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NEW YEAR, NEW OPPORTUNITIES

January 03, 2003

It's human to procrastinate; hence the frenzied nature of year-end tax planning. It's divine to start your planning at the beginning of the year, when it is easier to take advantages of the various loopholes lying around. Let's put together a list of resolutions to make our tax lives happier in 2003.

Personal Taxes

I will participate in my employer's 401(k) plan at least to the extent the employer matches my contribution. It's always a bad idea to turn down the boss's money.

If I am eligible to participate in a Roth IRA, I will contribute the maximum amount allowed ($3,000, plus an additional $500 if you are 50 or older by year-end). The Roth IRA is, for those eligible to participate, a tremendous opportunity to put some of your assets out of reach of the taxman forever.

After maximizing my Roth IRA, or if I am ineligible to participate in a Roth IRA, I will maximize my 401(k) contribution. If you are ineligible for a Roth IRA, it is probably because you have adjusted gross income over $150,000 for the year (or over $95,000 if you are filing single). You can shelter $11,000 of this from current tax in a 401(k) - plus another $2,000 if you are 50 or over by December 31, 2003. An Iowan at such an income level can keep around $4,000 of taxes away from the government by diverting $11,000 from the current spending pocket to the retirement savings 401(k) pocket.

I will set up a Sec. 529 savings plan - like College Savings Iowa - for my children or grandchildren early this year. These plans enable you save for college in tax-free IRA-like accounts; if the funds are used for college, the earnings are never taxed. Iowa taxpayers can also deduct College Savings Iowa contributions on their state tax returns.

I will fund my IRAs, 529 plans, etc. starting now. If you wait until the end of the year to fund your IRA, you lose forever the year of tax savings you would get by funding the benefit now.

I will avoid annuity-based savings products until I have maximized my IRA and Sec. 529 savings plan opportunities, including non-deductible traditional IRAs. Annuities can offer tax benefits comparable to IRAs and Sec. 529 plans. Annuities come with an insurance cost and, usually, a commission; IRAs and Sec. 529 plans can be set-up in no-load vehicles with low annual charges. Lower costs are a good thing.

Business Taxes

I will make sure our personnel department documents hires that qualify for tax breaks. The Federal Work Opportunity Credit will subsidize up to $2,400 of first year wages of qualified employees. The Welfare-to-Work Credit may subsidize up to $8,500 of the wages paid to a qualifying employee over the first two years of employment. Special Iowa deductions and credits are also available for many of the employees who qualify for the federal credit. Many of these breaks are available only if the employee's qualification is verified by the Job Service at the time of hiring.

I will tell my employees about the Federal tax credit for 401(k) deferrals. This tax credit encourages your employees to save. If employee participation in your 401(k) plan increases, it also may enable highly-compensated employees to increase their own 401(k) deferrals; the tax law may limit their ability to participate if overall employee participation is low.

I will consider setting up a Solo-401(k) for my Schedule C business right away. Many taxpayers considered these plans at year-end in 2002, but ran out of time. Don't let this break slip away for 2003.

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