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Los Angeles Certified Health Business Development Consultant

Last Updated:
Tuesday February 07, 2017

INDEX


TAX HIGHLIGHTS FOR 2003

In mid-year, I sent all of my clients and friends a Special Bulletin outlining the Jobs and Growth Tax Act of 2003. If you’d like another copy, please contact me. In this bulletin I will only highlight certain provisions of the Act, outline several tax planning pointers.

As far as complexity and volume of material, just consider this . . .

Book Number of Words
War and Peace 660,000
The Bible 774,746
The Internal Revenue Code over 2.8 million

Individual Taxes

 

Individual and corporate rates are pretty much the same.

Individual rates, 2003 to 2010
Corporate rates, with taxable at:
10%  15%  25%  28%  33%  35%
Less than $50,000 15%
$50,001 to $75,000 25%
$75,001 to $100,000 34%
$100,001 to $$335,000 39%
$335,001 to $10,000,000 34%

10% tax bracket expanded to $7,000 (single), and $14,000 (married), adjusted for inflation in 2004. (Reverting in 2005 to 2007 to $6,000 (single) and $12,000 (married). Planning pointer: Here is an opportunity for parents to shift income to their age 14 and older children to take advantage of this bracket.

Dividend income now taxed at 5% and 15% rates. Taxpayers in the 15% and 10% regular tax brackets are taxed at 5% for dividends. Taxpayers in regular tax brackets over 15%, will have dividends taxes at a 15% rate. Pointer: If you do not hold a share of stock for more than 60 days during the 120-day period beginning 60 days before the ex-dividend  date, dividends received on the stock are not eligible for the reduced rates. Note: California provides no special tax treatment for dividends, which are taxed as the taxpayer’s regular rate.

Social Security benefit calculator at www.ssa.gov/retire offers three increasingly detailed levels of benefit estimates for your retirement benefits. You can 1) calculate your retirement benefits using different retirement scenarios, b) find out how certain types of earnings and pensions can affect your retirement benefits, c) see if your spouse and children will be eligible for Social Security benefits on your records, and more.

Alternative Minimum Tax (or is it the Mandatory Minimum Tax?) This is no joke!

According to a Congressional Research Service (CRS) report, “The Alternative Minimum Tax for Individuals”, the number of taxpayers subject to the AMT will increase from approximately 1.8 million in 2001 to over 35 million (33 percent of all taxpayers) by 2010, if no tax legislative changes are made. It is estimated that repealing the individual AMT would cost from $640 to $840 billion over the 2003-2012 period. So, let’s figure that AMT is here to stay.

Three items presently account for 90% of the dollar value of AMT additions to regular tax.. The top six preferences are:

1)  State and local tax deductions, 2) Personal exemptions, 3) Miscellaneous deductions above the 2% floor, 4) Net operating losses, 5) Incentive stock options, and 6) Passive items

Some AMT Planning Pointers: (You should seek a professional to assist you with these calculations) ): 1) See if spreading the preference items between two years reduces or increases the AMT tax rate, 2) Prepay state income and property taxes cautiously. The deduction may be wasted in an AMT year. 3) Interest paid on home equity borrowing for ‘other’ than home improvements is not deductible for AMT, 4) If an employer will reimburse business expenses, the employee avoids AMT on this preference.

There are more.

Child tax credit refund of $1,000 was mailed to taxpayers during July and August based on information on your 2002 return filed in 2003.  If you were not eligible for the advance payment you may still qualify for the increased child tax credit of up to $1,000 when you file your 2003 tax return. Please let your tax preparer know the amount of this credit you received in 2003.

Self-employed health insurance, which is an above-the-line deduction, increases to 100% in 2003.  Planning pointer: Medicare premiums and long-term care insurance premiums are considered health insurance for this purpose.

Long-term care insurance. Some pointers for choosing a long-term care policy are:

1. Determine resources.  If you qualify for Medicaid, you don’t have enough money for premiums.

2.  Purchase at the appropriate age to save on premiums.

3.  Don’t forget inflation protection.

4.  Buy a tax qualified plan.  Nearly 90% of plans sold are tax qualified.

Section 529 educational plans.  This is a tax-free method to pay for qualified higher education expenses.  See www.savingforcollege.com  for general information and comparative analysis of the various state plans. See www.scholarshare.com for information for the California ScholarShare plan.

Pros and cons of Section 529 at a glance.

PROS

CONS

Income and growth are tax-free as long as withdrawals are used for qualified higher education expenses.

No deduction is allowed for contributions.

The donor retains control to disburse the money.  The donor can change the beneficiary.

No investment control. Funds are managed by the trust. TIAA-CREF manages the California ScholarShare plan.

