Ralph Bovitz, CPA, PFS

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Looking at this Year's Tax Deadline and Beyond


By Ralph Bovitz, CPA, PFS


     Here are some ideas that may help attorneys save some money, when preparing their year 2001 income tax returns.  And, as long as this is tax season, attorneys should start now to think about ways to reduce their taxes for next year.


Let’s look at some money saving ideas, as you prepare your 2001 tax returns and conclude with some tax planning ideas for 2002.  Frequently, tax saving can only be realized because of actions taken during the year, not after the year has ended. 


Attorneys that purchased furniture and equipment for their business in 2001 may be able to deduct up to $24,000 of the cost, under IRS Code Section 179.  Because of the September 11 terrorist attack, furniture and equipment purchased after September 10, 2001 and used in 2001, is eligible for an additional 30% special depreciation allowance in 2001, against the cost that exceeds $24,000.  For example, equipment costing $100,000 is first reduced by $24,000 (Section 179).  The remaining $76,000 will generate an additional depreciation deduction of  $22,800 (30% X $76,000) and the remaining cost, $53,200 is then eligible for traditional depreciation.


  Autos and leasehold improvements purchased after September 10 are also eligible for this special 30% depreciation deduction, subject to an increased limit on certain luxury vehicles.  However, if the contract to purchase such depreciable assets was made before September 11, the special depreciation deduction is not available. 


If you already filed your year 2001 tax return and did not claim this special 30% depreciation deduction, because the law allowing it was not enacted until March 9, 2002, you may want to consider filing an amended tax return, for the refund it would represent.  It is not clear at this writing if failure to take the special 30% depreciation deduction in year 2001 or failure to elect not to claim it in 2001 will adversely affect your depreciation deductions in future years.


For attorneys in tax brackets higher than 15%, investments made in 2001, and thereafter, and held for at least 5 years before sale are eligible for an 18% capital gains tax rate, instead of 20%, when sold.  Investments made in year 2000, or earlier, by attorneys in the over-15% tax bracket in the year of sale are not eligible for this 18% rate, even if held for more than 5 years, before sale.  There is a way around this discrimination against your older investments.  Pretend to have sold them on January 1, 2001 or January 2, 2001, if they are publicly traded securities.  You don’t actually have to sell the investment, just elect to do so on your 2001 tax return and pay the tax on this sale in 2001. Once “sold” in this manner, the investments are eligible for an 18% capitals gains tax rate, when actually sold in 2006 or later. 


Why would you go through this imaginary transaction for a 2% tax savings in the future?  You would, if your crystal ball said that the capital gains tax you would pay in 2001 on this imaginary sale would be worth the 2% tax savings in 2006, or later, when you actually sold it.  For example, an investment purchased in 1999 for $3,000 has a value of $4,000 on January 2, 2001.  You pretend to sell the investment and pay the $200 capital gains tax in 2001, on the $1,000 gain.  Now, assume in 2006, the investment is worth $100,000, your basis is $4,000, your gain is $96,000 and your 18% tax is $17,280 versus  $19,200, at 20%, a savings of $1,920.  To establish the value of your investment that is not a publicly traded security, you should obtain a professional appraisal of value as of January 1, 2001.  If you have already filed your 2001 tax return or learn that it would have paid to elect a sale on January 1 or 2, 2001, you can file an amended 2001 tax return by October 15, 2002.  No loss is allowable on a deemed sale. Once you elect this imaginary sale in 2001, the election is irrevocable.  Your death before a possible sale 5 years hence makes this election questionable, since there would be an automatic step-up in the investment’s basis for your heirs.


Attorneys can establish a Simplified Employee Pension (SEP) plan and realize a tax deduction for contributions to it for year 2001, to shelter as much as $25,500 in a tax-deferred retirement plan.  Contributions to the SEP, related to last year, must also be made on behalf of your employees, if they qualify.    If you are a salaried attorney, but do some legal work on the side or serve on a board of directors, consider a SEP for those sideline incomes.


 Even if you participate in a pension plan with your employer, you can still have a separate retirement plan for self-employment income. Another feature of the SEP is that contributions for last year are due by the due date of the entity’s tax return plus extensions.  Thus, a tax return due April 15, eligible for an extension as late as October 15, 2002, allow an attorney to fund the 2001 SEP contribution by that later date.  This can be an important feature if collections are slow at this time and will pickup before October. 


For 2001, medical insurance paid by self-employed attorneys, for themselves, spouse and other dependents, under a business medical plan is 60% deductible on your personal tax return.  In 2002, this deduction increases to 70% and to 100% in 2003. Payment of such a benefit for your employees is fully deductible on your business tax return. 


Looking ahead to next year’s tax season, here are some tax planning thoughts for 2002. 


Annual contributions allowed for most types of retirement plans have been increased after 2001.  Thus, IRA contributions for 2002 have increased to $3,000 (from $2,000 in 2001) plus an additional $500 is allowed for individuals 50 and over during 2002.  However, these increases are for Federal purposes only.  The State of California and several other states have not recognized these increased contribution levels.  It is hoped that California will conform.  Because of possible state penalties, IRA funding for 2002 should be limited to $2,000, at this time, until California has made a decision.  To realize the most benefit from tax advantaged compounding, make your 2002 IRA contribution as soon as possible, rather than leave funds earmarked for an IRA contribution in taxable accounts, until next year.  However, income limitations may preclude an individual from making an IRA contribution.


Attorneys planning to change jobs in 2002, and your current employer maintains a tax-qualified retirement plan, including 403 (b) and 457 plans, can rollover their retirement plan balance in 2002 to the new employer’s qualified plan, assuming the new employer accepts rollovers.  Where rollovers are not accepted, you can rollover your retirement account to an IRA.  This improved portability was designed to encourage taxpayers not to spend their retirement savings ahead of time and was not available in some instances, last year.  So, attorneys considering a job change should make themselves aware of their options, to avoid a tax and a 10% penalty from an early retirement plan distribution.  Employers often fail to advise departing employees of this option.


Once the tax year ends on December 31, many tax saving opportunities are lost for that year.  So, while there are some things you can do to minimize your tax bill for year 2001, now is the time, while you are in a tax-mood, to take some action to reduce your tax liability for year 2002.









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