Tax Savings Strategies

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Tax Savings Strategies

• Scott A. Isdaner, CPA, J.D.
• Leena Ritchie, CPA
• Ruth Tanur, CPA
• Isdaner Company, LLC
• Three Bala Plaza, Suite 501 West
• Bala Cynwyd, PA 19004
• 610-668-4200
• www.isdanerllc.com

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Our Focus

• Affected Tax Provisions
• Impact on Taxpayers
• Planning Ideas

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Overview of Jobs and Growth Tax Relief
Reconciliation Act (JGTRRA) of 2003

• Lower individual marginal tax rates
• Expansion of lowest tax bracket
• Marriage penalty relief
• Lower taxes on capital gains and stock dividends
• Increase in child tax credit
• Limited alternative minimum tax relief
• Increase in first year bonus depreciation
• Increase in small business expense election

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JGTRRA 03 in short

• 350 billion total cost
• Could balloon to over 1 trillion if cuts made
  permanent
• Front-loaded
• Most benefits in first three years
• More sunset provisions
• Interaction with 2001 tax law
• Not many new elements
• Acceleration of previously enacted cuts

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Acceleration ofRate Reductions

• Rates originally scheduled to take effect in 2006
  under 2001 tax law
• Accelerated into 2003 (retroactively)
• Break points adjusted for inflation
• 10 and 15 brackets remain
• Expanded for most taxpayers
• Applies for 2003 through 2010

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Acceleration ofRate Reductions
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Corporate Rate Reductions

• Accumulated earnings and personal holding company
  taxes only
• Penalty taxes lowered to 15 from maximum
  individual rate
• Applies for 2003 through 2010

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Impact of Rate Reductions

• Retroactive to January 1, 2003
• Lower tax for practically every taxpayer
• Heads of households must be in 25 bracket
• Withholding adjustments
• New tables issued by IRS
• Employers must use by July 1, 2003
• Larger net paychecks for all employees
• Required withholding on bonuses lowered to 25
• Lower estimated taxes
• Increased exposure to estimated tax penalties

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Impact of Rate Reductions

• Overall tax liability impacting
  business/investment decisions lessened
• Increased ability to save or invest
• Reduces benefit of tax-deferred and tax-free
  investing
• Further affected by capital gain/dividend rates
• Deductions become somewhat less valuable

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Planning for Rate Reductions

• Acceleration of income into years before 2011
• Coordinate timing of extraordinary income with
  lower tax rates on dividends and capital gains

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Expansion of 10 Tax Bracket

• Small amount of savings for most taxpayers
• Reverts to old law in 2005, then back to new law
  in 2008

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Planning for 10 Tax Bracket

• Additional incentive to shift income to children
  over age 13 who have little or no other income
• Pay children for work in family business

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Expansion of 15 Tax Bracket

• Congress latest attempt at eliminating marriage
  penalty
• Upper limit on 15 bracket for joint filers is
  now twice the single limit
• Applies to 2003 and 2004 then resets to the old
  law for 2005 through 2007 before returning to the
  new law amounts for 2008 through 2010
• Joint filer with at least 56,800 of taxable
  income will save 935 in 2003

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Planning for 15 Bracket

• Accelerate income into 2004 before joint filer
  brackets revert to old law in 2005
• Applies in very narrow circumstances where
  taxpayers income does not spill over into next
  bracket
• Most taxpayers will see a tax increase as a
  result of the expiration of this benefit in 2005

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Increase inStandard Deduction

• Standard deduction for joint taxpayers increased
  to twice that of single taxpayers
• Applies to 2003 and 2004 only
• Does not impact taxpayers who itemize

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Increase inStandard Deduction
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Impact of Standard Deduction

• More taxpayers will not need to itemize
• 2003 standard deduction will be 9,500 instead of
  7,950
• Certain states with federal taxable income as the
  starting point for their tax returns may end up
  with a revenue shortfall
• CO, HI, ID, MN, NC, ND, OR, SC, UT, VT

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Planning forStandard Deduction

• Fewer married taxpayers will need to itemize in
  2003 and 2004
• Consider deferring itemized deductions into 2005
  when the standard deduction reverts to 174 of
  the single standard deduction

