Avoiding Year-End Tax Traps

Making the right moves before December 31 can shave thousands off your bill to Uncle Sam

also the city physician for the township of Englewood, New Jersey, often makes two or three trips a day to either of his offices or to one of the four hospitals where he’s on staff. As a result, Dr. Adair is considering buying an SUV for $50,000 to use specifically for these professional rounds. If he makes these purchases and puts the equipment into service on or before Dec. 31, his taxable income will be reduced by at least $70,000 — the total of his purchases.

“Since Dr. Adair is in a combined federal and state 40% tax bracket, he will realize a tax savings of a least $20,000,” explains Largie.

But understand that not all equipment qualifies. Covered equipment includes computers and automobiles used for business in addition to — for the first time — furniture. For a list of eligible assets, see IRS Publication 535 (www.irs.gov). According to the IRS, ineligible property includes income-producing property (investment or rental property) and property held by an estate or trust or purchased from relatives.

“Better make use of this now because it goes back down to 30% at the end of 2004 if the provisions are not extended,” says Largie.

What the Tax Law Changes Mean for You
American citizens didn’t wait long to see the extra cash generated by the new tax laws. Employers lowered the amount of federal tax withheld from their workers’ paychecks, reflecting lower tax rates for most people and a larger standard deduction for married couples. Also, for many taxpayers who claimed the Child Tax Credit last year, the Treasury mailed checks as an advance payment of the credit’s increase. The new tax law also lowered the tax rates for long-term capital gains and qualifying dividends, allowing taxpayers to reduce their estimated tax payments for the year following May 2003.

However, there are other changes that affect individuals. These changes include:

Revised 2003 Tax Rate Schedules. The tax rate brackets of 27%, 30%, 35%, and 38.6%, have been reduced to 25%, 28%, 33%, and 35%, respectively. Also, the 15% rate bracket for married taxpayers filing jointly and qualifying widowers has expanded to twice that of single filers. And the maximum taxable income subject to the 10% tax rate has increased to $7,000 for single taxpayers and married taxpayers filing separately ($14,000 for married taxpayers filing jointly and qualifying widowers).

The basic standard deduction for married taxpayers filing jointly and qualifying widowers has increased to $9,500 (twice that of single filers). The standard deduction for married taxpayers filing separately has increased to $4,750 (the same as that of single taxpayers).

The maximum Child Tax Credit has increased from $600 to $1,000 per child.

A reduction in capital gains. The maximum tax rate on net capital gain (i.e., net long-term capital gain reduced by any net short-term capital loss) has been reduced from 20% to 15% (and from 10% to 5% for taxpayers in the 10% and 15% tax rate brackets) for property sold or otherwise disposed of after May 5, 2003 (and installment sale payments received after that date).

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