Effective Planning Key To Reaping Full Benefit From Bush Tax Cut

by Mike Godfrey, Tax -News.com, Washington

11 September 2003

With effective planning, many taxpayers can already start to take advantage of the many tax breaks signed into law this May by President Bush, according to a senior tax expert at accounting firm Deloitte & Touche.

"Some individuals mistakenly think that the immediate benefits of this year's tax changes were limited to the advanced payment of the increased child credit or changes in withholding tables," announced John Battaglia, a director at the D&T Private Client Advisors practice. "But individuals should review their 2003 tax position now and take appropriate steps to minimize taxes, especially with the due date for third quarter estimated taxes (September 15th) right around the corner. These steps can produce immediate reductions to estimated tax payments."

According to Battaglia there are two important factors to consider at estimate time:

• Basing estimates on the current year's liability. Battaglia advises checking whether it is more advantageous to base estimates on the projected current year liability instead of last year's, because the new law dropped income tax rates for this year.
• Adjusting withholding. The new federal withholding rate for bonus or supplemental payments has increased to 25 percent. "If you need additional tax withheld to avoid estimated tax penalties in the earlier quarters," says Battaglia, "you should alert your payroll department to withhold additional tax before receiving the bonus."

To benefit from many of this year's tax changes, Battaglia urges taxpayers to begin planning now in order to reap their full benefits:

"For example, by taking advantage of the new 50 percent bonus depreciation or the increased asset expensing, both available this year, some individuals may be able to lower their incomes enough to benefit from different types of deductions or credits, such as personal exemptions, IRAs, the child tax credit, and the Hope Scholarship and Lifetime Learning credits. Higher income taxpayers typically lose these tax benefits as their incomes exceed certain adjusted gross income thresholds."

He continues: "If you plan to use capital losses to offset capital gains, make sure you check how capital transactions occurring before the law change net against post transactions," adding that "In some cases, taxpayers may find that netting combinations of losses and gains may reduce the gains that would have qualified for the new lower capital gains rate."

Battaglia also reminds taxpayers that there are certain time limit restrictions on the holding of stocks in order to gain from the new lower rate of dividend tax.

"In order to benefit from the lower rates for dividends, the stock must be held for more than 60 days during a 120-day window, beginning 60 days before the stock's ex-dividend date (90 days within the 180 day period for some preferred stock)."

However, changes in the marginal rates in the 2003 tax act will have the effect of dragging more people into the dreaded Alternative Minimum Tax net, according to the Deloitte and Touche expert.

"Certain transactions or events, such as significant miscellaneous itemized deductions, long-term capital gains or dividends qualifying for lower tax rates, paying income tax in a state with a high state income tax structure, and/or exercising incentive stock options, may trigger the AMT. It is best to know whether you'll pay AMT - as soon as possible - so you can plan before year-end to make the most of your tax situation," he concluded.

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