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Reduction inCapital Gains Rate

• Long-term capital gains
• Tax rate drops from 20 to 15 for most LTCGs
• 5 maximum rate for taxpayers in 10 or 15
  bracket
• Rate reductions apply for sales between May 6,
  2003 and December 31, 2008
• 0 rate for taxpayers in 10 or 15 bracket in
  2008
• Rates apply to AMT as well

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Special Capital Gains

• What has changed
• SUPER LONG-TERM CAPITAL GAIN RATE OF 18
  ELIMINATED
• Assets held more than 5 years from
  Jan. 1, 2001 Potential negative impact
• Currently not allowed to revoke
  election Would need Congress
  to intervene allow refund claims
• SMALL BUSINESS STOCK
• AMT preference reduced from 42 to 7

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Special Capital Gains

• What has not changed
• 1250 depreciation recapture (real estate) - 25
• Collectables - 28
• Small business stock - 50 gain exclusion
• 28 regular tax rate (14 effective)
• Long-term gain holding period - over 1 year
• Net capital loss limitation - 3,000 per year

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Capital Gain Planning

• Defer income in year of capital gain to move into
  15 (or 10) bracket
• Pay capital gains at 5 rate (0 in 2008)
• Transfer appreciated securities to children over
  age 13
• Pay capital gains at 5 rate (0 in 2008)
• Once transferred, assets are childrens property
• Disincentive to invest in Section 529 plans

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Capital Gain Planning

• Net unrealized appreciation of employer
  securities in qualified plan
• Lump sum distribution taxed as capital gain
• Increased value to Section 83(b) election on
  restricted stock
• Timing of recognition of income and sale of stock

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Capital Gain Planning

• Reduced benefit of charitable contribution of
  appreciated securities
• Installment sales
• Reduced rate applies to payments received on or
  after May 6, 2003
• Accelerate receipt of installments into lower
  capital gains rate years

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Reduced Tax onCertain Dividends

• Compromise to Bushs plan to eliminate double
  taxation of dividends
• Applies for dividends received from 2003 through
  2008
• Tax rate on dividend income reduced to 15 (5
  for those in the 10 or 15 brackets)
• Same rates as capital gains

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Eligible Dividends

• Dividends paid on or after January 1, 2003 from
• Domestic corporation
• Qualified foreign corporation
• Traded on an established U.S. securities market
• Incorporated in a U.S. possession
• Certain treaty requirements between the countries
  are met
• Mutual funds, partnership, REIT or common trust
  fund passing through either of above
• Does not include money market funds, bond funds
  passing through interest, etc. even though
  amounts paid are classified as dividends

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Ineligible Dividends

• Dividends from
• Credit unions (really is interest)
• Mutual insurance companies
• Stock owned for less than 60 days in the 120-day
  period surrounding the ex-dividend date
• Certain preferred stock which are actually
  reported as debt by the issuer
• Extraordinary dividends
• Exceed 10 of shareholders basis
• If sold at a loss, treat as long-term regardless
  of holding period

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Impact of Dividend Rate Reduction

• Interest earned on savings accounts, CDs,
  government bonds, etc. still taxed at ordinary
  income tax rates
• Greater tax rate disparity
• Incentive for investors to take more risk
• No benefit for dividends held inside
  tax-deferred/free retirement plans

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Impact of Dividend Rate Reduction

• Dividends taxed at lower rate are not considered
  investment income for purposes of investment
  interest expense deduction
• Taxpayer may elect to treat any or all qualifying
  dividends or capital gains as investment income
  to offset investment interest expense

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Impact of Dividend Rate Reduction
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Planning for DividendRate Reduction

• Leveraging securities to purchase dividend paying
  stocks
• May benefit taxpayers with significant other
  investment income to offset expense without
  making election to treat dividends/capital gains
  as investment income
• Corporate distributions to reduce
• Accumulated earnings or personal holding company
  tax
• Pre-S corporation earnings and profits

