To Our Clients and Friends:

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.
Best regards,

C.W. Barsness CPA
A Professional Corporation

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*This artilce is presented for information and educational purposes only and is not intended to constitute legal, tax or accounting advice. The article profices only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional advisor.

All Content Copyright ©2002 - CW Barsness, CPA