Year-End Planning
As the year
begins to wind down, it’s time to take one more look at your 2003 tax
situation and implement strategies that will minimize your 2003 taxes.
The passage of the 2003 Tax Act automatically lowered your 2003 tax bill
with provisions like an across-the-board rate cut and an increase in the
amount of the child tax credit. But, don’t stop there. You can lower
your 2003 taxes even more by leveraging the 2003 Tax Act and throwing in
a few traditional tax planning strategies. Here are a few to consider.
Review
Your Investment Portfolio.
The 2003 Tax Act reduced the maximum long-term capital gain rate from
20% to 15%, effective for sales after May 5, 2003, and changed the tax
on dividends so they too are taxed at the favorable capital gain rates.
For sales of securities, the long-term capital gain rate applies when
the security is held more than one year—so watch your holding periods
and take advantage of the lower rate when practical. You might also
consider whether dividend-paying stocks make more sense in light of the
lower rate on dividends. And finally, year-end is a good time to prune
your portfolio of losing stocks so that you can get the tax benefit
sooner rather than later.
Take
Advantage of Education Tax Breaks.
If you or anyone in your family is college bound, now might be a good
time to take a closer look at the education tax incentives. These
include 529 Plans, tuition deduction, and education credits, among
others. 529 Plans are highly publicized and may be a good choice for
your college savings fund. The earnings are tax free if the funds are
used for qualified higher education expenses, and there are no income
limits on who can contribute. Although contributions are not deductible
on your federal return, many states allow residents to claim a state
income tax deduction for contributions to their instate 529 Plan. If you
haven’t checked these plans out, now might be the time.
Write off
More Business Assets.
The 2003 Tax Act included two provisions especially attractive to
business owners. The so-called Section 179 deduction increased from
$25,000 to $100,000 beginning in 2003. Businesses now can deduct up to
$100,000 of equipment, machinery, furniture, fixtures, and other
tangible property, subject to a phase-out rule when qualified property
purchases exceed $400,000. Even if new property additions don’t qualify
for the Section 179 deduction, favorable depreciation rules may apply.
For property acquired and placed in service after May 5, 2003, the 2003
Tax Act increased the upfront bonus depreciation rate from 30% to 50%.
That’s an immediate deduction equal to 50% of the cost, which is in
addition to regular deprecation on the remaining cost. Only new property
qualifies, but certain leasehold improvements are eligible in additional
to tangible personal property. Both the Section 179 deduction and bonus
depreciation can be claimed for property placed in service anytime
during the tax year, including the last day.
Defer
Income and Accelerate Deductions.
This traditional year-end strategy for reducing current year taxable
income still applies since it’s almost always advantageous to postpone
paying taxes as long as possible. Cash-basis proprietors might delay
year-end billings or accelerate business expenditures. If you itemize
your deductions, consider paying charitable donations, state and local
taxes, and medical expenses in 2003 rather than 2004, to the extent
possible.
Don’t
Overlook the AMT.
Do you deduct a large amount of miscellaneous itemized deductions or
state and local taxes, claim a number of personal exemptions, or
exercise incentive stock options? These are just a few of the situations
that can trigger the dreaded alternative minimum tax (AMT). This
alternative tax system for computing personal taxes is becoming more of
an issue for many taxpayers and planning for taxpayers in AMT can be a
lot different than traditional tax planning. So, don’t forget to
consider the AMT.
Don’t wait
until it’s too late to cut your 2003 tax bill. Take time now, to review
your 2003 tax situation and consider planning strategies. We want to
help. Please contact us to discuss any of the strategies mentioned here
or others that fit your specific tax and financial situation.
Return to 2004 Tax Tips
