2002 Tax Action Guide - Letter from Fielder and Company, Certified Public Accountants, Tampa, FL

2002 Tax Action Guide

October, 2002

Dear Clients and Friends,

Unprecedented and significant tax saving opportunities are available to those of you who are aware of them and take the necessary timely actions to benefit financially. Adding to the many tax cut measures passed before this year (see our prior letters), Congress enacted additional laws this year providing chances to further reduce your taxes and improve your financial situation (which is probably currently improved regarding your real estate and impaired regarding equity investments, including retirement savings). The 2002 tax act is referred to as the "Job Creation and Worker Assistance Act of 2002," and endeavors to offset some economic setbacks suffered as a result of the September 11, 2001 terrorist acts. The following suggestions and review of changes highlights those new provisions first and includes additional suggestions for some old ideas updated to take advantage of current laws and economic conditions. They include items I consider most likely to interest the majority of you, but your situation and goals may be different. Furthermore, all considerations can't be covered briefly, so call me to discuss your questions. Since most new laws benefit businesses, the first section may be skipped by individuals, if you wish, to go to Individual Taxpayer Opportunities below.

Changes of Interest to Business Owners

1. Faster depreciation writeoffs for tangible business property acquired after 9/11/01 and before 9/11/04: In addition to your continuing ability to take section 179 depreciation writeoff of $24,000 for eligible business assets acquired by December 31 if your business has profitability before the 179 depreciation writeoff, your business is entitled to a 30% first year depreciation deduction on eligible tangible assets before the regular depreciation writeoff. Though this change was passed in 2002, you may amend 2001 for additional writeoff, if applicable. This additional depreciation is taken after 179 expensing reduction, but before regular depreciation on the remaining basis. For vehicles, depreciation bonus of up to $4,600 can be added to the regular first year auto depreciation limit of $3,060, for a total first year deduction of $7,660. And, if you purchase and put into service a vehicle over 6,000 pounds weight by December 31 (heavy SUVs such as Suburbans, Expeditions, Navigators or heavy trucks), you are eligible for full 179 deduction to $24,000, 30 % additional depreciation and 20% of the balance of basis as regular first year depreciation, since their depreciation is not subject to limitations. This applies to new or used qualifying vehicles. Particularly for self-employed individuals who pay both self-employment and income taxes on their net taxable income, Congress' message is clearly to drive a road hog if you wish to reduce your taxes in a big way. Again, like the marriage penalty of income taxation, taxpayers are left to wonder what their representatives are thinking.

2. Optional 5 year net operating loss (NOL) carrybacks for 2001 and 2002 NOLs: To assist businesses experiencing current losses, the normal 2 year (3 years in some cases) carryback period to obtain refund of taxes paid is temporarily increased to 5 years, if elected, and forward 20 years. 2001 and 2002 NOLs also reduce alternative minimum taxes. If planning for maximization of tax savings includes self-employment losses by individuals, consider the impact that deferring receipts to next year may have upon self-employment taxes paid later upon receipts for which related expenses created prior losses, as well as the additional audit probabilities which arise from self-employment losses which shelter substantial other income. If substantial capital is needed or loans will be repaid out of earnings, consider incorporating as an S corporation to limit social security taxes paid, as well as liability.

3. 2003 optional mileage rate for business miles drops to 36 cents per mile from the 2002 rate of 36.5 cents per mile. (We have gift "pocket pal" daily diaries for mileage documentation for 2002 and 2003 for you upon request, while supplies last.) Per diem rates (not applicable to owners) remain the same at $125 for non-high-cost areas and $204 for high-cost areas, though the meals and incidental expenses (including cabs but not laundry) portion is now slightly higher.

4. Social security tax rates remain the same (7.65% for employees; 15.3% for self-employed) while maximum taxable OASDI earnings rises from $84,900 in 2002 to $87,000 in 2003 with no limit for medicare taxable earnings.

5. Higher contribution limits currently allow increased deferral of taxes on retirement savings, even using low cost, non-filing plans such as SIMPLE IRA ($7,000 maximum plus $500 if over 50 during 2002 with 3% of salary or self-employment earnings after year end and SEP (25% of earnings after SEP contribution if self employed or 25% of salary to a maximum of $40,000 contribution in 2002). See our chart of scheduled retirement plan limits through 2006 in our December 2001 year-end letter for various contribution plan types.

6. Prior targeted employment credits are extended for businesses, including the work opportunity credit (40% of first $6,000 wages paid by 1/1/2004 to qualifying pre-certified individuals) and welfare-to-work credit (35% of first $10,000 wages in first year and 50% of first $10,000 wages in second year paid to qualified long-term family assistance recipients by 1/1/2004).

7. Some environmental credits related to purchase of electric vehicles (10% of purchase price to $4,000 credit max) and for alternative energy production and use of clean-fuel vehicles have been extended to 2004, and the Archer medical savings accounts program has been extended through 2003.

