NEWS AND RESOURCES

Tax and Financial News for April 2004

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The Final Fifteen
Baseball has the World Series, football has the Super Bowl, college basketball comes down to the Final Four, and tax season has the final fifteen - days that is. Ok, technically we can have one or two extra days depending on what day the 15th falls on, but "final fifteen" has a nice ring to it.

In the next fifteen days, all of us procrastinators will have that heart-to-heart talk with our spouse, accountant and/or computer about how much we owe in taxes for 2003. To help you prepare for those little heart-to-heart talks, we would like to offer some last minute suggestions.

Letís get back to the reason youíre here. If youíve been keeping count, you will note there are numerous line items that we havenít touched on yet on the individual or partnership returns. The fact is it will take much longer than four months to discuss them so for now, we will just hit a few highlights.

Capital gains and losses are entered on line 13a of Form 1040. Since we have a line 13a, we also have a 13b. This is the line where you enter any capital gains after May 5, 2003. There is an important distinction between sales before and after May 5 - namely, tax savings. If your marginal tax rate is above 15%, long-term capital gains on sales after May 5 will have a maximum rate of 15% instead of the 20% for sales prior to May 6. Those in the 15% or 10% bracket will have a maximum long-term capital gains rate of 5% instead of the previous 8% or 10%.

The new lower rates are available for "net" long-term capital gains, so if you have a net long-term or short-term loss, forget it, you will be limited to a total deduction of $3,000 for capital losses in any one year. Be careful, some asset sales are taxed at higher rates. Gains from the sale of collectibles are taxed at 28%, while some real estate transactions can be taxed at 25% or 28%.

You may note that line 14 is for "other" gains and losses and refers to form 4797. Generally, this type of income or loss relates to business property, although it can also include timber sales and mineral interest property dispositions. The form is rather complicated and ultimately leads to inclusion of income from the sales of such property as "ordinary" income with a top rate of 35% or long-term capital gain income or loss. In general, if you have a business asset that has been depreciated, some or all of the gain related to the depreciation will be ordinary income. For example, if you sold a tractor that cost $10,000 and had $5,000 in depreciation for $15,000 (yeah, right!) $5,000 of the gain would be taxed as regular income and $5,000 would be taxed at long-term capital gain rates.

You may think to yourself that you didnít sell anything that would give rise to capital gains or losses, but donít be too quick to judge. If you owned mutual funds or interests in partnerships, these investments could throw off capital or ordinary gains and losses to you, so make sure youíve investigated all sources of income.

Some of us who have worked hard all their lives and are retired hopefully have income on lines 15 and or 16. These lines are for IRAs and pensions. Note that you have space to include the gross amount of a distribution and the taxable amount. If youíre not sure whether you have taxable income from either source, just check to see if you have a 1099-R in your stack of paperwork. If you do, all the information you need will be at your fingertips. If you donít have a 1099-R, donít worry about these lines.

Letís take a moment to talk about the 1099-R. You donít have to be retired to receive one. Anytime you withdraw funds from a retirement plan, be it an employer plan or an IRA, or an annuity, you should expect to receive a 1099-R. Since the IRS tries to match the 1099s they receive from payers to what you report, itís best to include the gross amounts reported on 1099-R in lines 15a or 16a and then show the taxable portion, if any, on lines 15b or 16b. This is especially true if you withdrew funds from a retirement account and 60 days later put it into a new retirement account. If you did this, report the gross distribution on 15a, write "Rollover" on the line and then enter $0 on 15b.

If you are among the many divorced taxpayers receiving alimony, you will enter what you received on line 11. Remember alimony is taxable income and child support is not taxable. Donít try to get out of reporting this income because your ex-spouse will be reporting the payments on line 32a, complete with your social security number.

It is an unfortunate fact, but many people received unemployment compensation in 2003. Even more unfortunate is the fact that itís taxable income. You should have received a form 1099-G detailing the amount you received.

