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Leslie Bonacum
Neil Allen

CCH Shows How You Can Plan Now For Lower Taxes

(RIVERWOODS, ILL., October 24, 2002) – Taking a look at your finances now can pay dividends next April 15, according to CCH INCORPORATED (CCH), a leading provider of tax and business information and software. CCH’s Tax Planning Strategies, which provides average taxpayers with help in making the right tax planning decisions, points out that getting a rough idea of your tax situation can be key to adopting strategies that will lower your 2002 taxes and putting in place long-range plans to reduce taxes for 2003 and beyond. ($24, 141 pages. For more information or to order, call 800-248-3248, or visit the CCH Online Store at

"There are still things the average person can do that can affect this year’s taxes," said John W. Roth, an attorney and analyst with CCH’s Federal and State Tax Group. "This is also the time to make strategic moves for next year, such as taking more advantage of the favorable tax treatment of retirement and employee benefit plans," Roth added.

"As a general rule, it’s better for anyone to pay a tax later than sooner," Roth said. "But in addition, people in higher brackets benefit from the annual indexing of the brackets and other items for inflation, so more of their income will be taxed at lower rates in 2003 than in 2002."

If you’re an employee and are usually paid a year-end bonus, you can often make arrangements with your employer to have the bonus paid in and credited to 2003 rather than 2002. If you run your own small business and bill your clients, you might be able to defer income simply by not billing until next year.

Roth pointed out that retirees often have an opportunity to lessen their taxes by carefully planning how they take large distributions from IRAs – for example, a distribution to buy a retirement home or pay off credit-card debt.

"Taking part of a large distribution in December and part in January is often the best course. You may be able to avoid moving to a high tax bracket, and keep more of your Social Security benefits from being taxed as well," Roth added.

Qualify for Tax Perks

Another reason to control your 2002 income is to make sure you can take maximum advantage of various tax breaks on your return.

For example, joint filers begin to lose the full value of the Hope scholarship and lifetime learning credits on their 2002 taxes when their adjusted gross incomes hit $82,000, and the credits are completely phased out for them at $102,000. The corresponding figures for those filing single are $41,000 and $51,000.

Similarly, the $600-a-head child credit begins to phase out at $110,000 for joint filers, $75,000 for single filers and $55,000 for married people filing separately, declining by $50 for each $1,000 of income above those thresholds.

The ability to contribute to a Roth IRA, which promises significant tax benefits in the future even if it does not diminish current taxes, is lessened when adjusted gross income exceeds the $150,000 mark and disappears at $160,000. The corresponding levels for single filers are $95,000 and $110,000.

"Knowing that you might lose the ability to take advantage of one of these opportunities might affect your decision on when to sell stock or some valuable collectibles," Roth noted.

Make the Most of Deductions

Individuals can exercise control over the timing of their deductions, as well as their income. If you have a property tax bill for 2002 that’s due in January, you can pay it in December to clinch a deduction on your 2002 return. Similar opportunities may exist with scheduling elective medical procedures or making a charitable contribution.

The question is whether accelerating deductions into the current year is always the best strategy. Sometimes it isn’t, in Roth’s view.

"If your itemized deductions are close to the size of your standard deduction, you’re often better off ‘bunching’ deductions in alternate years. That can give you a significant amount of itemized deductions in, say, odd years while you take advantage of the standard deduction in even years," Roth said.

Another case in which it’s best to be careful with deductions is for people who may be subject to the alternative minimum tax, or AMT. In the topsy-turvy world of the AMT, some items that are deducted in figuring your regular tax are added back in to figure a tentative "alternative" minimum tax. If the alternative minimum tax is larger than your regular tax, you pay it instead.

"If your regular tax and alternative minimum tax are fairly close together, you’re probably best off not bunching deductions, but trying to smooth out the ones that can trigger AMT liability from year to year," Roth suggested.

Review Your Investments

Noting that over much of 2002 there were significant declines in the stock market, Roth suggests that investors with losses or potential losses should consider their tax opportunities.

From a tax point of view, net capital losses up to $3,000 can reduce your income for 2002. Those in excess of $3,000 won’t reduce this year’s income, although they can be "carried forward" to 2003 and succeeding years.

"If you have losses greater than $3,000 at this point, you might look around for other securities where you have a gain that you’d like to lock in," Roth noted. "But don’t become so fixated on a minor tax advantage that you pass up the possibility of significant investment gains."

Stocks and Kids

A change in capital gains tax rates that took effect at the beginning of last year offers some special opportunities for tax savings when parents give securities to a child, Roth noted.

