|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Tax Planning 2003 Tax Legislation Are we finally getting some tax relief? Tax laws typically are complex, filled with exceptions and loop holes. Unfortunately, this applies to the past two major tax bills. Remember the elimination of the estate tax? The exemption from estate tax starts at $1,000,000 and gradually increases to $3,000,000 in 2009. In 2010, estate taxes are eliminated and in 2011 return with a $1,000,000 exemption. Was this designed with long term planning in mind? Heavens, no! The President and Congress, in order to agree on budget numbers, passed a most illogical set of rules. We have traded common sense for nonsense in our tax legislation! What about the new 2003 version of tax legislation? Again, accounting numbers dominate common sense, but, at least, there is immediate tax relief for us and most of our clients. Frankly, the benefit does not justify the Rubik’s Cube complexity our President and Congress created. You and Decker Financial as your tax preparer will be relying on future clarification from the IRS and tax software that, hopefully, approximates the multitude of rules, limitations, phase-ins, phase-outs, exemptions and inclusions created by the new tax law. The Good News How will the new tax law benefit Decker Financial clients?
These ten provisions of the 2003 tax legislation appear simple and direct. Behind these provisions are confusing and complex phase-ins, phase-outs, eliminations and re-instatements. The complexity is the job of the tax CPA. Your responsibility is to understand how to use these provisions to achieve benefits. The Details With our President and Congress acting like “rogue” accountants, it is difficult to do long-term tax planning, so let’s review the short-term provisions we should be able to count on and with which we can, hopefully, plan. Tax Rate Reductions For 2003 through 2010, we have a reduction in tax rates. The 28% rate is lowered to 25%; the 31% rate is lowered to 28%; the 36% rate to 33%, and finally the 39.6% rate becomes 35%. The 10% tax bracket range has been expanded for all taxpayers, meaning that more of your taxable income is taxed at 10%. To help dual-income married couples, both the 10% and the 15% brackets increase to twice the amounts for single taxpayers in an attempt to partially reduce the “marriage penalty.” By “marriage penalty,” the government does not mean being married is a punishable offense. Rather, a marriage penalty happens when the tax on the combined income of a married couple exceeds the sum of the taxes imposed if each spouse could file as a single unmarried taxpayer. This happens most often when both spouses have income. Here are the tax rate schedules for 2003. Single Individuals – 2003
Married Filing Jointly and Surviving Spouses – 2003
Remember, the first column is taxable income, which is after standard or itemized deductions and personal exemptions. Both itemized deductions and personal exemptions can be significantly reduced as your income increases, thereby increasing your taxable income. For single taxpayers this new rate schedule will definitely result in reduced taxes. The table that follows compares tax liabilities for single taxpayers under the old law versus the new law for 2003. Taxable income is listed in $ 10,000 increments. Single Individuals
Married couples filing a joint return also have a tax savings from the new tax rate schedules, but with a boost. Not only are the tax rates reduced, but the 15% tax bracket range is increased to twice the range for single tax payers to help lessen the “marriage penalty” imposed on dual-income married couples filing a joint return. The table that follows compares tax liabilities for taxpayers using the married filing jointly tax rate schedules under the old law for 2003 versus the new law for 2003. Taxable income is listed in $ 10,000 increments. Married Taxpayers
Planning Opportunities Shift income to children. Since the lowest rate is 10% and the highest rate is 35%, significant reductions in tax can be achieved when income-producing assets are given to children over the age of 14 who have no significant income. Of course, it becomes their money, and maybe their car if you are not careful. Standard deduction increased. Sorry, my single friends. Your standard deduction for 2003 is $4,750, only a $50 increase from the 2002 amount of $4,700. Once again, Congress was trying to reduce the marriage penalty explained earlier. In addition to reducing taxes for married couples, Congress also significantly increased the standard deduction for married taxpayers to twice the standard deduction for single taxpayers. For 2003, the standard deduction for single taxpayers is $4,750 so, for married taxpayers, it is $9,500. This is $ 1,950 more than the $7,950 originally planned. This is great news for married couples who are renters. For those clients with home mortgage interest and real estate tax deductions, these deductions are worth less than ever before. If you are using the standard deduction, the government gives you a free $9,500 deduction. If you have a home mortgage, the first $9,500 in payments for interest and property taxes costs you $9,500 in cash. The child tax credit increases. For those with children ages 16 and under, the child tax credit (CTC) has been increased from $600 to $ 1,000. Now we are talking real money. Of course, there is a phase out of the credit if your over all income is too high. This means that when you are married filing a joint return, the credit begins phasing out when your adjusted gross income exceeds $ 110,000. For single and heads of household filers, the phase out begins when adjusted gross income exceeds $75,000. In an effort to get money into the economy in order to “jump start it at any cost (does this remind you of the words of the first President Bush?), the government is issuing advanced payments of the CTC based on your eligibility for the CTC in 2002. What are the consequences? First, if you qualified for some part of the CTC in 2002, you probably will receive an advanced payment during 2003. The advanced payment will be $400 per qualifying child. Naturally, the Federal bureaucracy must be paid big dollars to send you your small check. Hey, but now both you and the bureaucrats have more money to spend NOW to jump-start the economy and make the stock markets surge. Second, your 2003 tax return will be more complicated, because you and your tax advisor must now account for the advanced