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Newsletter |
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Our Top 10
Tax Tips
Recent legislation changed several parts of the tax laws affecting
individuals. Every year, it's wise to consider how tax planning will be
affected, so here are our Top 10 individual tax planning tips for this
year.
RATE REDUCTIONS
1. Accelerate income. Deferred compensation is attractive when future
top rates will be significantly lower than current rates. That is no
longer the case. Regular income tax rates now start at 10 percent, and
the top rate in 2005 will be 35 percent. Those are historically low
rates. Who knows what the future will bring? Take the money now!
2. Seek investments that pay ordinary dividends or distribute long-term
capital gains. The maximum tax rate on both is only 15 percent in 2005.
3. Shift income to children and grandchildren. In 2005, the lowest
income tax bracket is 10 percent, 25 percent lower than the highest
bracket. Be sure that each child and or grandchild has enough income to
take full advantage of the $800 exemption and low rates without becoming
subject to the tax on investment income of a child under age 14.
HEALTH SAVINGS ACCOUNTS
4. Investigate the availability of High Deductible Health Plan (HDHP)
coverage combined with a Health Savings Account (HSA). Contributions to
the HSA are tax deductible and withdrawals to pay medical expenses are
not taxed. The Bush administration is determined to encourage the
broadest use possible of this new tax-favored medical care benefit, and
we expect many insurance companies and banks to offer these plans at
competitive rates in early 2005.
NEW IRA CONTRIBUTION LIMITS
In 2005, IRA contributions of up to $4,000 are permitted for anyone with
sufficient earned income, and the limit increases to $4,500 for a person
that has attained age 50 before year-end. In 2006, the base limit
remains $4,000 but the additional amount that can be contributed by a
person over 50 increases to $1,000 so that the total contribution can be
as much as $5,000. The limits continue to increase in years after 2006.
5. Make your maximum allowable IRA contribution as early as possible
each year. Tax deferred accumulation of income begins the day you fund
the IRA, and early funding will provide greater account value at
retirement. You can make your 2005 IRA contribution as early as January
4, 2005. Consider funding your IRA account with fixed income securities
such as bonds. This way you will be deferring taxes on what would be
otherwise be taxed at ordinary income tax rates. By contrast, if you
fund your IRA account with stocks or equity based mutual funds, you
could be converting long term capital gains which are taxed at low rates
into ordinary income taxed at higher rates when you begin to take IRA
distributions.
NEW 401(k) DEFERRAL LIMITS
Participants in 401(k), 403(b), and 457 plans can take advantage of
expanded limits on contributions. The general limit on contributions to
such plans in 2005 is $14,000 with an extra $4,000 allowed for
individuals over age 50 by year-end. It gets better - - employees will
be allowed to defer up to 100 percent of their compensation up to the
deferral limit, if the plan permits it.
6. Defer the maximum allowed by your employer's 401(k) plan - that
should also assure you of receiving maximum benefit from any employer
matching contribution and will help you receive the maximum tax
advantage possible.
7. A non-working spouse might consider working to boost the family
retirement assets - reentering the work force for the primary purpose of
making a maximum 401(k) deferral, the lesser of $14,000 or total
compensation in 2005, and making a significant improvement in the family
retirement assets.
EXPANDED EDUCATION INCENTIVES
Coordinated rules for Section 529 plans, Coverdell Accounts, Hope
credits and Lifetime Learning credits allow all of those sources of
funding higher education expenses to be of greater utility to many
families. Planning which education costs to pay from what funding
source, and when to pay them, is necessary in order to gain maximum
benefit from all available tax advantaged education assistance programs.
8. Take advantage of the Education Expense Deduction. In addition to all
other assistance provisions, and requiring careful coordination with
them for maximum benefit, a deduction of up to $3,000 is allowed for
college tuition costs. If your adjusted gross income does not exceed
$65,000 for singles, or $130,000 for married taxpayers filing joint
returns, you qualify. No deduction can be claimed for expenses of a
student for whom a Hope or Lifetime Learning credit is also claimed.
9. Fully fund Coverdell Education Savings Accounts - Contributions of up
to $2,000 per child are allowed each year, and the benefit is not phased
out until contributors have adjusted gross income in a joint return
between $190,000 and $220,000. Tax-free withdrawals are also allowed for
qualified elementary and secondary education expenses. If you begin
funding early enough, and maximum fund all available programs, you can
use the Coverdell account for pre-college costs and coordinate a Section
529 Plan with the Hope credit and Lifetime Learning credit for higher
education expenses.
10. Fund a Section 529, Qualified Tuition Program (QTP) - tax-free
distributions can pay for many higher education expenses. In addition,
QTP distributions can be coordinated with Hope and Lifetime Learning
credits as long as each is used to cover different expenses. |
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