Tax and Business Alert - November 2002

There is still plenty of time to lower your 2002 tax bill and add to your tax advantaged retirement savings and investment accounts. Here are a few ideas to help get you started.

Individual Retirement Accounts (IRAs)

You can contribute up to $3,000 to your IRA this year, up from $2,000 last year. And, if you arc at least age 50 by year end, you can contribute up to an additional $500 for 2002. These contribution amounts are scheduled to increase in future years for even greater retirement savings growth. Even if you can't deduct your contribution, an IRA is a great way to save and receive tax benefits in future years.

Elective Deferrals

The annual deferral limit for 401(k) plans, etc. rises to $11,000 this year (and eventually to $15,000 in 2006). If you are at least age 50 by year-end, you can contribute an additional $ 1.000 to 401 (k), 403 (b), and 457 plans in 2002 (gradually increasing to $5,000 in 2006). This is another great way to save and invest for the future and receive current and future tax benefits.

Coverdell Education Savings Accounts (ESAs)

The annual contribution limit for ESAs (formerly called Education IRAs) has increased from $500 last year to $2,000 per beneficiary. The phase out range for eligibility to make these contributions has also increased this year to between $190,000 and $220,000 for married taxpayers filing a joint return.

Investment Losses

If your investment portfolio contains securities that have declined in value (most will with current market conditions) consider disposing of some or all of them before year-end. Capital losses can offset your 2002 capital gains and reduce current taxes. Subject to limitations, some or all of any excess loss can be &ducted currently and any balance carried forward to future years.

Charitable Deductions

If you are charitably inclined, qualifying charitable deductions can create significant tax savings. And keep in mind, contributions charged to a credit card in 2002 and paid in 2003 are deductible this year (tile deduction is determined when the charge is made). See the article on page 2 for information on donating cars, trucks, and boats to a charity.

Annual Gift Tax Exclusion

The annual gift tax exclusion increases by $ 1,000 to $11,000 in 2002. Note that for Section 529 Qualified Tuition Programs, you are allowed to front load) your contributions by using five annual gift tax exclusions in year one. Therefore, you can transfer $55,000 to a Section 529 plan without incurring a gift tax liability ($ 110,000 if a gift-splitting election is made by a husband and wife). However, by front loading five exclusions in the current year you will have used your gifting exclusions for this particular beneficiary for the next five years. (See page 2 for additional information on Section 529 plans).

Defer Income and Increase Deductions

Tax rates remain the same in 2002 and 2003, but decline 1% in 2004 and again in 2006. So, pushing income into future years or bringing deductions into the current year might save you money.

Business Equipment Depreciation

For your business, a provision of the Job Creation and Worker Assistance Act of 2002 allows an immediate 30% depreciation deduction for qualifying original use property acquired after September 10, 2001. This allowance, when added to the Section 179 deduction of up to $24,000, plus regular depreciation could produce a substantial tax deduction in 2002.

MRD's May Mean Double Trouble

If you've attained age 70 ½ in 2002, you have until April 1, 2003 to begin receiving minimum required distributions (MRDs) from your traditional IRAs and qualified retirement plans (if you are currently retired).

However, your first distribution year is considered by the IRS to be 2002, the year you turned 70 '/2. Your second distribution year will be 2003. Therefore, if you postpone your 2002 distribution until 2003, you will take two distributions in one year (2003) and the tax consequences could be detrimental. By taking two distributions in one year, you could place yourself in a higher tax bracket, be subjected to larger deduction cutbacks, and incur higher taxes on your social security benefits.

You've probably heard the ads or seen the billboards-"Donate your vehicle or boat to a good cause and receive a great tax write-off in return. Free towing included!"

These solicitations may sometimes lead you to believe that by donating a vehicle or boat, you'll reap a greater tax benefit than if the item is sold and the proceeds donated to the charity. The reality, of course, is that there's no magic tax benefit. Thus, with the one exception noted in the observation, there should be no difference between the tax results of donating a personal vehicle to charity versus selling the vehicle at retail and donating the proceeds to charity. (Obviously, there may be a non-tax benefit of giving the vehicle to charity--you avoid the hassles of a sale.)

The limit on a charitable deduction for tangible personal property held more than a year and not used in a business generally is the donated item's actual value at the time of donation (i.e., what you could sell it for in an arm's-length transaction). However, if the item's cost is less than this value and the charity won't be using the item to carry out its exempt purpose, the deduction is limited to your cost.

Observation: In this latter situation where an item's value does exceed its cost (which almost never occurs when the donated item is a vehicle) and the charity won't be using the item to carry out its exempt purpose, you may be better off tax-wise by selling (rather than donating) the item, paying the tax on the gain, and then giving the net after-tax proceeds of the sale to charity.

The cost for four years of college is currently estimated to exceed $55,000 and $120,000, respectively, for public and private institutions of higher education. Section 529 (named for the Internal Revenue Code section covering these plans) plans offer a convenient way to accumulate college savings, provide the student tax-free funds for eligible college expenses, and allow significant gifting opportunities for parents, grandparents, and others. You are a good candidate to establish a Section 529 plan if you have children or grandchildren who will benefit in future years from tax-free funds to pay for educational expenses. You can also benefit if your adjusted gross income precludes you from using other educational funding incentives, you want to control the ultimate disposition of funds without establishing a trust, or if you would like to utilize up to five times the annual $ 11,000 gift exclusion to a single

College Savings Plans Network (CSPN) at www.collegesavings.org is an affiliate of the National Association of State Treasurers. In an effort to make higher education more attainable, the network serves as a clearinghouse for information among existing college savings programs. CSPN also monitors federal activities and promotes legislation that will positively affect state programs. The CSPN website provides links to search the U.S Department of Education's database of 529 plan eligible institutions, and contains extensive information on financial aid and scholarships. Also available are links to each state's Section 529 plan and answers to the most frequently asked Section 529 plan questions.