CTC payment you received during 2003. Based on our experience with the 2001 rate reduction credit and pre-payment, we are in for a nightmare. People tend to not remember what they received, if they received a check, or how much. In my own case, the IRS made an adjustment on my return denying an exemption for my son in 2000 because I reversed two digits in his Social Security number (even CPAs are human) which reduced the overpayment I was applying to my 2001 return. After I called and corrected his Social Security number, the IRS made the proper adjustment and then proceeded to issue two refund checks. Neither check was equal to either the rate reduction credit or the tax effect of a dependency deduction. It took me over an hour of analysis to come to the correct 2001 tax return presentation. The IRS would have cost a client $200 in additional tax preparation fees to understand and correct the problem. Third, you may be in for a tax windfall. The law reads that in 2003, the payback of overpaid CTC cannot cause the calculation of CTC on your 2003 return to go below zero. If you qualified for the full CTC in 2002 for two children, your advanced payment of CTC will be $800 ($400 × two children). Then, if in 2003, your adjusted gross income exceeds the phase-out amount, the calculation of the CTC for 2003 will be zero. However, since the repayment of the advanced payment cannot cause the CTC for 2003 to go below zero, the family can keep the $800 and receive a cash windfall. Be careful with this though. Look for the IRS to try to correct this loop hole by the time you file your 2003 tax return causing another complexity. Alternative minimum tax changes. There is very little to say about the changes to the alternative minimum tax (AMT). Although the exemption amount for reducing AMT income has increased, it is a minor increase and the AMT will continue to haunt us. The main problem is that increasingly more “normal” taxpayers will be subject to AMT just because of the way it is calculated compared to the way your regular tax is calculated. Please do not get upset with your CPA when you see that you have AMT on your tax return. It is not a mistake. Currently about one million people pay AMT. By the year 2010, if major AMT tax changes are not made, seventeen million people will be paying AMT. Capital gains tax rates. Capital gains for 2003 will be complicated, because the new maximum capital gains tax rate of 15% applies only to transactions after May 5, 2003. This means that only sales on or after May 6, 2003 qualify for the new 15% maximum long-term capital gains rate. Long-term capital gains sales before May 6, 2003 are subject to the old long-term maximum capital gains tax rate of 20%. Just to give you a feel for the problem, in 2003 we have the following capital gains rates:
According to the IRS, eight new lines will be added to the Schedule D worksheet for calculating capital gains tax. In the past, calculating long- and short-term capital gains and losses was very time consuming, especially if exact dates and tax basis were not known by the taxpayer. This information will be very important for 2003 returns. Since short- and long-term losses first offset short- and long-term gains, it will be interesting to see how the IRS applies the offsets. That is, do post-May 5 losses first offset post-May5 gains or gain they offset pre-May 5 gains so the post-May 5 gains can be taxed at 15%? Reduced tax rates for dividends. Like capital gains, dividend income will be subject to tax at 15% for taxpayers in marginal tax brackets of 25% and up. If a taxpayer is in a 10% or 15% marginal tax bracket, the tax rate on dividends is 5%. Where are my kids when I need them? The big difference between the tax rate for dividends and capital gains is the 5% rate. 10% rates for dividends apply to all dividends received starting on January 1, 2003. Reduced rates for capital gains, on the other hand, apply only to transactions after May 5, 2003. Some dividends do not qualify for the reduced tax rate. The new 5% or 15% dividend tax rated does not apply to dividends paid by:
Dividends paid by US corporations are eligible for the reduced tax rates, as are the dividends paid by qualified foreign corporations. Qualified foreign corporations are foreign corporations whose stock is traded on a US stock exchange or a corporation covered by a treaty with an exchange of information provision and only when the IRS has determined that the treaty is satisfactory. This could be a big hurdle. Also, be prepared for higher tax preparation costs, because there are additional adjustment calculations required on the foreign tax credit form to reflect reduced rates for US dividends and capital gains. Just how much additional tax return preparation time will be required must wait until both the IRS forms and tax software have been updated. One final thought about dividends. The tax rate on dividends for a taxpayer in the 10% or 15% marginal tax brackets will be 0% in 2008, but for one year only. That is a long time from now and many changes can occur in the interim. If you really think that is a foundation for practical tax planning, you may also be interested in buying the Brooklyn Bridge. In Conclusion The new tax law definitely provides tax savings which benefit all of us. The ten items listed above are fantastic considering the tax burden most people pay. While the new rules required a tremendous increase in complexity, Decker Financial and Decker & Associates, Inc. look forward to using the new tax law to your favor. I urge you to schedule an appointment to meet with a Decker Financial counselor to prepare a 2003 tax estimate so you can make the proper salary withholding and estimated tax adjustments during the summer of 2003. If you have dividend income and/or long-term capital gains, you may be able to take a nicer summer or fall vacation, which is exactly what President Bush is hoping – that you will spend those dollars. On the other hand, with a 3%+ reduction in tax rates, you should consider investing more in your 401(k) if you are not already at the maximum. Alternatively, you could add to your private investment portfolio. In every case, planning will be beneficial and this could be an opportunity to help you achieve financial independence a few years sooner. Want to share this article with a friend? To send a copy of this article to someone else, click the e-mail article link at the top of the page. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||