Individual Taxpayer Opportunities

1. Take advantage of the bear market to realize some losses in non-retirement investments by selling them by December 31 sufficient to offset capital gains realized in sales of stocks, mutual fund dividends or other sales such as non-residence real estate sales and to realize $3,000 net capital loss to reduce other 2002 taxable income. Additional net losses above the $3,000 limit will carryover for full deduction against future capital gains or writeoff at $3,000 per year limit against other income. Don't purchase the same securities sold at a loss within 30 days either side of the sale date or your loss won't be deductible currently (it will add to your current shares' basis). In spite of reports the House was passing higher writeoff allowances for capital losses and higher IRA contribution limits (exceeding the current $3,000 plus $500 if over 50 years old), Congress is not likely to finalize such agreements soon.

2. Consider cashing out all Roth accounts if they don't contain rollover contributions previously taxed, they have losses exceeding 2% of your adjusted gross income, and you itemize deductions. You may take a loss on your annual contribution only Roth IRA as a miscellaneous itemized deduction, giving you refund of what's left plus tax savings to fund future contributions within the higher annual limits. If your losses are small, you may decide to leave the balance for future tax-free growth of the balance as the more prudent bet, instead of cashing out before December 31. IRA conversions previously taxed must remain as Roth balances until after the fifth year including the year of income recognition to avoid 10% penalty upon distribution on the amount previously recognized as income, so annual contribution only funds are the only funds available for withdrawal without penalty.

3. A new 2002 mortality schedule allows lower minimum required retirement distributions for participants over 70-1/2. You may use the following divisors applied to your beginning of year total account valuation in 2002 as an option to the previously issued IRS table. This is the only table to use in 2003 for owner IRAs unless your spouse beneficiary is more than 10 years younger. While minimizing annual distributions maximizes tax-deferred growth, sometimes it is more prudent to take larger distributions even if not currently needed to take advantage of lower tax rates which may be available by spreading withdrawal over the years vs. bunching when needed.

Age	Distrib. Divisor	Age	Distrib. Divisor	Age	Distrib. Divisor	Age	Distrib. Divisor	Age	Distrib. Divisor
70	27.4	80	18.7	90	11.4	100	6.3	110	3.1
71	26.5	81	17.9	91	10.8	101	5.9	111	2.9
72	25.6	82	17.1	92	10.2	102	5.5	112	2.6
73	24.7	83	16.3	93	9.6	103	5.2	113	2.4
74	23.8	84	15.5	94	9.1	104	4.9	114	2.1
75	22.9	85	14.8	95	8.6	105	4.5	115 & over	1.9
76	22.0	86	14.1	96	8.1	106	4.2
77	21.2	87	13.4	97	7.6	107	3.9
78	20.3	88	12.7	98	7.1	108	3.7
79	19.5	89	12.0	99	6.7	109	3.4

4. For 2002 and 2003, educators below college level who spend their own money for classroom materials used may deduct up to $250 worth each year "above the line," even if you don't itemize. Keep receipts for documentation of these expenditures as reminders and for use if challenged on audit.

5. Within income limitations (generally modified adjusted gross incomes of less than $50,000 for singles and $100,000 for joint return filers with phase-outs to $65,000 for singles and $130,000 for joint filers in 2002) an above-the-line deduction for student interest paid up to $2,500 is allowed now for any period of time the interest is due and payable by the taxpayer. Formerly, income limits were lower, and interest paid had to be within 60 months of loan repayment period commencement.

6. The luxury auto tax of 2% of purchase price of new cars in excess of $40,000 in 2002, expires in 2003. Waiting can save you this tax.

7. Consider funding to meet the increased limits for retirement plan contributions, if eligible. See our December and June 2001 letters to review our discussion of those limits and education savings accounts new limits of $2,000 and new coverage of even pre-college education costs liberally defined.

8. Check withholding and quarterly estimated taxes you are paying this year to insure avoidance of underpayment penalty. Safe harbor amount is last year's tax total (112% of last year's total tax if adjusted gross income was $150,000 or higher). If income and taxes are less in 2002, 90% of your current tax paid or to a balance due of less than $1,000 by April 15 will avoid penalty for underpayment.

9. Tax brackets adjust for inflation, though rates won't change next year. However, deferring income to 2003 and accelerating deductions to the extent possible may allow you to retain the payment this year and reduce required payments in 2003 to avoid penalties for underpayment. Remember to pay discretionary deductions for items such as real estate taxes, state income taxes, charitable donations (especially of appreciated capital assets vs. cash), etc. by December 31, unless you bunch such items every other year to increase tax impact when totals are close to the standard deduction (see our December 2002 letter).

Clients will receive a tax organizer package from us in December with an envelope for accumulation of tax related reports which are received soon after year end. Should you have acquaintances or relatives who would benefit from our planning and preparation assistance, please encourage them to contact us soon for addition to our client list. We appreciate your relationship and encourage your questions anytime, as we have here for 26 years.

Sincerely,
Jim Fielder, Jr.