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Increased Child Tax Credit

• 1,000 per qualifying child in 2003
• Up from 600 in 2002
• Check from U.S. Government beginning late-July
• Advance payment of increased 03 credit
• Based upon filed 2002 returns and age of child as
  of 12/31/03
• Checks will be cut weekly for extended 2002
  returns once filed
• 27 million families receiving 14 billion
• Discussions to make credit amount permanent

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Child Tax Credit Schedule
   
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Impact of Child Tax Credit

• Advance payment must be accounted for on 2003 tax
  return
• Recompute maximum amount allowed
• New children in 2003 - full credit available
• Reduce allowable credit by amount of advanced
  payment, but not below zero
• Higher incomes in 2003 than in 2002 resulting in
  phase-out of allowable credit
• Will result in some taxpayers getting a bonus

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Child Tax Credit Example

• John and Jane have gross income of 60,000 on
  their 2002 joint tax return
• They have two children (ages 6 and 10) in 2002
• They will receive an advance payment of 800 (2 x
  400)
• If their gross income for 2003 is 500,000, they
  will not be entitled to a child tax credit but
  there is no mechanism for a repayment of the
  advance.

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Advance Payment Issues

• For 2003 divorces
• Half of advance payment deemed made to each
  parent
• Divorced couples who alternate the dependency
  exemption
• Check will be issued to parent claiming the
  exemption in 2002 although the advanced payment
  is for 2003...

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Advanced Payment Issues

• IRS has no information on dependents ages
• Further guidance may be issued in the near future

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Planning for Child Tax Credit

• Have more kids
• Watch income phase-out levels
• Control income in years that credit is higher

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Alternative MinimumTax Relief

• Taxpayers subject to AMT
• 1999 - 1 million
• 2010 - 17 to 36 million (estimated)
• New law doesnt change 2010 projection
• AMT exemption raised for 2003 and 2004
• 58,000 for joint filers (up 9,000)
• 40,250 for single filers (up 4,500)
• Much of increased exemption is absorbed by rate
  decreases accelerated into 2003 and 2004

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Planning for AMT

• Timing of items subject to AMT
• Incentive stock options
• Payment of taxes, medical and miscellaneous
  itemized deductions
• Bunching of income
• Utilization of AMT credit

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Increase and Extension ofBonus Depreciation

• 30 bonus depreciation created in 2001
• Purchases of qualifying property between 9/11/01
  and 9/11/04
• 50 bonus first year depreciation
• Property acquired after May 5, 2003
• Placed in service before January 1, 2005
• 30 rate applies to property acquired (or if a
  binding written contract existed) before May 5,
  2003

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Qualifying Property

• Depreciable under MACRS and has a recovery period
  of 20 years or less (not previously used)
• MACRS water utility property
• Computer software
• Qualified leasehold improvement property
• Interior portion of nonresidential real property
• Made by lessor or lessee
• Property placed in service more than 3 yrs. ago
• Certain expenditures do not qualify (enlargement,
  common area, elevator, escalator, structural
  framework)

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Bonus Depreciation Planning

• May elect out of 50 bonus depreciation
• Taxpayers may use 30 bonus or elect out of bonus
  depreciation entirely
• Expect to be in higher bracket in future years
• Luxury auto limitations
• 2003 limit with 50 bonus projection -10,710
• Large autos weighing over 6,000 pounds not
  subject to the luxury auto depreciation limits
• Most states do not conform to federal bonus
  depreciation rules

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Increased Section 179 Expense

• Up to 100,000 expense allowed for qualifying
  property (up from 25,000)
• Applies to tax years beginning after 2002 and
  before 2006
• Available expense election phase-out
• Dollar for dollar for qualifying property over
  400,000
• Reverts to 25,000/200,000 in 2006
• Section 179 expense comes before bonus
  depreciation

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Qualifying Property

• Personal property
• Tangible property
• Off-the-shelf computer software
• May be new or used property

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Planning for Section 179 Expense

• Expense election lowers AGI
• May allow for additional itemized deductions to
  be utilized
• Limited to taxable income of business
• Consider not electing if taxpayer will be in a
  higher bracket in the future

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Planning for Section 179 Expense

• Expense computer software (outside of Section
  179) if useful life is one year or less
• All states (except CA) conform to Section 179
  rules

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