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December 2001 Year-End Tax Planning Letter
Dear Clients and Friends:
Lots of rules have
changed in 2001. You should review our letter of June 2001
for details.
In this brief letter, I
suggest some moves to accomplish by December 31 to maximize tax saved in 2001,
remind you in general of the types of changes which we detail in our June letter
and notify you of recent rates set since June.
Actions
to consider by December 31
Sell some stock outside retirement plans --
Recover some of your stock
declines since purchase by selling shares this year. You may save capital gains
tax on sales made this year at a gain or on mutual fund capital gain dividend
distributions by realizing losses to offset capital gains up to 100%, with
excess losses above gains deductible up to $3,000 against other income this year
and the rest carried over for tax benefit in future years. You maximize your
tax savings from charitable donations by gifting appreciated stock instead of
selling it. No tax is paid on the appreciation, and the donation is valued
at current market. Also, gifting stock to children may reduce the tax due
on
sales by them at a gain.
Fund "education IRAs" with $500 per
beneficiary by December 31 for 2001, if you don’t exceed income limits
-- The benefits of these accounts, now renamed "education savings
accounts," are greatly expanded in 2002, as described in item 7 of our June
letter. Contributions increase to $2,000 per year to April 15 and qualified
distributions expand to include many more types of education costs for
kindergarten through twelfth grades as well as higher education costs. You
manage the accounts, unlike 529 plans which have also expanded, and can use them
even to purchase computers, hire tutors and pay for room and board. Eligibility
income levels phase-out between $150,000 - $160,000 for joint filers and $95,000
and 110,000 for others, and beneficiaries must be below 18 years old. Next year’s
phase-out rises to $190,000 - $220,000 for joint filers (1/2 for others).
Act to reduce or eliminate underpayment penalty
for 2001 -- You may be charged
7% penalty on your tax balance due if you haven’t paid 90% of your 2001 tax on
a timely basis through withholding or estimated tax deposits quarterly. You are
exempt from penalty if your tax payments equal your prior year tax and
your adjusted gross income was less than $150,000 (or 110% of your 2000 tax if
adjusted gross was more) or if the balance due doesn’t exceed $1,000. Check
your last return and payments to date this year to see if you need to request
additional December withholding or make a quarterly deposit for the difference
by January 15, 2002, to save an avoidable penalty. Withholding is preferable
because it covers the entire year instead of only the last quarter. Call if you
need assistance or a tax deposit form to file.
Defer income or create deductions this
year to retain the tax another year and take advantage of next year’s lower
rates - Unless you expect much higher taxable
income in 2002, or bunch itemized deductions every other year to exceed standard
allowances, consider reducing taxable income in the following ways:
Pay deductions
such as real estate taxes, charitable contributions, state income taxes, and
business expenses of self-employed (including "section 179" asset
purchases before December 31 up to $24,000 deductible this year
against income).
Defer sales of capital assets at a
gain while realizing losses.
Take advantage of the new lower
required minimum distribution calculation tables if over 70-1/2 by
lowering IRA and other retirement account withdrawals to the minimum only by
December 31.
Get consent form 8332 signed
by the custodial ex-spouse if you wish to take dependency exemption for
children you support to save on taxes through lowered taxable income, possible
lower rates, education credits and the increased $600 per dependent child tax
credit on children 16 or younger, if you qualify considering income
limitations.
Make
SIMPLE, 401(k), 403(b) and other payroll deduction retirement contributions
to the limit by December 31, and checking to insure you haven’t exceeded the
limits of $6,500 for SIMPLE plans ($7,000 in 2002) and 15% to $10,500 ($11,000
in 2002) for the other mentioned plan contributions. Start or increase your
payroll deductions early in 2002.
Move
funds from your taxable brokerage money market funds to cash
accounts again for December 31 to move back after January 1 if they will be
taxable for Florida intangible tax because you and your spouse are
Florida residents with taxable securities or funds valued over $100,000 (or
$80,000 if you are single) to save $1 tax per $1,000 value. Florida
legislators have delayed the previously scheduled repeal of this tax, so be
sure to let us know if you are subject to it and won’t be preparing your own
return so we can file it for you in time to realize early payment discounts if
you file before the June 30 due date and avoid the substantial penalty
payments due by late filers.
