FEATURE ARTICLE |
Chamberlain S. Peterside, Ph.D and Charles Aiello, CPA | Wednesday, February 16, 2005 |
advertisement
|
[email protected] New York, NY, USA | ANNOUNCE THIS ARTICLE TO YOUR FRIENDS |
IT'S TAX TIME AGAIN
...MAKE THE MOST OF IT
�New Tax Legislation.
ecent tax legislation (the Job Growth Tax Relief Reconciliation Act -JGTRRA), signed by President Bush on May 28th 2003 contained lots of sweeping changes, albeit temporary changes that must be made permanent by Congress before expiration. We all remember receiving a $400 check (per child) from the IRS last summer, yet most of us don't fully comprehend these changes or what they portend for our bottom-line. We would attempt to explain the key features and how you can benefit from them.
For starters, the $400 refund resulted from the retroactive -- beginning in 2003, increase in child tax credit from $600 to $1000 contained in the legislation, thus every taxpayer with a qualifying child had to receive the well-deserved refund. Beyond that, there are some other far-reaching novelties in the law such as:
How these changes affect you as a taxpayer depends on your filing status, income level and occupation. Taxpayers owe it to themselves to continually explore avenues for optimizing their tax liability this year and beyond.
advertisement
|
Speaking about retirement savings, we all realize how volatile the market was between 2000 - to early 2003. This adversely affected a lot of investors. Moreso, with the impending large-scale retirement of so-called "baby-boomers" it became necessary to take drastic measures to encourage investors to save more, which explains the "catch up" provision allowed for older investors. If you fall in this age bracket you can contribute an extra $3000 to your 401(k) or 403(b) Plan, $1500 more to your SIMPLE IRA for 2004 and $500 more to a traditional or Roth IRA.
�Higher Deductions.
A very important provision of the new tax law worthy of note is the increment in deductible limit for tuition payments. For taxpayers that meet certain income requirements -- such as single filers with Adjusted Gross Income (AGI) of $65,000 or less, or joint filers with AGI of $130,000, you can now take a deduction of as much as $4000 on your tuition payments. However, some people may be unable to take the deduction if they qualify for either "Hope Credit" or Lifetime Learning Credit. Income-earners with higher AGI of between $65,000-$80,000 for single filers and $130,000-$160,000 for joint filers can deduct only $2000.
Additionally, the tax law provides for a higher child tax credit from $600 to $1000 per qualified child. This law may change by 2005 unless Congress acts, -- the credit would revert to $700 in 2005 and remain so until 2008 when it would then increase back to $1000. True, this amount can hardly compensate for the high cost of child care these days, nonetheless, this can be considered a welcome reprieve for most mid to low-income families, so the smart thing to do should be to utilize this funds to set up some sort of long-term savings plans for the child say for college and help empower them for the future.
�Tax Relief.
Its often said that the US tax code contains a marriage penalty that is disadvantageous to couples filing joint tax returns. Typically, the size of standard deduction allowed for single filer was more than if couples filed joint return. Not anymore. The standard deduction for joint filers has been increased by $200 up to $9700, by $100 for single filers increasing up to $4750 and by $150 for head of households increasing up to $7150.
One of the fundamental aspects of the new tax legislation was the lowering of income tax rates across board. The new federal tax bracket now ranges from 10%-35%. Married couples earning less than $14300 and filing jointly would have practically no federal tax liability. Their tax bracket would be 10%. Single filers or head of household earning $7150 and $10,200 respectively also fall under this category. For the well-heeled taxpayers, the maximum federal tax rate now peaks at 35% for incomes above $319,000
�Be Smart About It.
However, the Earned Income Credit (EIC) is one potential source of substantial refund for low-income families. EIC could be as much a $5000 for an average family with qualified children or dependents. The EIC threshold is $35,000, but as is often the case, it is imperative that you don't consider EIC refund check as a windfall from Uncle Sam; therefore it makes sense to begin building a nest egg with these refunds gradually but consistently.
Ultimately, more tax burden still falls on single filers or those without qualified dependents or children. One way to reduce your tax burden is to itemize your deductions, but to do this effectively and legally you must have qualified expenses, such as business expenses, charitable contributions, real estate related expenses, healthcare expenses, dependent care expenses, tuition payments etc. You must have relevant proof for any deductions you take. None of this information presented can substitute for concrete professional advices by a tax expert, ideally your CPA, therefore seek appropriate advice before taking action.
Chamberlain is the Founder & CEO of New Era Capital Corporation and
MyCompleteFinance.com. He was previously a Financial Advisor in the Global Private
Client Group of Merrill Lynch in NY.
Charles is a Senior Tax Advisor with MyCompleteFinance.com and an Adjunct
Professor of Accounting and Taxation at Long Island University in NY.