FEATURE ARTICLE

Chamberlain S. Peterside, Ph.D
and
Charles Aiello, CPA
Wednesday, February 16, 2005
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[email protected]
New York, NY, USA

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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:

  1. Reduction of long-term capital gains tax and dividend tax to 10%-15%

  2. Reduction of marginal tax rates across the board, -- the highest marginal tax rate is now 35% for income above $319,000.

  3. Increase in contributions for 401(k) and 403(b) plans, with the introduction of a "catch up" provision for older taxpayers above 50 years.

  4. Increase in unified credit for estate tax purposes to $1,5million.

  5. Increase in standard deductions across board, and elimination of "marriage tax penalty".

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.


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�More Savings.
Beginning from 2004, taxpayers can now contribute more money to their retirement plan, - as much as $13000 of gross income can be put away in a 401(k) or 403(b) plans, which is an increase of $1000 from last year. For SIMPLE IRA (Simplified Incentive Matching Plan for Employees), annual contribution increases by $1000 up to $9000. The good news is that these funds grow tax-deferred. Contribution limit for Roth/Traditional Individual Retirement Accounts (IRA) remains $3000

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.