Make
annual gifts excludable to $10,000 per person per year ($11,000 in
2002) in time for the recipient to cash by December 31 if you desire to
transfer wealth (and future income on assets transferred) to younger relatives
in avoidance of potential gift or estate taxes. Review our June letter for significant
estate tax reductions being phased-in including the exclusion
increase from $675,000 to $1,000,000 per individual effective January
1, 2002. Review your own titling of assets and designation of
beneficiaries to maximize use of the increasing exclusions with basis
adjustment to market value upon death. Spouses can retitle unlimited assets
anytime and achieve some income tax as well as estate tax benefits by having
asset accounts titled separately (vs. joint) with transfer on death
beneficiary designations and signed durable powers of attorney in event of
incapacity, if these assets are not held in trust. Please have an
individual will prepared soon if you don’t have one, and consider the
benefit of also preparing a living will and appointment of a health
care surrogate and possible organ donation instructions if desired. Also, update
beneficiary, personal representative, trustee and guardian
designations in wills and trusts, retirement and other investment accounts, as
well as insurance policies owned. Completing these relatively simple steps
saves lots of money, time and aggravation to those you care about the most,
and provide you with valuable peace of mind as you face the future. Be sure to
communicate your instructions to your designated personal
representatives, trustees, guardians or surrogates, and advise them where your
instructions are to be found.
Business employers should:
Review items listed
on their prior year tangible tax returns to eliminate items no longer
owned and add items purchased for use in 2001. Eliminating items no longer
used saves taxes. Get data to us ASAP for filing by April 1 deadline.
Reimburse
or add to expenses to be reimbursed all business expenses paid
personally including business mileage in your personal cars at the rate of 34.5
cents per mile in 2001 (and 36.5 cents per mile in 2002).
Let us know if
you’d like free pocket diaries for keeping your mileage record in each
car.
Update payroll
programs for the 2002 increase in social security earnings wage base from
$80,400 in 2001 to $84,900 in 2002. Notify your payroll return preparer
of year-end bonuses and personal use of company owned vehicles before year
end for proper inclusion, and advise them of your new unemployment
compensation rate assigned for 2002.
Follow the previously suggested
actions to reduce 2001 taxable income by deferring income and
accelerating deductions.
Don’t overlook filing any corporate
annual reports with the required annual filing fee due by May 1. Late
filing penalties are really excessive. You should receive it soon from the
Secretary of State. Update the information if changed, sign and date it and mail
it with payment right away. Retain a copy.
Keep
all data supporting sales tax returns filed and proof of paying sales tax
or use tax on all taxable purchases (including tangible assets owned by your
business as long as owned) for five years after filing returns (after June,
2002, the liability period decreases to three years).
Review of 2001
and 2002 Changes
See Our June Letter
for Details
Additional rate reductions across
the board in both years with continuing reductions afterward. If you don’t
receive your full advance 2001 lower rate reduction refund credit based upon
your 2000 tax return taxable income by December 31, advise us of any amount
you did receive when you provide us with your 2001 data organizer, and we will
calculate and include credit for the difference on that return. More
taxpayers will become subject to alternative minimum taxes unless
Congress revises those complex rules to provide more exemption. Some increase
in exemptions ($4,000 for marrieds; $2,000 for others) is effective for
2001-2004.
