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April
2003
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2003 Tax Planning -- Gearing Up To Make Adjustments
For New Law Changes
Although we tend to focus on our tax compliance obligations, completing and filing our 2002 tax return correctly and on time, waiting until after this deadline to address our other tax planning needs is not a good idea. Tax planning, which should begin as early as possible in the year, is especially important in 2003, a year when many tax breaks passed in 2001 and 2002 hit their stride. Failure to act now may mean missed tax planning opportunities. Effective tax planning is a year-round undertaking that works best if started early.
Getting an early jump on tax planning is especially important
as a result of the passage of two major pieces of tax legislation: the
Economic Growth and Tax Relief Reconciliation Act of 2001
(EGTRRA) and the Job Creation and Worker Assistance
Act of 2002 (JCWA). These two tax laws have significantly
changed the "playing field." To add to the challenge, the
new tax cuts proposed by President Bush need to be watched
carefully. Since the president has proposed many of these
tax cuts retroactive to January 1, 2003, it is important
that we prepare early for this contingency.
Often times we think that tax planning does not really
apply to us...it's just for the rich and famous. On the
contrary, given the constant changes in the tax laws, the
days of reserving tax planning for the "privileged few" are
truly gone. Good reasons exist for every taxpayer to investigate
ways to minimize his or her tax liability on an annual
basis beginning early each year.
For starters, here is a short list of some of the important considerations and variables that go into developing our personalized tax plan for this year:
Income tax rates. EGTRRA lowered the marginal tax rates in both 2001 and 2002. However, no new rate decreases are scheduled for 2003 so far. As things stand now, the tax rates for 2003 remain at the 10% (for first $6,000 of income), 15%, 27%, 30%, 35%, and 38.6% levels. However, under President Bush's plan, which he is adamant will pass this year, the rates would be retroactively lowered for all of 2003 to 10, 15, 25, 28, 33 and 35 percent. Even without the President's cuts, rates are scheduled to drop again in 2004, signaling a possible advantage for us to accelerate deductions now and defer income into next year.
Changes in estate and gift taxes in 2003. Due to EGTRRA, repeal of the estate tax is being phased in through a series of lower estate tax rates and larger exemptions. For 2003, however, the need for estate planning continues, at a critical level. The highest estate tax rate this year is 49 percent; slightly lower than the 50% rate applicable in 2002. For 2003, the exemption amount that anyone can apply against his or her estate remains at $1 million -- not a substantial amount when the value of real estate, retirement accounts, life insurance and other assets are added together.
Lowering our taxable estate by giving more assets away can work, but only to a point. In 2003, we are limited to giving anyone (except our spouse) tax-free gifts of up to $11,000 (or $22,000 for married couples making joint gifts). Estate planning, therefore, remains an essential ingredient in any comprehensive strategy for saving us and our family from paying more taxes than we need to in 2003 and later years.
Increased contributions to tax-qualified retirement
plans. Retirement planning is also changing for all of us. Social Security and Medicare will cover fewer of our expenses, while at the other end of the spectrum, current low interest rates and a declining equities market may hinder our plans to cover the rest of the expenses on our own. Smart tax planning with retirement assets and insurance plans can give our retirement nest egg that significant edge each year that can grow with compounding interest into a substantial sum.
In 2003, the maximum amount that we can contribute through a salary reduction agreement to our 401(k) plan is $12,000. Under special catch-up contribution rules, taxpayers age 50 and over can contribute up to $14,000 to a 401(k) through salary reduction contributions in 2003. In addition, the amount our employer is permitted to make in non-salary reduction contributions to our 401(k) as well the amount employers can contribute to other types of retirement plans on our behalf may have increased.
Taxpayers eligible to make IRA contributions can put away up to $3,000 in 2003. Special catch-up contribution rules also apply here. Important differences between deductible IRAs and Roth IRAs continue to require that a tax plan be re-evaluated and customized to fit our financial profile.
Education expenses. The cost of education is continuing to outpace inflation, while the price of not getting a proper education is becoming even clearer. Congress is using tax incentives to help individuals pay for education. Maximizing many of the new benefits, however, takes planning. Again, he or she who starts earliest in the year generally reap the most benefits from planning.
In 2003, we can deduct, above-the-line, up to $3,000 in qualified higher education expenses. There are important income thresholds. The deductible limit may be reduced for taxpayers taking advantage of some of the other education-related tax breaks, such as the Hope or Lifetime Learning Credits.
Coverdell Education Savings Accounts, on the other hand, generally have no practical income restrictions. Although they nominally bar contributions completely by joint return filers with incomes of more than $220,000 ($110,000 for singles), parents can effectively circumvent even these relatively high caps through the use of corporation, trusts or other entities. We can contribute up to $2,000 annually to these accounts to fund educational expenses. Although the contributions are not deductible, the account balance of contributions plus earnings can be withdrawn tax free for a qualifying purpose. The funds in the Coverdell Education Savings Accounts can be used not only to pay for our children's college tuition expenses but also can be used tax-free to pay a variety of expenses related to elementary and secondary education.
Conclusion
This list of new benefits summarized in this letter is by no means exhaustive. The tax law now reaches into so many areas of our lives that tax planning has become as imperative to good financial planning as tax return preparation is to paying only our fair share of tax. It is important that we begin to plan our tax strategy for 2003 as soon as possible. Please call us for further details if you have any questions about how we might start to customize a tax plan for you.
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Veres
& Company
Certified Public Accountants
Freedom Square Office Park
4401 Rockside Road, Suite 406
Independence, Ohio 44131
(216) 524-8422
Fax (216) 524-2624
e-mail: staff@veres.com
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