Estimating Adjusted Gross Income (AGI):
Because many tax benefits are tied to or limited by AGI—IRA deductions, for example—a key aspect of tax planning is to estimate both your 2003 and 2004 AGI.
Safe Estimates: You may avoid the penalty for failure to pay estimated taxes by paying 90 percent of 2003 taxes or 100 percent of 2002 taxes.
If your 401(k) plan has been amended to allow for catch-up contributions for 2003 and you will be 50 years old by Dec. 31, 2003, you may contribute an additional $2,000 to your 401(k) account, for a total maximum contribution of $14,000.
SIMPLE Plan Contribution:
The SIMPLE plan deferral limit is $8,000 for 2003. If your SIMPLE plan has been amended to allow for catch-up contributions for 2003 and you will be 50 years old by December 31, 2003, you may contribute an additional $1,000.
Saver’s Credit: A non-refundable tax credit is available based on the qualified retirement savings contributions to an employer plan made by an eligible individual. Only taxpayers filing joint returns with AGI of $50,000 or less or single returns with AGI of $25,000 or less, are eligible for the credit.
Deferring Income to 2004:
If you expect your AGI to be higher in 2003 than in 2004, or if you anticipate being in the same or a higher tax bracket in 2003, you may benefit by deferring income into 2004. If you are self-employed, delay year-end billing to clients, so that payments will not be received until 2004.
Deduction timing is also an important element of year-end tax planning. Deduction planning is complex, however, due to factors such as AGI levels and filing status. If you are a cash-method taxpayer, consider the following:
Deduction In Year Paid:
An expense is only deductible in the year in which it is actually paid.
Payment By Check: Date checks before the end of the year and mail them before January 1, 2004. If you pay by credit card in 2003, you can take the deduction even though you won’t pay your credit card bill until 2004.
If you anticipate a state income tax liability for 2003, make your estimated payment before the end of 2003.
Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100 percent (up from 70 percent in 2002) of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses, and dependents as an above-the-line deduction.
Equipment Purchases: If you are in business and purchase equipment, you may make a Section 179 Election, which allows you to expense (i.e. currently deduct) otherwise depreciable business property.
Capital Gains: Property held for more than one year is taxed at a maximum rate of 15 percent if sold after May 5, 2003. Rates for property taken into account before May 6, 2003 are 20 percent. Capital losses may be fully deducted against capital gains and also may offset up to $3,000 of ordinary income.
Alternative Minimum Tax (AMT): Some of the standard year-end planning ideas will not reduce tax liability if you are subject to AMT. Because of its complexity, it would be wise for a certified public accountant to analyze your AMT exposure.