The donor can take the money back (and pay taxes and penalties.)

Trust will be in conservative investments not necessarily those that a donor would choose.

If money remains after beneficiary graduates, it can be used for grad school or transferred to another family member

Contribution applies against annual and lifetime gifting amounts where direct payment of tuition does not.

No AGI limitation for donors.

Financial aid may be impacted by amounts in the plan (student or parent.)

Estate planning can include transfers to Section 529 plans.

Only cash can be contributed. Other assets must be liquidated if they are used to fund the plan.

Students may attend any accredited school in the nation.  School does not have to be named when the account is opened.

Penalties apply if funds are not used for college.

Trust can be used for most college expenses including tuition, fees, books, supplies and room and board.

Some tax advantages are due to expire in 2010.

Gift tax.  The 2003 annual exclusion remains at $11,000.

IRA provisions.  An individual can make a contribution to a Traditional or Roth IRA up to the lesser of $3,000 or the individual’s compensation if neither the individual nor the individual’s spouse is an active participant in an employer-sponsored retirement plan.

Individual not active participant, but spouse is.  The IRA deduction is phased out for taxpayers with AGI between $150,000 and $160,000.

Annual IRA contribution limits are increased as follows:

2002-2004

    2005-2007

        2008

     $3,000

        $4,000

     $5,000

Additional catch-up IRA contributions are permitted for those 50 and over, in the following amounts:

 2002-2005

      2006

      $500

   $1,000

Sale of stock by nonresidents – tax planning pointer:

An individual who owns all or a majority of the stock in a corporation, should consider moving out of California prior to selling the stock in anticipation of retirement. The sale of stock is considered intangible property and is sourced to the taxpayer’s state of residence. The move to the nontax state should take place before even beginning  the process of looking for a buyer. This plan does not apply to the sale of a California corporation’s assets, for which gain on sale will be sourced to California.

Business Taxes

The 2003 law provides some needed tax relief to businesses by increasing the additional first year depreciation percentage, adding to the first year luxury auto write off, and quadrupling the section 179 expensing amount.

Bonus depreciation.

  • 30% bonus depreciation has been extended to property placed in service before 1-1-05

  • 50% bonus depreciation has been added for property placed in service after 5-5-03 and before 1-1-05.

You can elect to use the 30% or the 50% bonus, or neither, on a property-by-property basis.

Increased section 179 expensing – This section allows a taxpayer to deduct a portion of the cost of certain business property instead of depreciating it. The Act increases the amount that can be deducted from $25,000 to $100,000, increases the level of expenses above which the deduction is further limited from $200,000 to $400,000, and permits revocation of the election to expense without IRS consent. These new rules are in effect for 2003 through 2005.

Auto expense

There are severe depreciation limitations for passenger automobiles. For purposes of the depreciation caps, a passenger automobile includes any four-wheeled vehicle manufactured primarily for us on public streets, roads, and highways, that has an unloaded gross vehicle weight (i.e. curb weight fully equipped for service but without passengers or cargo) of 6,000 pounds or less.  A truck or van (including a sport utility vehicle or minivan) is treated as a passenger automobile if it has a gross vehicle weight (i.e. maximum total weight of a loaded vehicle as specified by the manufacturer) of 6,000 pounds or less.  Consequently, some large SUVs are not subject to the depreciation caps.

The following 2003 SUVs have approximate gross vehicle weights (GVW) exceeding 6,000 pounds, allowing the Section 179 expensing rules on the first $100,000 and depreciation, including the 30%/50% additional first year depreciation, of the balance, if any, over 5 years:

AM General Hummer BMW X5 Cadillac Escalade Chevy Suburban, Tahoe, Trail Blazer Dodge Durango Ford Excursion, Expedition GMC Envoy, Yukon, Yukon Denali Land Rover Discovery Lexus LX 470 Lincoln Navigator, Aviator Mercedes M Class SUV Mitsubishi Montero Porsche Cayenne Toyota Land Cruiser, Sequoia SUV VW Touareg

Be sure to check the specific vehicle for its GVW before buying it.  The GVW is listed on a metal place on the inside of the driver’s door.  GVW can be found for other models at www.intellichoice.com.

Investment

Reduction in capital gains rate (for both regular and AMT tax) – The 20% maximum rate on net capital gains is reduced to 15% for individuals, estates, and trusts for capital assets sold or exchanged (and to installment payments received) on or after May 6, 2003 and continuing through 2008. For taxpayers in the 15% and 10% regular tax brackets, the 10% capital gains rate is reduced to 5% starting May 6, 2003 and is reduced to zero for 2008 only. The capital gains rates return to 2002 levels in 2009.

