Still Time To Reduce Year End Taxes (12/03)

Media Background and source information

The following is an advisory for businesses and individuals who are reviewing their year-end 2003 and fiscal 2004 finances. You are invited to consider this in all or part for inclusion in an article or column you are preparing. For further information, additional explanation or specific examples of how these strategies can and are being implemented, please call Minkus & Pearlman Public Relations at (847) 509-5777. Please credit International Profit Associates, Inc., of Buffalo Grove, Il., and Craig Koop, Director of Implementation, of International Tax Advisors, Inc., Damon Park, Tax Analyst, International Tax Advisors Inc., and the company’s tax advisory services group, also contributed to this briefing.

International Profit Associates/ International Tax Advisors Group

Business & Taxing Planning Update, Year end 2003

STILL TIME TO REDUCE YEAR END TAXES

Businesses and individuals armed with an understanding of changes in the federal tax codes and a few moments of well spent time can still make decisions that can may significantly influence the impact of their 2003 tax responsibilities liability, according to International Profit Associates, Inc., and the Buffalo Grove, Ill.- based company’s tax advisory services group.

"Taking a little bit of time now to estimate your current tax liability and a one or more well thought out decisions about the timing of taking income and/or making a payment can generate either generally improve your tax position," said Craig Koop, (title) Director of Implementation, of International Tax Advisors, Inc., the tax advisory services group of International Profit Associates.

"A small investment in time and understanding can serve at a minimum to reduce this years taxes and push off the tax liability to April 2005. As a result," Koop added, "you can leverage this initial effort into 15 months of opportunity that is not only measured in interest gained on the amount you might have otherwise spent, but even better, the chance to implement other tax advantaged strategies."

There are generally three basic methods that can be employed to decrease income tax liability:

defer or accelerate income;
accelerate expenses; and
take advantage of available tax credits.

INCOME SHIFTING

Individuals with relatively stable income and who experience no significant movement between tax brackets most commonly postpone payment of taxes by deferring income and accelerating deductions.

For example, delaying a year end bonus until January, 2004, means the taxes are not due until April 15, 2005. In addition to simply deferring the payment of taxes, one key objective may also involve shifting income into low tax-bracket years and maximizing deductions in high tax-bracket years.

In some limited circumstances, you may actually benefit by accelerating income from 2004 into 2003. For example, if you anticipate being in a higher tax bracket in 2004, or if you will need additional income in order to take advantage of an offsetting deduction or credit in 2003 that will not be available in the future, it may make sense to recognize that income in the current year.

LONGER-TERM INCOME SHIFTING

Another tax saving opportunity may exist through modifications to your retirement planning. For example, every time you put money in your 401k or other retirement plans that allow for pre-tax contributions, you reduce your current income taxes. In addition to obtaining a deferral on the recognition of this income until the money is pulled out of the plan at retirement (or earlier in some cases), the tax savings (the deferred tax portion) remains in the account and acts to increase the compounding return on your investment. As a result, you obtain a tax deferral as well as an increased compounding return on your investment.

The key here is to maximize retirement savings by increasing your contributions, which in turn lowers your taxable income, and thus, your income tax.

DEDUCTION TIMING

Deduction timing also is an important element of year-end tax planning. If your itemized deductions are constant and relatively close to the standard deduction amount, there is generally little benefit from itemizing. To maximize the benefits of itemizing deductions, you should consider adjusting the timing of your deductible expenses so that they are higher in a tax year in which you may itemize those deductions.

Craig Koop, Director of Implementation at International Tax Advisors, recently said that, "Although traditional tax planning would generally call for the acceleration of deductions in order to reduce the current year’s income, when doing so, a taxpayer must determine whether they will be affected by the alternative minimum tax (AMT), which could completely eliminate the benefit of increased deductions."

Tax credits, when they are available, are another powerful planning tool. A tax credit is more valuable than a tax deduction because it offers the taxpayer a dollar-for-dollar reduction in taxes as opposed to simply a reduction of taxable income.

For example, a $1 tax credit will reduce your tax bill by $1. A deduction of $1, on the other hand, will only reduce your taxable income (not your actual tax) by $1, resulting in a net tax savings, for example, of 35 cents (if you are in the top 35% tax bracket).

In fact, if a taxpayer is in an AMT situation, it may be more beneficial to accelerate income and take advantage of lower AMT rates in a year where it applies, as the top AMT rate is 28% and the top ordinary income rate is 35%.

USE TAX CREDITS

Tax credits, when they are available, are another powerful planning tool. A tax credit is a more valuable than a tax deduction because it offers the taxpayer a dollar-for-dollar reduction in taxes as opposed to simply a reduction of taxable income.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 enacted many educational, child, and business tax credits (some of which are summarized in the attached summary).

