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The Road Ahead
Tax and Financial News
July 2003
The Road Ahead
I donât know about you, but I stand in awe of our government. You have the House of Representatives, the Senate and the President and they are the most confusing bunch you will ever run into. The House wants to cut taxes another $85 billion or so and the Senate doesnât mind changing a provision or two of the law they just passed as long as someone makes up for the revenue short fall. In this case, they want to increase tariffs. The President, on the other hand started out wanting a $700 billion tax cut, but eventually settled for only about half that. Given that, it would make sense that he would prefer the Houseâs new changes to the tax law, but no, thatâs too much; he prefers the Senateâs version.
Itâs enough to drive even the most cynical of us crazy. Thatâs one of the reasons why we tend to avoid analyzing tax law changes until they are actually law. We also recognize that thereâs probably more tweaking to come. After all, there hasnât been an effective energy policy put into place and the prescription drug plan for Medicare recipients is yet to be hammered out. Except for the fact that we prefer to see lower tax burdens on those who are paying the tax, it sure would be nice to have a little consistency for a whileâ¦but we wonât, so letâs look at how you can benefit from the changes that are already law.
First, we arenât going to talk much about the advance payments the IRS will start mailing the week of July 25. By and large, if you already qualify, you will get it and if you donât, you canât do much about it. You can, however, take a good hard look at your next few paychecks. Even without making any changes to your withholdings, the reduced rates will lower your withholdings. If your employer hasnât implemented the lower withholdings by now, keep a keen eye on the next few paychecks. The new rates should be implemented by July 1, 2003. This means if taxes in your first July paycheck arenât lower, you may need to ask the payroll department if theyâve changed the rate tables.
One more thing you should do is look at what has already been withheld. Itâs possible that the higher withholdings through June will be so great that you can claim an additional deduction or two to get your money now, rather than later. The choice is yours and even if you donât act, you will basically be giving yourself a little cushion when you figure your taxes at year-end.
By now, many of you who didnât have kids last year but are expecting this year are saying, "What about us? Whereâs our advance payments?"
Sorry, but youâre out of luck, at least as far as advance payments go. Still, when figuring your estimated taxes, donât forget to reduce the final number by the $1,000 credit you will get at year-end. Hey, if youâre really lucky and have twins, youâll get $2,000.
Whatâs that? Youâre self-employed and make estimate payments? Youâre in luck because you can start using the new tax rates to determine how much you pay in quarterly. This will surely decrease your cash outlay for the year. How much, we donât know without calculating the amount. However, we can say one client reduced his outlay by over 10%, but most of his income was of the self-employment type. If he had high dividend and capital gain income, the percentage would be higher.
Doesnât this sound great? Sure it does, but there is one catch. As far as we know, the estimated tax penalty provisions havenât changed. Those are the ones that keep you from paying penalties if you pay in what your tax liability was in 2002. If you expect income to be the same from 2002 to 2003, you will save on the quarterly estimates. This is true because one of the ways to get out of underpayment penalties is to pay in 90% of this yearâs actual liability. Therefore, even reducing your payments may not harm you.
However, if you expect a huge increase in income, and thus, your income taxes, your new estimates may actually be higher than what you paid last year. In that case, pay in only what it takes to keep from paying underpayment penalties at year-end.
By the way, before you compute your expected taxable income, donât forget to factor in the new depreciation rates. In 2003, you can forget about that $25,000 immediate write-off for new equipment you bought. In 2003, youâll get to write off $100,000. Not only that, you will need to factor in the 50% first year bonus depreciation instead of the 30% in 2002. Things are definitely looking better now.
All of these changes almost make paying those estimates this year a pleasureâ¦well, when compared to last year anyway. With all this good news, though, there has to be a downside doesnât there?
Of course thereâs a downside, but itâs not that bad. Forgetting about the very temporary nature of some of the changes, substantially eliminating the marriage tax penalty this year will make some of those itemized deductions we have cherished much less attractive. With the increased standard deduction, less of the monthly mortgage payment you make will be deductible. Itâs the same with charitable contributions, taxes and other deductions.
What this essentially means is that it may be time to re-evaluate some of your financing decisions. It may serve you well to pay off that mortgage by liquidating low-yielding investments. Previously, you could factor in the tax savings when making the decision, but if your near the end of your mortgage period, you may be getting to a point where your itemized deductions donât exceed the new standard deduction. That makes those mortgage payments even more costly.
Does all of this sound a bit complicated to you? If so, donât feel alone. While there were relatively "few" changes in this yearâs bill, they were massive in their potential impact and we havenât even talked about Alternative Minimum Taxes that could affect you this year. The bottom line is Congress has given many of us a break in terms of dollars but added to the complications of complying with the Internal Revenue Code.