Savingforcollege.com at www.savingforcollege.com states on its Home Page that it is "The Internet Guide to 529 Plans." The site has a wealth of Section 529 plan information in sections titled Learn 529, Compare 529s; Find a 529 Consultant, and The Internet Guide to Coverdell Education Savings Accounts.

By combining an electric motor with a gasoline powered engine, hybrid vehicles obtain greater fuel efficiency and produce fewer emissions than similar vehicles powered solely by conventional gasoline-powered engines. Furthermore, unlike the first generation of electric cars, these hybrid vehicles don't have to be plugged in to recharge their batteries, as the electric motor recharges the battery while the car runs. Because hybrid vehicles are much more convenient, they may well prove to be much more popular than electric cars (at least the car manufacturers hope so).

You are allowed to deduct the incremental cost of the vehicle that is attributable to the use of clean-burning fuel, up to $2,000. You claim the deduction on your tax return filed for the year the vehicle was first placed in service.

The Toyota Prius is the first hybrid gas-electric vehicle to be certified by the IRS. According to the IRS, purchasers or a new Toyota Prius for model years 2001, 2002, and 2003 are entitled to a $2,000 deduction for the year the vehicle was first put into use. If you have already filed your return for that year, you can file an amended return to claim the deduction.

In addition to the Toyota Prius, two other hybrid vehicles are currently being sold in the
U.S.--the Honda Insight and a special version of the Honda Civic. Honda indicates that they will qualify for a $2,000 deduction as well. They all sell for about $20,000.

Used vehicles don't qualify for the clean-burning fuel deduction. However, the deduction is allowed regardless of whether the vehicle is used in a business or for personal use. Also, it's an "above-the-line" deduction, so you can take advantage of it even if you don't itemize.

In an August 15, 2002 news release, the Justice Department stated that it has asked a federal court in Miami to allow the IRS to serve a "John Doe" summons on MasterCard International. Such a summons would enable the IRS to obtain information about people whose identities are presently unknown. The IRS expects that this information will help identify people who use offshore accounts to evade their U.S. tax liabilities.

In October 2000, the court approved a similar "John Doe" summons on MasterCard for 1998 and 1999 records of cards issued by banks in the Bahamas, Antigua and Barbuda, and the Cayman Islands. Tile new petition seeks records relating to the years 1999-2001 of cards issued by banks in more than 30 countries, including Liechtenstein, Switzerland, and marry Caribbean nations, such as Belize and Bermuda. Recently, a federal court in San Francisco permitted the IRS to serve a summons on Visa International for records of cards issued by banks in those same 30 countries.

The IRS suspects that many taxpayers have been hiding unreported income in tax haven banks and then accessing these funds with debit or credit cards. The IRS audit staff is gearing up to look for cases where these cards were used or large item purchases that appear out of line with the income shown on the buyer's income tax returns.

Business Equipment Depreciation

For your business, a provision of the Job Creation and Worker Assistance Act of 2002 allows an immediate 30% depreciation deduction for qualifying original use property acquired after September 10, 2001. This allowance, when added to the Section 179 deduction of up to $24,000, plus regular depreciation could produce a substantial tax deduction in 2002.

One way you can find and keep valuable employees is to offer the best compensation package possible. An important part of any compensation package is fringe benefits, especially tax-free ones. From an employee's perspective, one of the most important fringe benefits you can provide is medical coverage. Disability, life, and long-term care insurance benefits are also significant to many employees. Fortunately, these types of benefits can generally be provided on a tax-free basis to your employees. Let's look at these and other common fringe benefits.

Medical Coverage

If you maintain a health care plan for your employees, coverage under that plan isn't taxable to them. Employee contributions are excluded from income if pre-tax coverage is elected under a cafeteria plan; otherwise, such amounts are included in their wages, but are deductible on a limited basis as itemized deductions.

Disability Insurance

Your disability insurance premium payments aren't included in your employee's income, nor are your contributions to a trust providing disability benefits. Their premium payments (or any other contribution to the plan) generally aren't deductible by them or excludable from their income. However, they can make pre-tax contributions to a cafeteria plan for their disability benefits; such contributions are excludable from their income.

Long-term Care (LTC) Insurance

Plans providing coverage under qualified LTC insurance contracts are treated as health plans. Accordingly, your premium payments under such plans aren't taxable to your employees. However, LTC insurance can't be provided through a cafeteria plan.

Life Insurance

Your employees generally can exclude from gross income up to $50,000 of qualified group-term life insurance coverage you provide. Qualified coverage exceeding $50.000 is taxable to the extent it exceeds the employee's contributions toward coverage.

Retirement Plans

Qualified retirement plans that comply with a host of requirements receive favorable income tax treatment, including ( I ) current deduction by you, the employer, for contributions to the plan; (2) deferral of the employee's tax until benefits are paid; (3) deferral of taxes on plan earnings: and (4) in the case of 401 (k) plans, 403(b) plans, and SIMPLE plans, the employee's ability to make pre-tax contributions.

Dependent Care Assistance

You can provide your employees with up to $5,000 ($2,500 for married employees filing separately) of tax-free dependent care assistance during the year. The dependent care services must be necessary for the employee's gainful employment.

Adoption Assistance

Generally, employees can exclude from income qualified adoption expenses of up to $10,000 paid or reimbursed by you.

Educational Assistance

You can help your employees with their educational pursuits on a tax-free basis through educational assistance plans (up to $5,250 per year), job-related educational assistance, qualified tuition reductions, and qualified scholarships.