Taxpayers also should note the impact of the Jobs and Growth Tax Relief Reconciliation Act which affects individuals and businesses by instituting changes in marginal income tax rates, enhanced "bonus" depreciation, long- term capital gains rate reduction, and a tax rate reduction for qualified dividends.

SPLIT DOLLAR LIFE INSURANCE

In addition to the aforementioned, the Internal Revenue Service (IRS) made a change in the rules governing an executive compensation tool known as the "split dollar life insurance." There are possible income recognition, gift tax consequences and income tax consequences at the time of "roll-out" or termination. Every split dollar arrangement should be reviewed by a tax attorney or accountant to determine the impact of this notice.

BUSINESS VEHICLE DEPRECIATION

Vehicles purchased during the year weighing more than 6,000 pounds and used predominantly for business also are the subject of more favorable treatment for the first time in 2003. These vehicles, which tend to be mid-size or larger Sport Utility Vehicles are not subject to the luxury auto depreciation limitations, meaning they can be depreciated at a faster rate (over 6 years as opposed to 10 or more). Additionally, the limitation to expense depreciable tangible property in the year of purchase has been increased from $24,000 to $100,000 for 2003 through 2005. Also, the bonus depreciation has increased from 30% to 50% for 2003 and will remain at 50% through 2004. (See accompanying piece for more details.)

(SUVs), are included in the new codes which raised the limitation on depreciable property expense from $24,000 to $100,000 for 2003. Also, the bonus depreciation has (SUVs), are included in the new codes which raised the limitation on depreciable increased from 30% to 50% for 2003.

CHARITABLE GIVING

Charitable giving is always a consideration in tax planning. When making charitable contributions, however, it is important to keep in mind that such contributions are subject to certain limitations based upon a percentage of AGI, as well as limitations linked to the type of property being contributed and the type of tax exempt organization receiving the donation.

ABOUT INTERNATIONAL PROFIT ASSOCIATES

International Profit Associates, Inc., is the nation’s leading consultant to small and medium sized businesses. The company and its affiliates, including International Tax Advisors, Inc., have served more than 100,000 clients since 1991. More information about the company may be found at www.ipa-iba.com.

International Tax Advisors, Inc., provides strategic tax planning services, and representation of clients in resolving matters with tax collection agencies in the United States and Canada. The clientele is composed of a diverse group of businesses (including both established and emerging companies) and their individual owners. Additional information, including a comprehensive resource center, may be found at http://www.internationaltaxadvisors.com .

Craig Koop is Director of Implementation for International Profit Associates, Inc., and its International Tax Advisors, Inc., division. Mr. Koop is responsible for developing tax strategies for middle-market businesses and their entrepreneurial owners. Mr. Koop is a CPA and JD having both his undergraduate degree from DePaul University and his law degree from the DePaul College of Law. In addition, Mr. Koop has a masters of science degree in taxation from the DePaul University Kellstadt Graduate School of Business.

Mr. Koop’s distinguished career includes positions with Hinshaw & Culbertson where he was in the tax and estate planning group of the Chicago-based law firm; KPMG where he served Fortune 500 clients as a member of the international accounting and consulting firm’s strategic tax planning group; and Deutsche Financial Services where he handled all aspects of their tax compliance and planning in the 50-state U.S. tax environment and in Canada.

International Profit Associates, Inc., and International Tax Advisors, Inc., provides this information for the benefit of your readers. Every effort has been made to ensure that all information contained herein is accurate per the date of its original distribution, however, this information is subject to change. Furthermore, it is important to understand and convey that the tax and financial planning situation and needs of each business and individual is likely to be different. As a result, you and your readers should always contact your tax advisor to obtain proper professional advice before any action is taken.

International Profit Associates and its related entities cannot be held responsible for any loss incurred as a result of the use of this information. Should this information be presented on the Internet, International Profit Associates and its related entities assumes no responsibility whatsoever for the content of those web sites. Moreover, the addition of this information on those sites does not represent an approval or endorsement of those products or services unless expressly approved and granted by International Profit Associates.

Questions and comments should be forwarded to Raymond Minkus (847) 509-5777 or to rdm@minkuspr.com on behalf of International Profit Associates, Inc.

This information is being provided as a service to you and your readers/viewers. However, every business and individual situation differs and it is important that those considering acting on the aforementioned seek input from their accounting professional or tax consultant before making any decisions about what is in the best interest of their business or individual situation. For more information, please contact me at (847) 509-5777. Thank you again, Raymond Minkus.