As the end of the year approaches, it is a good time for you to engage in tax planning. You know your tax picture from earlier in the year and you have a pretty good idea of what it will be for the rest of the year. With that knowledge in hand, you are now in a position to take various actions that may save taxes for this year, next year, or both years.
Year-end planning is even more important this year than in past years because a new law passed in 2003 offers new tax-saving opportunities that didn't exist at the start of the year. These new opportunities may require new or changed strategies to realize maximum savings for this year and next. For example, the income tax rates were retroactively reduced, the maximum tax rate on capital gains and dividends was lowered, ?marriage penalty? relief was provided in the form of higher standard deductions for married couples and a broadening of the 15% bracket for them, the child credit was increased, the ability to immediately deduct business assets was greatly enhanced, and ?bonus depreciation? was improved. In addition, recent IRS liberalizations offer tax-saving possibilities but only if action is taken before year-end.
Here is a checklist of actions that may help you to save taxes if you act before year-end. Not all actions will apply to everyone, but many clients will benefit from numerous items in the list:
Increase the amount you set aside for next year in your employer's health flexible spending account so that you can get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.
If you have any capital gains or losses from sales of stock or other capital assets or you have stock or other capital assets that are ripe for sale, you need to engage in some special year-end planning this year because the capital gain rates were changed in the middle of the year. For both 2003 and 2004, short-term capital gains and ordinary income are taxed a top rate of 35%. On the other hand, post-May 5, 2003 long-term capital gains generally are taxed at a maximum rate of 15% (for pre-May 6, 2003 long-term gains, the maximum rate is generally 20%). However, the post-May 5, 2003 maximum rate is only 5% (10% for pre-May 6, 2003 gain (8% for property held over 5 years)) to the extent the gain would otherwise be taxed at a rate below 25% if it were ordinary income. The particular strategy that will work best for you in light of these changes will depend on your capital gain picture to date and other factors.
It may be advantageous to try to arrange with your employer to defer your bonus until 2004.
Clients who own an interest in a partnership or S corporation may need to increase their basis in the entity so that they can deduct a loss from it for this year.
If you own matured E bonds, consider exchanging them for HH bonds to avoid realizing accrued interest, which would be taxed this year.
Consider using a credit card to prepay expenses that can generate deductions for this year.
You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
Business clients should consider putting new equipment in service before year-end to get a 50% bonus first-year depreciation allowance, plus regular depreciation deductions on the remaining adjusted basis.
Business clients also should consider making expenditures that qualify for the $100,000 business property expensing option. This is much more generous than it was in past years and applies to many more businesses.
A special opportunity exists for business clients to take action by year-end to fix expensing or depreciation problems for the 2001 tax year.
You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
You may be able to save taxes this year and next year by applying a bunching strategy to ?miscellaneous? itemized deductions, medical expenses and other itemized deductions.
Those facing a penalty for underpayment of estimated tax may be able to eliminate or reduce it by increasing their withholding.
Self-employed individuals should consider setting up a self-employed retirement plan.
You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $11,000 each year to an unlimited number of individuals but you can't carry over unused exclusions from one year to the next.
Those who are contemplating marriage or divorce need to watch out for how the marriage penalty could affect them.
Those receiving Social Security benefits should consider taking a number of steps to reduce or eliminate tax on their benefits.
Workers may want to ask their employers to increase withholding of state and local taxes to pull the deduction of those taxes into this year (but only if doing so won't cause an AMT problem).
Consider extending your subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2003 miscellaneous itemized deductions subject to the 2%-of-AGI floor.
These are just some of the steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.
