IT IS THAT TIME OF YEAR; YEAR END TAX PLANNING TIPS

IT IS THAT TIME OF YEAR; YEAR END TAX PLANNING TIPS

HAROLD S. SMALL, J.D., CPA, and AEP

Tax planning requires year-round attention to your situation and planning in anticipation of the end of the tax year (calendar for individuals and many businesses, and fiscal for some business entities) and for the tax filing due date relating to your tax year. However, at this time of year, the issue of what to do on an individual basis reoccurs. Here are some suggestions for your year-end planning.

1. Timing of income recognition. When you have the ability to affect the timing for the recognition of income or losses, consideration should be given as to taxable income in 2002 and the estimated amount of taxable income that will be realized in 2003. Causing taxable events to be deferred or accelerated may affect the taxes payable because of different tax rates in the different years, or as a result of changes in tax rates resulting from changes in the tax law. For example, income tax rates are supposed to be the same in 2002 and 2003, but are scheduled to decline 1 percent in 2004 and again in 2006. Also, if because of the economy your income is lower in 2002, you may want to defer some of your payments that are deductible into 2003 by delaying the making of your payment until 2003.

2. Securities transactions. Look at your portfolio and decide if you want to create taxable income or losses with regard to particular stocks prior to year end. The sale of a security may accelerate or defer the recognition of a gain or loss. However, don’t let the tax implications control your over-all investment plans and profit motive. Since many investors have experienced losses from securities transactions in 2002, you may want to look at some winners that can be sold to trigger taxable income to apply against the losses already realized.

3. Estimated Tax Payments. Make sure that estimated taxes are timely paid to avoid penalties. The acceleration of payment of California estimated taxes into 2002 (pay by December 31 instead of January 15) will result in a current year federal income tax deduction, which reduces your 2002 income tax liability. A similar benefit can be obtained by paying the second installment of your real property taxes by December 31, 2002 instead of waiting until the April 10, 2003 deadline for payment.

4. Timing of Deductions. Accelerating or deferring deductible expenses (e.g. real property taxes and medical expenses) can affect the amount of taxes payable. In addition, bunching medical expenses in one tax year may provide deductions that otherwise may be lost because of the qualifying amounts.

5. IRA and 401(k) Deductions. Timely make your contributions to get deductions for 2002. Make your contributions for 2003 in January so that the income earned on the contributions in 2003 will not be subject to income taxes in 2003.

6. Roth IRA Conversions. Consider whether there is an opportunity (because of today’s depressed stock prices) for you to convert from a traditional IRA to a Roth IRA. Once converted, there should be no additional tax. However, remember that there is a threshold requirement that the modified AGI is $100,000 or less. Not all conversions are beneficial, so plan carefully.

7. Charitable Contributions. Be kind to your favorite charity(ies) and take tax advantage of deductions for your contributions. Review charitable giving opportunities which can include immediate cash gifts and gifts of appreciated assets that provide immediate deductions (up to 50% of AGI for cash and/or 30% for appreciated securities), and longer term planning which may involve the use of donor-advised funds, charitable gift annuities, charitable remainder trusts, and private family foundations.

8. Accelerated Depreciation. Because of a recent change in the tax law, it is possible to take bonus depreciation on depreciable assets acquired during a specific window of time. The result is accelerating the depreciation deduction.

9. Alternative Minimum Tax. Be mindful of the impact of the AMT in your year end tax planning. More and more taxpayers are affected by this area each year, and when AMT affects your situation, many planning strategies that are otherwise beneficial can backfire. Some of the areas to watch carefully include exercising incentive stock options (although that may not be as important when so many stock options are “under water”), substantial long-term capital gains, significant itemized deductions, large depreciation deductions.

There are other planning opportunities available and you should consult with your tax professional for guidance. However, these ideas should give you a starting point for your year-end planning and the actions needed to obtain the desired results.

THE FOREGOING CONCEPTS AND IDEAS ARE GENERAL STATEMENTS AND ARE INTENDED TO PROVIDE CONCEPTS FOR CONSIDERATION IN BUSINESS AND TAX PLANNING. CAREFUL CONSIDERATION NEEDS TO BE GIVEN BY THE USER REGARDING THE USE AND APPLICATION OF THE CONCEPTS. YOUR LEGAL AND TAX COUNSEL SHOULD BE CONSULTED BEFORE THE IMPLEMENTATION OF ANY OF THE IDEAS INDICATED HEREIN. SHOULD YOU HAVE QUESTIONS REGARDING THIS MATTER, HAROLD S. SMALL, ESQ., CAN BE REACHED AT 12526 HIGH BLUFF DRIVE, SUITE 200, SAN DIEGO, CALIFORNIA 92130 OR AT 858.350.8888.