No matter what your income bracket, you need to plan. This year, higher-income taxpayers will find opportunities for tax cutting as a result of the Jobs and Growth Tax Relief Reconciliation Act of 2003. The new law primarily affects investors who may pay lower federal taxes on investment gains and dividends, and business owners who can benefit if they reinvest in their companies.
The following are a few tips, but it’s always advisable to consult a professional tax expert.
Contribute to your IRA, an employer-sponsored retirement plan or a self-employed plan. The maximum yearly contribution allowed for a traditional Roth/IRA is $3,000 if you’re under 50 and $3,500 for those over 50. Contributions for a 401(k) are $13,000 and $16,000 respectively.
Give income-producing assets to children age 14 and over. Called “shifting” income, this technique could result in income being taxed at 10 or 15 percent, or possibly as low as 5 percent on dividends and capital gains, or even lower, instead of at the parents’ tax rate, which could be as high as 35 percent.
Pay 2005 medical expenses and professional miscellaneous expenses in 2004. To claim deductions for medical expenses or unreimbursed and miscellaneous business expenses, they must exceed 7.5 percent or 2 percent respectively of your adjusted gross income. If you don’t meet these requirements for 2004, try bunching your expenses by paying 2005 professional dues, journal subscriptions, investment management fees and such medical expenses as planned dental work or eye appointments in late 2004.
Cut as much as 20 percentage points off your tax rate by converting ordinary income to dividends or capital gains, but be very aware of required holding periods. Ordinary income can be taxed at a rate as high as 35 percent, while long-term capital gains and qualifying dividends are taxed at a maximum of 15 percent under the new law.
Be aware of alternative minimum taxes. It is a must that a tax advisor be consulted in regard to alternative minimum taxes (AMT). AMT was originally created by Congress to ensure that wealthy individuals and corporate taxpayers pay their fair share of federal income taxes. It is estimated that 73 percent of taxpayers earning more than $75,000 annually will be paying under the AMT system by 2010. Therefore – it is essential to repeat – this is a complicated tax system for which you should always consult a tax advisor, especially prior to year-end, so you may continue to avoid the negative implications of the AMT. Among the many AMT triggers are: claiming substantial deductions for state income taxes, dependent exemptions, incentive stock options, or interest on home equity loans used for purposes other than home improvement. Each of these items, among many others, has the potential to be disallowed or treated differently under the AMT system.
Going one step further, even if you believe you will not be affected by the AMT rules, it is always a good practice to consult a tax advisor.
For the business owner, changes in the tax laws allow for the write-off of up to $100,000 of the cost of qualifying assets in the year of purchase instead of depreciating the assets over time. In addition, there is a special first-year “bonus” depreciation rule that allows 50 percent of the cost of qualifying assets to be written off as an additional depreciation in the year that the assets are placed into service. Consult a tax professional for time limitations.
The bottom line is, armed with knowledge, a little bit of patience and perhaps expert advice, you may just lower the amount you are required to pay.