Note:  The maximum capital gain rates do not apply if they are higher than the taxpayer’s regular tax rate.  There is no change to the rates on short-term capital gains, which continue to be taxed at ordinary income rates.

I am available to discuss any of these matters with you.

Your resource for all of your tax, financial, and business planning matters,

 

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SPECIAL BULLETIN - JULY 2003

  1. Highlights of the 2003 Tax Act

  2. The Economy:  What It Means To Us 

  3. Mortgage Rates

  4. Sale of Life Insurance Policies

July, 2003

This Special Bulletin was prompted by the $350 billion tax cut bill1 signed into law on May 28th by President Bush.

Before delving into provisions that will reduce your tax bill, I’d like to give you my viewpoint on the ‘big picture’.

In June 2001, President Bush signed into law the Tax Act of 2001. The law provided for $1.3 trillion of tax relief over the next 10 years, with all provisions expiring after December 31, 2010.

Under the Congressional Budget Act of 1974, Congress adopted procedures to attempt to control its own spending.  In 1990, the Budget Act incorporated the Byrd rule, which meant that any provision that would increase the deficit for a fiscal year beyond those covered by the measure is subject to that procedure. In simple English, under the Byrd rule, unless Congress takes affirmative action, the provisions of the Tax Act of 2001 will ‘sunset’ (terminate) after December 31, 2010. As I understand it, if there are no surpluses as projected by the year 2011, the Act will sunset.  If there are surpluses as projected, then sunset is repealed and the Act continues on. Unless of course, events in 2010 dictate that Congress take new action.

The 2001 Act was tail-end loaded:  Tax reductions of $475 billion took effect in the first 5 years, and $875 billion in the last 5 years.  The 2003 Tax Act merely accelerates, temporarily, a number of individual tax reductions that were enacted in 2001 with delayed effective dates.

The Richards explanation . . . The U.S. economy has been stalled for too long and too many people are out of work. Fund raising for the 2004 Presidential elections has begun. The election is 1-1/4 years away. It takes time to turn the economy around. The confluence of these situations made it prudent for the President to take action. The acceleration of some of the provision of the 2001 Act make good sense, and will put money into the hands of the public.

Whether or not the 2003 Act will heat up the economy, remains to be seen.  Alan Greenspan has lowered interest rates to a 45-year low and that hasn’t helped. I personally believe that the old tricks won’t work because we are now, for the first time ever, in a true global economy. There will be a learning curve before our economists can figure out the ‘new world economic order’.

what should you do about the tax act? Changes in the relative tax rates on ordinary income, dividends, and capital gains mean possible reconsideration of savings and investment decisions. The potential that most of the changes will eventually be extended, and the temporary nature of the lower rates on capital gains and dividends makes long-term planning difficult.  Two good solutions for making sense of the 2003 Tax Act are: continue to make your business and investment decisions based on sound, basic economic considerations rather than be tax driven, and; seek advise from your tax-planning professional.

My very best wishes for the summer.

Your resource for all of your tax, financial, and business planning matters,

 

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HIGHLIGHTS OF THE 2003 TAX ACT

In attempting to provide an overview of provisions, not all the details are included.  Therefore, do not attempt to make tax judgments from this material.  If you believe a provision applies to your situation and would like to know how your personal situation is impacted, you should contact your tax-planning advisor.

Effective for 2003 and 2004

Marriage penalty (limited) relief  - The taxable income amounts in the 15-percent bracket for married couples is increased to twice the amounts for single taxpayers. Similarly, the standard deduction for married couples is increased to double the amount for single taxpayers. The 15-percent bracket decreases in 2005 and is phased up in 2006 and 2007; from 2008 to 2010 it is the same as 2003.

Acceleration of (temporary) increase in the 10 percent bracket – The top of the 10% bracket is increased in 2003 instead of 2008, bringing more taxpayers into the 10% bracket.

Acceleration of tax rate reductions - The rate reductions scheduled for 2006 and thereafter take effect in 2003 and remain that way until 2010. The new 2003 brackets are 25%, 28%, 33%, and 35%. This is a real tax benefit for all taxpayers. (Note:  New withholding tables have been sent to all employers recommending its use beginning July 1st.)

Alternative minimum tax (temporary) relief – The AMT exemption amounts have been increased (which reduces the AMT tax) for 2003 and 2004, reverting to the pre-2001 amounts after 2004.

Increase (temporarily) in child tax (non-refundable) credit  - The tax credit for qualifying children supported by the taxpayer is increased to $1000 per child in 2003 and 2004, instead of in 2010. The credits are reduced in 2005 to 2009 to the 2001 Act levels. The IRS will mail advance payments to taxpayers of the 2003 rebates of $400 per qualifying child between July 25 and October 1, 2003.  If you do not receive the rebate, and are entitled to the full $1,000, you will claim it on your 2003 tax return. Retain the notices of your advance payment amounts and inform your tax preparer.