Retirement contribution limits increase with
additional contributions allowed for participants in IRAs and other plans such
as SIMPLE, 401(k), 403(b), SAR-SEP and 457 plans for participants 50 years and
older:
| PARTICIPANT
MAXIMUM ANNUAL CONTRIBUTIONS |
ADDITIONAL
FOR OVER 50 |
|
YEAR |
ROTH OR TRADITIONAL IRA |
SIMPLE IRA |
457 |
401(k)/403(b)/
SAR-SEP |
IRA |
SIMPLE IRA |
401(k)/403(b)/
SAR-SEP/457 |
|
2001 |
$2,000 |
$ 6,500 |
$ 8,500 |
$10,500 |
-- |
-- |
-- |
|
2002 |
3,000 |
7,000 |
11,000 |
11,000 |
$ 500 |
$ 500 |
$1,000 |
|
2003 |
3,000 |
8,000 |
12,000 |
12,000 |
500 |
1,000 |
2,000 |
|
2004 |
3,000 |
9,000 |
13,000 |
13,000 |
500 |
1,500 |
3,000 |
|
2005 |
4,000 |
10,000 |
14,000 |
14,000 |
500 |
2,000 |
4,000 |
|
2006 |
4,000 |
10,000 |
15,000 |
15,000 |
1,000 |
2,500 |
5,000 |
| |
(adjusted) |
|
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Estate tax reductions
beginning with 2002 increase in exemption from $675,000 to $1,000,000
per decedent to 2010 total repeal with limits on basis adjustments, and
much uncertainty after 2010. The top tax rate also falls from 55% to 50%
in 2002.
Beginning 2002:
College tuition deduction option in lieu of education credits for low
income taxpayers, education IRA and student loan interest deduction
changes take effect as detailed in your copy of our June letter.
Changing
Limits
Taxable income
levels at which the following regular tax rates begin:
|
2002 |
10% |
15% |
27% |
30% |
35% |
38.6% |
|
SINGLE |
0 |
$ 6,000 |
$27,950 |
$ 67,700 |
$141,250 |
$307,050 |
|
MARRIED JOINT |
0 |
12,000 |
46,700 |
112,850 |
171,750 |
307,050 |
|
HEAD OF HOUSEHOLD |
0 |
10,000 |
37,450 |
96,700 |
156,600 |
307,050 |
|
MARRIED, SEPARATE |
0 |
6,000 |
23,350 |
56,425 |
85,975 |
153,525 |
| |
| 2001 |
|
|
27.5%*
|
30.5%
|
35.5% |
39.1% |
| SINGLE |
|
|
$27,050 |
$
65,550 |
$136,750 |
$297,300 |
| MARRIED
JOINT |
|
|
45,200 |
109,250 |
166,500 |
297,350 |
| HEAD
OF HOUSEHOLD |
|
|
36,250 |
93,650 |
151,650 |
297,350 |
| MARRIED,
SEPARATE |
|
|
22,600 |
54,625 |
83,250 |
148,675 |
| * The initial rate
is 15%, with potential 10% rate adjustment credit if full advance refund
payment was not received during 2001. |
Standard deduction:
| SINGLE |
$4,700
in 2002 ($4,550 in 2001) |
| MARRIED,
JOINT |
$7,850
in 2002 ($7,600 in 2001) |
| HEAD
OF HOUSEHOLD |
$6,900
in 2002 ($6,650 in 2001) |
| MARRIED,
SEPARATE |
$3,925
in 2002 ($3,800 in 2001) |
Additional
standard deduction for over age 65 or blind remains at $900 for married
individuals but increases from $1,100 in 2001 to $1,150 in 2002 for
singles or heads of household.
Personal exemptions rise
to $3,000 in 2002 from $2,900 in 2001 with phase-out {2% for each $2,500
or fraction thereof ($1,250 for separate filers)} beginning with AGI of
$137,300 for singles in 2002 ($132,950 in 2001); $206,000 for marrieds
jointly filing in 2002 ($199,450 in 2001); $171,650 for head of
household in 2002 ($166,200 for 2001); and $103,000 for separate filers
in 2002 ($99,725 in 2001).
Itemized deduction
phase-out of 3% of AGI begins at
$137,300 in 2002 ($132,950 in 2001) for all taxpayers except married
filing separately: $68,650 in 2002 ($66,475 in 2001).
Kiddie tax (children
under age 14 taxed at parents’ rate) exemption remains $1,500 in 2002.
Children with unearned income less than $750 are not required to file or
pay tax (unless to report gains or losses on sales of investments
reported on 1099s) in both years.
Sincerely,
Jim Fielder, Jr.
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