to Escape 2001/2002 Tax Bug Bite
By: Richard L. Goldstein, MBA, CPA
the time you read this, December 31 will be gone. Planning to reduce
the amount you owe Uncle Sam is basically over. Now would be a good
time to make sure that the year 2002-tax bug does not bite you too
hard. This months column discusses some planning considerations
for 2002 and some last minute ideas when preparing your 2001 tax
tax liability should not be a surprise on April 15, 2002. If you
dont know what your 2001 tax situation is by the time you
read this column, your tax bill will be higher than it could have
be. It still makes sense to talk things over with your CPA. He or
she just may be able to give you some tax savings ideas and start
the planning process for 2002.
your 2001 tax liability is based on the Alternative Minimum Tax
(AMT), there is a good possibility that you permanently lost tax
deductions. The AMT affects taxpayers with large amounts of preference
items. For example, I have seen taxpayers take tax planning into
their own hands by accelerating deductions. This strategy includes
the prepayment of state taxes and business expenses, only to find
that no tax benefit was achieved. Moreover, these deductions become
lost because they cannot be deducted in 2002.
may have deductions for medical expenses, taxes, home mortgage interest
not used to buy build or improve your home, miscellaneous itemized
deductions, investment interest, or exercised incentive stock options
and/or received tax exempt interest from private activity bonds.
While these items may be deductible or not taxable for regular income
tax purposes, the same may not be true under the AMT system.
do you cope with the AMT? One strategy, for a taxpayer who is consistently
subject to AMT year after year, is spread out the preferences over
two or three years rather than compressing them into one. This takes
advantage of the AMT exemption amounts. An example may to pay your
2002 state tax liability in 2003 rather than 2002 if a tax benefit
will not result.
Sale and Repurchase Election
media has been writing and talking about this election. Nevertheless,
you may not understand what is involved. Under this election, you
may elect to treat any readily tradeable stock (which is a capital
asset and includes shares issued by an open-end mutual fund) held
by you on January 1, 2001, as having been sold on January 2, 2001
for its closing market price on that date, and as having been reacquired
on that date for its closing price. You may elect to treat any other
capital asset or property used in your business and held on January
1, 2001 as having been sold on that date for its fair market value
on that date, and reacquired on that date for its fair market value.
Once the election is made it is irrevocable.
election is made by reporting the deemed sale(s) on your timely
filed return (including extensions). If the deemed sale results
in a loss, enter zero on the tax return because the election cant
result in a taxable loss.
the election? For tax years beginning after 2000, gain from the
sale or exchange of property held more than five years that would
otherwise be taxed at 10% capital gain rate is instead taxed at
8%. Gains from the sale or exchange of property held more than five
years with a holding period that begins after December 31, 2000,
that would otherwise be taxed at a 20% rate will be taxed at an
may want to make this election for an asset which as of January
1, 2001 hasnt appreciated substantially (so that no gain or
only a small gain is recognized) but which you expect top hold for
at least five more years and which you expect further appreciation.
This would also be a good move if you have losses in 2001 to offset
the gain recognized in making the election. The election should
not be made if it will cause a substantial tax to be recognized
immediately, since the result of the election will be to save only
10% of the tax (i.e., the maximum tax rate is reduced from 20% to
18%) that would otherwise have to be paid.
election can also backfire if you are in a high tax bracket when
the election is made but the gain on the later stock sale would
be taxed at the 15% rate if it were ordinary income instead of capital
gain. Where this to happen, you would have paid a 20% tax on the
deemed gain that would otherwise have been taxed at 8%.
you are self-employed, you should have established a Keogh plan
to jump-start your retirement savings and get a tax break. If this
was not done by December 31, deductible contributions for 2001 cannot
be made. If a plan was established by December 31 and you are short
on cash, the contribution can be made as late as the extended due
date of your 2001 tax return (including extensions) without losing
the tax deduction. If you missed the year-end deadline to establish
a Keogh plan, consider establishing a Simplified Employee Pension
Plan for 2001 in 2002. (There is no year-end deadline for a SEP.)
Keogh plans, however, can be designed to provide more flexibility
for a self-employed business owner than a SEP can provide. The Keogh
also has less comprehensive coverage requirements for other employees.
is always better to establish and fund a plan immediately (you start
building tax deferred earnings earlier).
S Corporation Losses
11th and the economy in general may have converted what was budgeted
to be a profitable year into a loss year. A shareholder of an S
corporation can deduct his/her pro-rata share of losses only to
the extent of his or her total basis in (a) the S corporation stock,
and (b) debt owed him or her by the S corporation. This determination
is made as of the end of the tax year in which the loss occurs.
Any loss or deduction that cant be used on account of this
limitation can be carried forward indefinitely and deducted as long
as you have basis to deduct the loss. If your 2001 tax loss will
be limited, you need to start planning for 2002 now. Consider lending
the S corporation more money or making a capital contribution by
the end of the S corporations tax year (in most cases December
your children after school or during vacation time is often an overlooked
benefit. It permits a business deduction for the compensation paid
and shifts income to lower income family members. Since the compensation
is "earned income," have your children establish an IRA.
Making a traditional IRA contribution coupled with the standard
deduction means that $7,700 can be paid in 2002 with no income tax
cost to the child/employee. Alternatively, the child can establish
a Roth IRA. Even though the contributions are not tax deductible,
the child has a great head start on building a tax-free source of
retirement funds. Additionally, you or your child need pay no social
security taxes if you are a sole proprietorship (or a single member
LLC) or a partnership owned by you and your spouse and the child
is 17 or younger. No FUTA tax is due in this situation, if the child
is under 21.
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