"When a person who is in the 10- or 15-percent tax bracket sells securities that have been held for five years or more, the tax rate on the gain is only 8 percent. What’s more, if a parent gives stock to a child, the period of time that the parent held the stock is added to the child’s ‘holding period’ in determining whether the five- year requirement has been met."

Consider a mother who currently has held some shares of stock for five years. If she sold the shares, she would have a gain of $5,000, taxable at 20 percent, which would add $1,000 to her tax bill. If she gave the shares to a child 14 years old or over in the 10-percent bracket, and the child sold the shares, the tax bite would be only $400 (8 percent of $5,000). The child would receive $600 more than if the mother had sold the stock and given the child the proceeds.

Roth noted, though, that the strategy would not work if the child were under age 14.

"The unearned income is taxed at their parent’s rates," Roth said.

An IRA for Kids?

Roth also believes that the upcoming holiday season, with its ample opportunities for part-time or temporary jobs, is an excellent time to implement a truly long-range tax strategy – a Roth IRA for your teenage children.

"If kids are provided with a Roth IRA when they’re in high school or college, they can have decades of tax-free earnings build-up to enjoy later in life.

With compounding working in their favor, they can build up an impressive fund for providing income after they reach age 59 ½. That would let them devote more of their resources during their working years to current needs.

"All they need is the extra earned income now to cover the size of the Roth contribution," Roth said.

To make sure their kids have the earned income that is a prerequisite for an IRA, owners of small businesses might think of hiring them as seasonal help. This has an added advantage because, unlike other employees, no Social Security withholding is required, but the child may be subject to self-employment tax.

"High-income families should definitely consider a strategy along these lines, even if it means increasing a child’s allowance to compensate for the wages that are funneled into the Roth IRA," Roth observed.

Making Tax-Wise Choices

Even if your income and deductions are pretty well set for 2002, contributions to certain retirement plans can still reduce the size of the check you write next April, or increase the size of the check you receive. And, if you are an employee, your company may be offering you opportunities around this time of year to reduce your 2003 taxes.

A tax-deductible IRA can have several impacts on your 2002 tax bill by reducing your all-important adjustable gross income.

"When you lower adjusted gross income, there’s not only a direct flow-through to a lower taxable income, but the size of your allowable itemized deductions may increase as well," Roth observed. "What’s more, the adjusted gross income on your federal return is often the starting point for figuring state income taxes."

You can put up to $3,000 into an IRA if you have that much earned income and are not covered by an employer’s qualified plan. Even if you are covered by a qualified plan, you can now make the maximum IRA contribution if your adjusted gross income is less than $54,000 and you file jointly. The contribution phases out completely for joint filers at $64,000, while for single filers the phaseout range is from $34,000 to $44,000. If you’re age 50 or older, you can contribute up to an additional $500 as a "catch-up" contribution.

The IRA does not have to be established in this year. As long as it is in place and the money is contributed as of April 15, 2003 – the filing deadline for 2002 taxes – you can take the deduction. You can enjoy several months of tax-free earnings if you fund the IRA now, however.

If you’re self-employed, you can probably defer much more in a Keogh account than in an IRA, with a correspondingly larger effect on your tax bill. Like an IRA, a Keogh can be funded as late as next April, but unlike an IRA, a Keogh must be established with your bank or other financial institution by December 31 to have an effect on your 2002 tax bill.

Employee Plans Can Lower Next Year’s Taxes

The closing months of the year are often "open enrollment" periods for employee benefit plans that can reduce your taxes for next year, if not this one.

"Paying for health or dependent care expenses on a pre-tax basis and contributing to a 401(k) will directly lower your taxable income for 2002," Roth observed.

For 2003, opportunities for saving through an employer-sponsored plan such as a 401(k) will be bigger than ever. If you’re under 50, you can contribute up to $12,000 to a 401(k), 403(b), salary reduction SEP or 457 plan and up to $8,000 to a SIMPLE plan. If you’re 50 or older, you can also make additional "catch-up" contributions of $2,000 to employer plans other than SIMPLEs and $1,000 to a SIMPLE plan.

If you know your 2003 tax bill will be lower for any reason – including credits you may be newly eligible for next year – you should take steps to enjoy your lower taxes by increasing your take-home pay.

"By adjusting your withholding on Form W-4, you can start receiving your 2003 refund in January instead of waiting until 2004," Roth said.


CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of business professionals and their clients. The company annually produces more than 700 electronic and print products for the tax, legal, securities, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer North America. The CCH web site can be accessed at The CCH Federal and State Group Tax site can be accessed at

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EDITOR’S NOTE: For members of the press, a complimentary copy of CCH's Tax Planning Strategies is available by contacting Neil Allen at 847-267-2179 or


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