Year-end tax planning

As 2003 draws to a close, there is still time to reduce your 2003 tax bill and plan ahead for 2004. The standard approach still makes sense — accelerate deductions into 2003 and defer income into 2004. Be aware, however, that many tax benefits are tied to or limited by adjusted gross income.

When considering whether to accelerate or defer income or deductions, you should know the impact this may have on your AGI and your ability to maximize itemized deductions that are tied to AGI.

Here are several overlooked tax strategies to consider.


Retirement plans


* IRA. The annual deductible contribution limit for an IRA for 2003 is $3,000. A $500 catch-up contribution deduction is allowed for taxpayers aged 50 or older by the close of the taxable year.

An individual will not be considered an active participant in an employer plan simply because the individual’s spouse is an active participant for part of a plan year. Thus, you may be able to take a full $3,000 deduction for an IRA contribution regardless of whether your spouse is covered by a plan at work, subject to a phase-out if your joint modified AGI is $150,000 to $160,000.

Above this range, no deduction is allowed.


* 401(k). The 401(k) elective deferral limit is $12,000 for 2003. If your plan has been amended to allow for catch-up contributions and you will be 50 years old by Dec. 31, 2003, you may contribute an additional $1,000.


Charitable contributions

Consider making charitable contributions at the end of the year. This gives you use of the money during the year and still claim a deduction for that year. You can use a credit card to charge donations in 2003 even though you will not pay the bill until 2004. A mere


Business deductions


* Self-employed health insurance premiums. Self-employed individuals can claim 100 percent (up from 70 percent in 2002) of the amount paid during the taxable year for insurance.


* Equipment purchases. If you are in business and purchase equipment, you may make a Section 179 Election, which allows you to expense otherwise depreciable business property. In general, you may expense up to $100,000 of equipment costs (with a phase-out for purchases in excess of $400,000) if the asset was placed in service during 2003.


* First-year bonus depreciation. For qualified property placed in service in 2003, you may take an additional depreciation allowance of 30 percent of the adjusted basis of the property (50 percent of the basis if the property is placed in service after May 5, 2003). The adjusted basis of the qualified property is reduced by this additional allowance before computing any other depreciation.


Child tax benefits

* Credit for adoption expenses. For 2003, the adoption credit limitation is $10,160 of aggregate expenditures for each child; the credit for adoption of a child with special needs is $10,160 regardless of expenses. The credit ratably phases out for taxpayers whose income is between $152,390 and $192,390.


Investment planning and gift planning

The following rules apply for most capital assets in 2003:


* Capital gains on property held one year or less are taxed at an individual’s ordinary income tax rate.


* Capital gains on property held for more than one year are taxed at a maximum rate of 15 percent (5 percent if an individual is in the 10 percent or 15 percent marginal tax bracket) provided the property is properly taken into account after May 5, 2003. Rates for property taken into account before May 6, 2003, are 20 percent and 10 percent, respectively.


* Dividends. Qualifying dividends received in 2003 are subject to rates similar to the capital gains rates. Qualifying dividends are taxed at a maximum rate of 15 percent. Qualifying dividends includes dividends received from domestic and certain foreign corporations.


* Gifts. To avoid capital gains, consider giving appreciated property to children or grandchildren if they are in a lower tax bracket than your own. For 2003, each person is entitled each year to give gifts of $11,000 to an unlimited number of people without incurring any gift tax. For example, you can annually give $11,000 to each of your children, their spouses and your grandchildren without utilizing any of your applicable credit amount. Your spouse can agree to gift-split thus doubling the amount of these gifts. Bill Barks is director of the employee benefits area of Heaton & Eadie. Reach him at (317) 581-9000, [email protected] or Heaton & Eadie has dedicated itself to providing innovative accounting and management consulting services to clients in middle market.