Probably one of the more complicated calculations on the income tax return is the calculation of the taxable portion of your social security benefits on line 20. In a nutshell, if your adjusted gross taxable income, plus non-taxable interest and dividends, plus one-half of your social security benefits exceeds $32,000 (married filing joint), $0 (married filing separately), or $25,000 (married filing separately and living apart for one year and all other taxpayers), then some of your social security is taxable.

If you have income and you canít figure out where to put it, put it on line 21. Some typical items that go here are gambling winnings, income from non-compete agreements, miscellaneous self-employment income not attached to a particular business (directors fees, etc.) and many other items of income. Certain deductions, including a net operating loss carryover from prior years will also go on this line. Be sure to attach a schedule, especially if you received a 1099.

Enough of bad news, what about some good news? Lines 23-29 are the good news lines. If you are an educator (kindergarten to 12th grade), you can deduct up to $250 in classroom supplies you paid for in 2003. While we realize there will be very few teachers who spent that much, the deduction is there for those who did. Stop yelling at the computer, itís just a joke. The fact is $250 is probably way lower than what you actually spent.

If you have the cash and need a last minute deduction, donít forget about funding an IRA. For 2003, the maximum combined contribution to your Roth and/or traditional IRAs is $3,000 for you and $6,000 for married filing joint. If you are an active participant in a qualified plan at work, some or all of your contribution to the traditional IRA could be non-deductible. Taxpayers over 50 by December 31, 2003, can also make an additional $500 catch-up contribution. To be deductible on your 2003 return, contributions to a traditional IRA must be made by April 15, 2004. Be careful not to put in more than your earned compensation for the year.

Up to $2,500 in student loan interest is deductible on line 25 (subject to phase-out based on your income) and tuition and fees paid for post-secondary education up to a maximum of $3,000 (and subject to a phase-out based on income) are deductible on line 26. You should carefully coordinate this deduction with the Hope and Lifetime Learning Credits. Sometimes the deduction will save you more than the credit and vice-versa; it all depends on your marginal rate.

Donít forget to deduct ½ of your self-employment tax and all of your health insurance if you are self-employed and not entitled to participate in a subsidized health plan maintained by your or your spouseís employer. The health insurance deduction is also available to greater than 2% shareholders in S Corporations. Your health insurance deduction canít exceed your earned income from self-employment or wages from an S Corporation.

Finally, self-employed individuals who wish to establish a qualified retirement plan for themselves and any employees may do so, deduct the contributions on behalf of the employees from self-employment income and deduct the contribution for themselves on line 30. If you established a Keogh plan by December 31, 2003, you have until the day you file your tax return to make a contribution and deduct it for 2003. A SEP plan can be established anytime up to the date of the filing of your return (including extensions) with a maximum deduction of 25% of self-employment income or $40,000, whichever is less.

Retirement plans are wonderful if you want to put money away for retirement, but remember, what you put into a qualified plan as a percent of your income must also be deposited for eligible employees, subject to certain safe-harbor rules.

WARNING

Partnerships, trusts and individuals have until April 15, 2004 to file their tax returns and pay the tax due. If you canít meet the deadline, you must file a request for an extension of time to file your returns, but any tax due (generally applicable only to trusts and individuals) must be paid by April 15 to avoid penalty and/or interest.

We cannot emphasize enough the need to be cautious if you have a qualified retirement plan in place. Do not file your return until you make your contributions if you want a 2003 deduction. This applies to partnerships as well as individuals. If you plan to contribute to anything other than an IRA, you can extend your return up to October 15 to get the money to contribute to your plan.

Conclusion

Writing this article feels like a whirlwind tour of the Orient - too much ground to cover in too little time and space. There is no way we can do justice to the Internal Revenue Code in such a short time, but we hope the article has been helpful. If you have any questions or concerns, donít hesitate to give us a shout. Weíre always available to help current and new clients with the intricacies of the Internal Revenue Code.

Happy April 15 and please donít forget to keep our troops in your thoughts.

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