Effective for 2003 to 2008

Reduction in capital gains rate (for both regular and AMT tax) – The 20% maximum rate on net capital gains is reduced to 15% for individuals, estates, and trusts for capital assets sold or exchanged (and to installment payments received) on or after May 6, 2003 and continuing through 2008. For taxpayers in the 15% and 10% regular tax brackets, the 10% capital gains rate is reduced to 5% starting May 6, 2003 and is reduced to zero for 2008 only. The capital gains rates return to 2002 levels in 2009.

Note:  The maximum capital gain rates do not apply if they are higher than the taxpayer’s regular tax rate.  There is no change to the rates on short-term capital gains, which continue to be taxed at ordinary income rates.

Reduction in tax rate on dividends – The same 15% (or 5%) maximum tax rate that applies to net capital gains also applies to dividends paid by most domestic and foreign corporations. The new rates are effective for dividends received after 2002 and through 2008.  Most, but not all, of the dividends from a regulated investment company (generally a mutual fund) and real estate investment trusts (REIT) will not be eligible for the reduced tax rate.

Miscellaneous – From 2003 to 2008 the collapsible corporation rules are repealed, and the accumulated earnings tax and personal holding company tax rates have been reduced.

Business Provisions

Bonus depreciation – This provision was enacted to stimulate investments by business in depreciable property. This is an excellent tax break.

30% bonus depreciation has been extended to property  placed in service before January 1, 2005

50% bonus depreciation has been added for property placed in service after May 5, 2003 and before January 1, 2005.

You can elect to use the 30% or the 50% bonus, or neither, on a property-by-property basis.

Example: Company XYZ purchasing $1 million of equipment may elect to take bonus depreciation of $500,000, with the balance subject to the regular depreciation rules.

Certain passenger automobile weighing 6000 pounds or less have limitations placed on the amount of 30% or 50% bonus depreciation that can be taken. However, vehicles with a gross weight over 6000 pound – like many SUVs – are not subject to the limited bonus depreciation and hence the full 30% or 50% amounts apply.

Increased section 179 expensing – This section allows a taxpayer to deduct a portion of the cost of certain business property instead of depreciating it. This is another excellent tax break. The Act increases the amount that can be deducted from $25,000 to $100,000, increases the level of expenses above which the deduction is further limited from $200,000 to $400,000, and permits revocation of the election to expense without IRS consent. These new rules are in effect for 2003 through 2005.

Example of section 179 expensing and bonus depreciation:
Taxpayer purchases $400,000 of qualifying MACRS property. The maximum deduction is $280,000. (400,000 – 100,000 section 179 expensing = 300,000 – 150,000 of 50% bonus depreciation = 150,000 – 30,000 of MACRS first-year table percentage = 120,000 remaining undepreciated cost.

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The Economy (and what it means to us) (or – a case for strategic planning and business management)

Almost every article about the economy reports optimistic and pessimistic information: “stock prices fell and bond yields jumped as investors weighed conflicting reports about the health of the U.S. economy”, “two economic reports gave hopeful signs that the nation’s economy is improving, despite some downbeat data on June employment trends”, “despite repeated assertions that it’s now on the mend, the economy has lost 324,000 jobs so far this year and grew at an anemic 1.9% pace during the first three months on the year”.  What can be deduced from the news?  How do we balance our budgets and run our businesses from the information we hear and read about?

My solution is to stick to basics. In good times, prepare for bad times.  In bad times, prepare for good times.  For surely, one will follow the other.  It’s only a question of time. But you must be prepared, personally and for your business, for the inevitable change of fortune.

Mortgage Interest Rates

In September 2001 and again in July 2002 I reminded my clients and friends that mortgage rates were dropping to new lows (and they did). Well, once again, and for the last time, if you are considering a refinance or home purchase, the rates are still lower than those previous two lows (and I believe they will be going up shortly). If you are interested in a new home loan or a refinancing, I can help facilitate the transaction and make the process painless.  Contact me for details.

Sale of Life Insurance Policies

Most people do not know about this because insurance carriers and agents do not broadcast this information. There is a secondary market for the sale of life insurance policies that you may not be aware of. Under certain circumstances, when you no longer need or can no longer afford to maintain the insurance coverage, instead of surrendering the policy for its cash value or letting it lapse, or taking a reduced paid up policy, you may be able to sell the policy to a life settlement provider for substantially more cash.  Contact me for further details.

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