Bill Barks

Saturday, 29 November 2003 11:09

Year-end tax planning

As 2003 draws to a close, there is still time to reduce your 2003 tax bill and plan ahead for 2004. The standard approach still makes sense -- accelerate deductions into 2003 and defer income into 2004. Be aware, however, that many tax benefits are tied to or limited by adjusted gross income.

When considering whether to accelerate or defer income or deductions, you should know the impact this may have on your AGI and your ability to maximize itemized deductions that are tied to AGI.

Here are several overlooked tax strategies to consider.


Retirement plans


* IRA. The annual deductible contribution limit for an IRA for 2003 is $3,000. A $500 catch-up contribution deduction is allowed for taxpayers aged 50 or older by the close of the taxable year.

An individual will not be considered an active participant in an employer plan simply because the individual's spouse is an active participant for part of a plan year. Thus, you may be able to take a full $3,000 deduction for an IRA contribution regardless of whether your spouse is covered by a plan at work, subject to a phase-out if your joint modified AGI is $150,000 to $160,000.

Above this range, no deduction is allowed.


* 401(k). The 401(k) elective deferral limit is $12,000 for 2003. If your plan has been amended to allow for catch-up contributions and you will be 50 years old by Dec. 31, 2003, you may contribute an additional $1,000.


Charitable contributions

Consider making charitable contributions at the end of the year. This gives you use of the money during the year and still claim a deduction for that year. You can use a credit card to charge donations in 2003 even though you will not pay the bill until 2004. A mere


Business deductions


* Self-employed health insurance premiums. Self-employed individuals can claim 100 percent (up from 70 percent in 2002) of the amount paid during the taxable year for insurance.


* Equipment purchases. If you are in business and purchase equipment, you may make a Section 179 Election, which allows you to expense otherwise depreciable business property. In general, you may expense up to $100,000 of equipment costs (with a phase-out for purchases in excess of $400,000) if the asset was placed in service during 2003.


* First-year bonus depreciation. For qualified property placed in service in 2003, you may take an additional depreciation allowance of 30 percent of the adjusted basis of the property (50 percent of the basis if the property is placed in service after May 5, 2003). The adjusted basis of the qualified property is reduced by this additional allowance before computing any other depreciation.


Child tax benefits

* Credit for adoption expenses. For 2003, the adoption credit limitation is $10,160 of aggregate expenditures for each child; the credit for adoption of a child with special needs is $10,160 regardless of expenses. The credit ratably phases out for taxpayers whose income is between $152,390 and $192,390.


Investment planning and gift planning

The following rules apply for most capital assets in 2003:


* Capital gains on property held one year or less are taxed at an individual's ordinary income tax rate.


* Capital gains on property held for more than one year are taxed at a maximum rate of 15 percent (5 percent if an individual is in the 10 percent or 15 percent marginal tax bracket) provided the property is properly taken into account after May 5, 2003. Rates for property taken into account before May 6, 2003, are 20 percent and 10 percent, respectively.


* Dividends. Qualifying dividends received in 2003 are subject to rates similar to the capital gains rates. Qualifying dividends are taxed at a maximum rate of 15 percent. Qualifying dividends includes dividends received from domestic and certain foreign corporations.


* Gifts. To avoid capital gains, consider giving appreciated property to children or grandchildren if they are in a lower tax bracket than your own. For 2003, each person is entitled each year to give gifts of $11,000 to an unlimited number of people without incurring any gift tax. For example, you can annually give $11,000 to each of your children, their spouses and your grandchildren without utilizing any of your applicable credit amount. Your spouse can agree to gift-split thus doubling the amount of these gifts. Bill Barks is director of the employee benefits area of Heaton & Eadie. Reach him at (317) 581-9000, or Heaton & Eadie has dedicated itself to providing innovative accounting and management consulting services to clients in middle market.

Wednesday, 17 December 2003 11:15

Look out, little guys

Business owners beware.

In the past, only large retirement plans with 100 or more participants required an audit by an independent accountant. But new rules require all plans to include an audit report with their returns unless they meet specific guidelines.

The requirement was extended to protect participants in smaller plans from fiduciaries' illegal activities and safeguard the extraordinary assets that have accumulated in small plans over the past 25 years.

These audits can be costly. Knowing the expense associated with a plan audit -- and realizing it may discourage smaller employers from implementing qualified plans -- the Department of Labor (DOL) has issued specific guidelines smaller plans can follow to avoid the audit requirement. Plans with 100 or more participants remain subject to existing audit requirements.

A small plan that meets the requirements can exempt itself, but the new requirements can be confusing. Here are some of the basics.


Qualifying plan assets

At least 95 percent of plan assets must constitute qualifying plan assets. Qualifying plan assets include qualifying employer securities; shares issued by a registered investment company (such as a mutual fund); assets held by an insurer, bank or registered broker-dealer; participant loans; investment and annuity contracts; and assets in personal brokerage accounts that receive statements from a registered financial institution at least once a year.

For example, suppose a plan is invested in 24 percent government bonds, 65 percent mutual funds, 5 percent annuity contracts and 6 percent limited partnerships. Because limited partnerships aren't considered qualifying plan assets, only 94 percent of the assets meet the definition of qualifying plan assets; therefore, this plan must have an audit.


Bonding requirements

Any person handling nonqualified plan assets must be bonded for at least the nonqualified assets' value.

All qualified plans are subject to a minimum bonding requirement of 10 percent of plan assets up to $500,000. The bond must cover any person authorized to transact business on the plan's behalf.

The bond's intent is to protect the plan from loss because of a plan fiduciary's fraud or dishonesty. The new bonding requirements for small plans are not in addition to the traditional 10 percent requirement.

For example, say a plan includes 25 percent non-qualifying assets. It would have to obtain 15 percent additional bonding to equal the total bond level of the percentage of the plan's nonqualifying assets.


Summary annual report

In your summary annual report, include additional detailed information and distribute it to participants annually.

Previously, the report's content was mostly a summary of the information on the IRS Form 5500. Now you must include four additional items to avoid a small-plan audit:


* The name of each financial institution holding or issuing qualifying plan assets and the value of the assets issued as of the plan's year end


* The name of the surety company issuing the bond if more than 5 percent of the plan assets are nonqualifying assets


* A notice telling participants they may ask for a free copy of evidence of the required bond and copies of statements from the financial institutions describing the qualifying plan assets


* A statement informing participants and beneficiaries that they should contact their regional U.S. DOL office if they are unable to obtain any of the information required to be provided under the summary annual report


Audit report

So what is an audit report? It's a comprehensive review of various aspects of a plan, such as participant data, deferral elections, investment elections, eligibility, vesting, distributions, loans and financial information associated with the qualified plan.

An accountant analyzes these items to develop an opinion of the plan. This opinion, along with accompanying financial statements and disclosures, makes up an audit report. You must include a complete report with IRS Form 5500 that you file with the DOL annually.

Because each plan has its own unique factors, the cost of this type of audit can vary significantly based on the plan's complexity. A typical plan audit runs anywhere from $5,000 to $10,000 per year on average, although some plans may cost considerably more and others slightly less.


Bill Barks is director of the employee benefits area of Heaton & Eadie, which provides accounting and management consulting services to clients in the middle market. Reach him at, (317) 581-9000 or