The Earlier the Better!

With last year's tax prep, returns and refunds behind you, it's time to embark on another tax year. Now is the perfect time to do some tax planning. Think of it as charting your course for the voyage ahead. At this stage it may seem too early to make detailed plans, but you can identify the major landmarks to guide you through the year. Fortunately, Congress gave us two new ;charts in the form of the two tax laws that passed late last year. 

Tips

Here are some ideas and tips to help you stay on course during the coming year. Manage your income for the year Managing your income is important because many tax breaks begin to phase out at certain income levels. At this stage, try to estimate whether you're in danger of losing any tax breaks. Use last year's income as a guide and factor in events (such as marriage, divorce or a job change) that could change your tax situation. Consider these ways to manage your income level, if necessary: Make tax-deductible contributions to an IRA or 401 (k) plan Recognize losses in your investment portfolio Consider switching investments to tax-exempt securities Shift income to family members in lower tax brackets Decide if you're likely to itemize deductions

Two changes in last year's tax laws could affect your decision whether to itemize or take the standard deduction. Congress increased the standard filing deduction for married filers to $10,000, extending last year's marriage penalty relief. This increase means that it might not pay you to itemize. There's a new itemized deduction for state and local sales taxes paid. You can now choose to deduct these sales taxes instead of state income tax. If you are taxed in a state with no or low state income tax, or if you plan to buy big ticket items, this change could make it worth your while to itemize.

You may need to monitor our potential itemized deductions throughout the year and make a final decision close to year – end. If it's a close thing, consider moving discretionary deductions into this year and taking the standard deductions next year.

You might be affected by two other changes. First, new rules could reduce your deduction for a vehicle donation this year. Second, the deduction for teachers who buy classroom supplies was reinstated for 2005. If you're a teacher, save your receipts and plan to deduct up to $250.00. This deduction is available whether you itemize your deductions or take the standard deduction.

Plan

Plan your retirement savings for the year It's never too late to start saving for a comfortable retirement. Plan to contribute the maximum you can afford to retirement plans, such as IRAs, 401(k)s Keoghs and SEPs. You'll enjoy tax-free or tax deferred savings and, in many cases, an upfront tax deduction as well. In 2005 you can contribute up to $4,000 to an IRA and $14,000 to a 401 (k) plan. Don't forget the additional catch-up contributions you're allowed if you're 50 or older in 2005 - $500 for an IRA and $4,000 for a 401(k). If you're self employed, look into the "solo 401(k)" plans now being offered. If your income is low, look into the saver's credit which gives you a tax credit for making retirement plan contributions. Plan for recent changes in business taxes Businesses should plan for some new tax breaks in 2005, as well as for the continuation of old ones.

A new tax deduction for businesses involved in manufacturing or production activities will effectively cut the top business tax rate for many companies. Businesses that qualify may include traditional manufacturing, construction, agricultural processing, architecture and engineering services, and many other industries. Check early in 2005 to see whether your company qualifies. The generous "Section 179" expensing provision of recent years will continue through 2007.

This allows you to claim an immediate deduction for business equipment purchases rather than depreciating the cost over several ears. Factor the extension of this tax break into your equipment purchasing plans. There are new rules for S Corporations. This form of business provides the liability protection of a corporation but allows income to flow through to the owners without double taxation. The new rules are more favorable, especially for family owned businesses.

Check with Us

Check with us if you need details. Keep an eye out for the alternative minimum tax The alternative minimum tax (AMT) was originally set up to make sure that high income individuals paid their fair share of taxes. Because the threshold amount was never indexed for inflation, more and more middle-income taxpayers have discovered that they have an AMT liability. Congress provided partial relief by raising the exemption amount in 2003, and has now extended that relief through 2005. However, you still need to check that your tax strategies don&8217;t make you liable for the AMT.

Plan your investment strategy Your investment portfolio offers scope for creative tax planning. Keep taxes in mind as you plan your strategy. Remember though, you should manage your investments for overall risk and return, not just to minimize taxes. Your investments give you the flexibility to manage income by selectively taking investment gains or losses. If you plan to take gains, try to meet the 12-month holding period for long term gains.

That way you'll enjoy lower tax rates (15% maximum versus up to 35% for short term gains). Remember that qualifying stock dividends are taxed at 5% or 15%, compared to a top rate of 35% interest payments on bonds and savings accounts. Don't overlook your education funding plan If you have children, it's time to plan for their education costs.

Numerous tax credits, loans, savings accounts and prepaid tuition plans are available to fund education expenses, each with different tax consequences. Tuition plans alone offer a bewildering array of investment choices, terms, and restrictions. Develop an education funding plan that is tailored to your specific circumstances.

The earlier you do this, the more successful your plan is likely to be. Please contact our office for more information on these and other planning ideas.