Making sure you factor in all the changes coming from the 2003 tax law changes can be a tremendous task. Donât let it get you down. If you think you need to change your estimated payments, give us a call. We will be happy to reduce your headaches and make this yearâs tax road a little less bumpy for you.
Donât forget about our troops that are still in harmâs way. Keep them in your prayers and your hearts.
Have a great Independence Day and a wonderful July.
Itâs enough to drive even the most cynical of us crazy. Thatâs one of the reasons why we tend to avoid analyzing tax law changes until they are actually law. We also recognize that thereâs probably more tweaking to come. After all, there hasnât been an effective energy policy put into place and the prescription drug plan for Medicare recipients is yet to be hammered out. Except for the fact that we prefer to see lower tax burdens on those who are paying the tax, it sure would be nice to have a little consistency for a whileâ¦but we wonât, so letâs look at how you can benefit from the changes that are already law.
First, we arenât going to talk much about the advance payments the IRS will start mailing the week of July 25. By and large, if you already qualify, you will get it and if you donât, you canât do much about it. You can, however, take a good hard look at your next few paychecks. Even without making any changes to your withholdings, the reduced rates will lower your withholdings. If your employer hasnât implemented the lower withholdings by now, keep a keen eye on the next few paychecks. The new rates should be implemented by July 1, 2003. This means if taxes in your first July paycheck arenât lower, you may need to ask the payroll department if theyâve changed the rate tables.
One more thing you should do is look at what has already been withheld. Itâs possible that the higher withholdings through June will be so great that you can claim an additional deduction or two to get your money now, rather than later. The choice is yours and even if you donât act, you will basically be giving yourself a little cushion when you figure your taxes at year-end.
By now, many of you who didnât have kids last year but are expecting this year are saying, "What about us? Whereâs our advance payments?"
Sorry, but youâre out of luck, at least as far as advance payments go. Still, when figuring your estimated taxes, donât forget to reduce the final number by the $1,000 credit you will get at year-end. Hey, if youâre really lucky and have twins, youâll get $2,000.
Whatâs that? Youâre self-employed and make estimate payments? Youâre in luck because you can start using the new tax rates to determine how much you pay in quarterly. This will surely decrease your cash outlay for the year. How much, we donât know without calculating the amount. However, we can say one client reduced his outlay by over 10%, but most of his income was of the self-employment type. If he had high dividend and capital gain income, the percentage would be higher.
Doesnât this sound great? Sure it does, but there is one catch. As far as we know, the estimated tax penalty provisions havenât changed. Those are the ones that keep you from paying penalties if you pay in what your tax liability was in 2002. If you expect income to be the same from 2002 to 2003, you will save on the quarterly estimates. This is true because one of the ways to get out of underpayment penalties is to pay in 90% of this yearâs actual liability. Therefore, even reducing your payments may not harm you.
However, if you expect a huge increase in income, and thus, your income taxes, your new estimates may actually be higher than what you paid last year. In that case, pay in only what it takes to keep from paying underpayment penalties at year-end.
By the way, before you compute your expected taxable income, donât forget to factor in the new depreciation rates. In 2003, you can forget about that $25,000 immediate write-off for new equipment you bought. In 2003, youâll get to write off $100,000. Not only that, you will need to factor in the 50% first year bonus depreciation instead of the 30% in 2002. Things are definitely looking better now.
All of these changes almost make paying those estimates this year a pleasureâ¦well, when compared to last year anyway. With all this good news, though, there has to be a downside doesnât there?
Of course thereâs a downside, but itâs not that bad. Forgetting about the very temporary nature of some of the changes, substantially eliminating the marriage tax penalty this year will make some of those itemized deductions we have cherished much less attractive. With the increased standard deduction, less of the monthly mortgage payment you make will be deductible. Itâs the same with charitable contributions, taxes and other deductions.
What this essentially means is that it may be time to re-evaluate some of your financing decisions. It may serve you well to pay off that mortgage by liquidating low-yielding investments. Previously, you could factor in the tax savings when making the decision, but if your near the end of your mortgage period, you may be getting to a point where your itemized deductions donât exceed the new standard deduction. That makes those mortgage payments even more costly.
Does all of this sound a bit complicated to you? If so, donât feel alone. While there were relatively "few" changes in this yearâs bill, they were massive in their potential impact and we havenât even talked about Alternative Minimum Taxes that could affect you this year. The bottom line is Congress has given many of us a break in terms of dollars but added to the complications of complying with the Internal Revenue Code.
Making sure you factor in all the changes coming from the 2003 tax law changes can be a tremendous task. Donât let it get you down. If you think you need to change your estimated payments, give us a call. We will be happy to reduce your headaches and make this yearâs tax road a little less bumpy for you.
Donât forget about our troops that are still in harmâs way. Keep them in your prayers and your hearts.
Have a great Independence Day and a wonderful July.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.
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