| |
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.
|
|
