Mid-Year Personal Tax Planning

Summertime is perhaps the least likely time anyone wants to think about income taxes. However, mid-year is an excellent time to consider steps you might take to reduce your taxes for this year.

Develop a Plan

Don’t wait until the last minute to get ready for your 2004 federal income tax bill. Planning ahead is especially important if you expect to earn more income this year than last year. It’s smart to prepare a taxable income projection for the year, including the income you expect to receive through the remainder of 2004 and the tax deductions that you may be entitled to claim.

Once your taxable income for 2004 is projected, an estimate of your 2004 tax bill can be calculated using the current tax rate schedule.

Avoid Estimated Tax Penalties

Your total payments in tax withholding from your paycheck and estimated tax payments you send to the IRS over the course of the year should be at least 90% of your 2004 tax liability.

Alternatively, you can base your payments on the taxes you paid for 2003. If your adjusted gross income (AGI) in 2003 was $150,000 or less ($75,000 or less for married persons filing separate returns), the alternate required 2004 payment is 100% of your 2003 tax liability.

If your 2003 AGI was over $150,000 ($75,000), the alternate required 2004 payment is 110% of your 2003 tax. If you fail to meet these rules, the IRS may charge you interest and penalties, unless the tax shown on your tax return (after withholding) is less than $1,000.

Adjust Your Wage Withholding

If you are employed, check one of your recent pay stubs to see if your tax withholdings are putting you well on your way to paying your 2004 estimated tax. If too much or too little is being withheld from your pay, ask your employer’s payroll department for Form W-4 and complete it right away. The sooner you submit a new W-4, the more accurate your withholding is likely to be.

Make Estimated Tax Payments

If you receive significant income from sources other than your job, or if you are self-employed, you may have to make quarterly estimated tax payments directly to the government.

Contribute to Your Retirement Plan

If you are contributing to a retirement plan at work, such as a 401(k) plan, try to take full advantage of the tax benefits offered. The money you contribute in 2004 is not included in your taxable income for the year so, not only does contributing to your plan allow you to reduce the income tax you currently pay, but it also lets you save on a tax-deferred basis. In any event, try to make enough of a contribution to secure the maximum matching contribution made by your employer.

If you have a traditional IRA or Roth IRA, you have until April 15, 2005, to make a contribution of up to $3,000 to your account for 2004, or up to $3,500 if you’re age 50 or older. Check with us for eligibility requirements and other important tax considerations.

Take Minimum Distributions

Generally, by April 1 of the year after the year you turn age 70½, you must begin to withdraw funds from your traditional IRA and other tax-advantaged retirement plans. Thereafter, you must withdraw minimum distributions by December 31 of each year. The IRS has simplified the rules for determining the required minimum distributions (RMDs) from such arrangements. Whether you contributed to such an account yourself, or you inherited an account, the IRS changes may make calculating your RMD easier and may even lower the amount that you must withdraw each year. We would be pleased to help you determine your RMD under the new rules.

Donate to Charity

Making donations of cash and assets to charity can benefit a favorite cause while lowering your taxes. You have until the end of 2004 to make donations that will be deductible for 2004 tax return purposes. In fact, if you pay at year-end by use of a credit card, you can deduct the donation in 2004, even though you don’t pay the credit card bill until 2005.

If you own appreciated stock, consider donating it to a charitable organization. You’ll avoid paying income taxes on the capital gains, and you will be able to deduct the full value of the stock as a charitable contribution, subject to limitations based on your income. If you still like a particular stock and want to remain a shareholder in the company, you can always buy new shares in the same company after making a charitable contribution of its stock.

Think Ahead

With early tax planning, you are more likely to be prepared for April 15 next year. Now that we are more than halfway through 2004, you may wish to touch base with one of our professionals to look at other ways you can save taxes for 2004. Contact us today.

The information provided in the newsletter has been obtained from sources believed to be reliable but its accuracy is not guaranteed.