your vehicle when volunteering for charity. 3. Interest Expense. You may want to make your January mortgage payment on your home this year, but in time for your lender to include the extra payment on the 1098 form given to the IRS.These are other examples of itemized deductions to remember.Fully Deductible
· Amortizable bond premiums
· Gambling losses to extent of winningsDeductible to extent that the total exceeds 2% of Adjusted Gross Income
· Fees for IRAs
· Job hunting
· Tax and investment help
· Safe deposit box
· Unreimbursed employee business expenses
There are several other itemized deductions allowed and rules to accompany them. Be sure to consult us to ensure that you are maximizing your itemized deduction possibilities.
December 2002
Part Two
There is a chill in the air, which means it is time for year-end tax planning. Deferring income until next year is a sound tax planning strategy. This way you delay paying tax and have free use of money for a year. Tax rates don’t change in 2003, and the tax brackets are just a bit wider. However, if you think that you will be in a higher tax bracket next year, consider doing the opposite…try to accelerate some income into 2002. Here are some options for tax planning:
1. Shift income to next year by buying short-term treasuries or CDs, as long as the next payout isn’t until 2003. Or, use the opposite strategy to have income taxed to you this year, and move your money from CDs to perhaps a money market.
2. Contribute to an IRA, Roth or KEOGH plan before the due date. This way money that otherwise would be producing taxable income for you is building up tax deferred or tax free inside these retirement accounts.
3. With an employer’s cooperation contract to defer future 2002 wages until next year.
4. Boost 401(k) contributions in November and December. Paying cap for 2002 is $11,000, with an extra $1,000 if you were born before 1955.
5. Retirees can take larger IRA payments, if that is better tax-wise.
6. Professionals can delay year-end billings to collect less in 2002 or speed them up so more is taxed in 2002.
7. Some year-end bonuses can be delayed so they won’t be taxed until 2003.
Remember to review your tax situation for 2 years at a time so you make proper decisions. Feel free to contact us about these different options of deferring 2002 income.
December 2002Part One It is never too early to consider year-end tax planning… a time to take measures to minimize the tax you pay this year and next. Here are some tax reminders if you have investments:Check out your investment portfolio and see how you stand:
a. Tally sales of securities held over 12 months (long term) and less than 12 months (short term).
b. If you have a net long term gain it is taxed at no more than 20%. But if you have net loss, $3,000 of it can offset other income. Losses above $3,000 can be carried forward.
c. Therefore selling some losers by December 31st can payoff because losses can be used to offset gains or simply generate the $3,000 deduction.
d. If you sell a security for tax reasons, but still want to keep owning it, you have to either want more than 30 days or pick a different investment in order to utilize the deduction for the loss.Appreciated securities are a great way to make charitable gifts. You can deduct the full value of such assets (if held longer than a year) by donating them to charity and avoid any income tax on the appreciation. If you sell instead, you will be taxed on the gain and have less to give.Be aware that if you buy a mutual fund late in the year and it pays a dividend in 2002 after you purchase it, you are taxed on the payout this year without any increase in your overall wealth. Same is true when you are choosing stocks and bonds to purchase. Buying after record date means dividend and interest aren’t 2002 income.
If you have a portfolio, consider looking at it for year-end planning and call us if you would like to discuss different investment options for tax purposes.
November 2002
Tax Aspects of RefinancingWith mortgage rates at a 40 year low, many taxpayers are considering refinancing their home to reduce their monthly payment or to obtain cash for home improvements, tuition, etc. Here are a few of the tax considerations:1. Points paid on a refinanced loan are amortized over the term of the loan rather than up front. An exception to this is if you paid the points out-of-pocket and then used part of the refinancing proceeds for home improvements. A proportionate amount of the points could be deducted up front. 2. If cash is taken out when refinancing –up to $100,000- the interest you pay back is considered to be on home equity debt. You can pay off credit card debt, buy a car, etc. with the proceeds and the interest is still fully deductible. If the amount of the home equity debt exceeds $100,000, however, interest would only be deductible if the proceeds were used for home improvements.3. If you have already refinanced in the past and want to refinance again, the balance of the points that you were amortizing from the first loan becomes fully deductible. Likewise, if you sell your residence before the term of your refinanced loan is up, the remainder of your points can be deducted in full.
4. One tax aspect that is sometimes overlooked – if you decrease your interest payment every month, your deduction for mortgage interest on your tax return will be less. Expect to pay more tax!
October 2002
Tax TipRetirement Plans
Employer sponsored retirement plans and IRA’s are a great way to invest in your future. The government just increased the annual contribution limits so you can sock away more and maybe reduce your taxable income. Contribution Limits for Traditional and Roth IRA’s
2002-2004: $3,000 per year
2005-2007: $4,000 per year
2008: $5,000 per yearContribution Limits for 401(k), 403(5) and 457 plans
2002: $11,000
2003: $12,000
2004: $13,000
2005: $14,000
2006: $15,000Catch up contributions
Also if you are 50 years or older, you can make an additional $500 contribution to your IRA and an extra $1,000 contribution to your plan at work.
Making sense of the numbers
Assume there is an annual return of 11% (the historical average annual return for stocks) on your contributions, for 20 years. If you contributed the previous IRA limit of $2000, you would have $144,562. But if you increase your contributions to $3,000 a year, you’d have $216,410 in 20 years, a $71,848 difference.
As always, don’t hesitate to call if you have questions about adjusting your retirement plans, or the tax benefits involved.
September 2002The New Stimulus Bill Affect on Your Business The tax bill is not what we were all hoping for, but there are two items that will impact many privately owned businesses. · 30% depreciation "bonus" · 5-year carry back period for net operating losses Depreciation bonus For property purchased after September 11, 2001, that has a life of less than 20 years, you can deduct additional first year depreciation equal to 30% of the property cost. Note: - This is in addition to the existing "section 179" first year deprecation of $24,000; - It applies to leasehold improvements, if leased from unrelated parties; - The depreciation "cap" on automobiles is increased by $4,600. Net operating loss carry back The new law extends the carry back period from 2 years to 5 years. The net operating losses must arise in the years ending in 2001 or 2002. The IRS has not yet indicated many of the practical details, including how the carry back will work for tax returns related to 2001 that have already been filed. This new law is effective at a historically unusual time of the year. Accordingly, the IRS and tax professionals are scrambling to work out the details. As always, don't hesitate to call if you need to make a significant decision that may be impacted by this law change, or taxation generally.
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