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TAX TIME: CAN YOU TAKE A MULLIGAN?

March 27, 2003

One of the first terms of art learned by new golfers is "mulligan." A mulligan is, of course, a second tee shot after a particularly embarrassing first effort; the first effort is mercifully omitted from the score.

The tax law is sparing with mulligans. For the most part, the end of the year means the end of your ability to affect how your tax return comes out. Of course, no rule in the tax law lacks exceptions, so you may still have time to "take a mully" with your tax return.

SEP PLANS: MULLIGAN FOR THE SELF-EMPLOYED

Self-employed taxpayers can set up and fund a SEP plan as late as April 15 and still deduct the amount paid on their 2002 return. A SEP can be considered a sort-of souped-up IRA for the self-employed. A SEP contribution can be made up to 25% of self-employment income, to a maximum of $40,000. They can be set up using a very simple IRS form (Form 5305-SEP) and opening the appropriate SEP-IRA account with your bank or broker.

TRADITIONAL DEDUCTIBLE IRAS

The old deductible IRA still is still available for 2002 for two groups of taxpayers:

-Those with W-2 or self-employment income who did not participate in any employer pension plan, profit-sharing plan or 401(k) for 2003.

-Any taxpayer with self-employment or wage income ("earned" income) whose adjusted gross income (AGI) is less than $54,000 ($34,000 for single taxpayers). The ability to deduct an IRA contribution phases out as AGI exceeds these amounts, and disappears altogether once the amounts are exceeded by $10,000 (i.e., at $64,000 for married taxpayers and $44,000 for singles).

Such taxpayers can still make contributions for 2002 and deduct them on their 2002 returns. The maximum IRA contribution is $3,000 per person for 2002, or, if less, "earned" income. A stay-at-home spouse can make deductible IRA contributions if the other spouse is eligible.

OTHER IRAS

Taxpayers who don't qualify for a deductible IRA are not without options. While these options will not reduce your 2002 liability or increase your refund, they are still good financial medicine.

THE ROTH IRA is a great opportunity for those who qualify. While Roth contributions are non-deductible, earnings within the Roth IRA are never taxed, even on withdrawal. It is subject to the same contribution limits as a traditional IRA, except that the ability to make Roth contributions phases out as AGI exceeds $150,000 ($95,000 for single taxpayers).

THE NON-DEDUCTIBLE TRADITIONAL IRA is not as attractive as deductible or Roth IRAs, but they are still not a bad deal. Income earned within the IRA grows tax-free until it is tapped after retirement. The annual contribution limits are the same as for other IRAs, but there are no AGI limits.

SPECIAL OFFER FOR BOOMERS! Taxpayers aged 50 or more at December 31, 2002 can contribute $500 on top of the normal $3,000 IRA limits.

CAN I DO ALL THREE? No, even mulligans have limits. The $3,000 (or $3,500) limits apply to your combined IRA contributions. You can contribute, say, $1,500 to a traditional IRA and $1,500 to a Roth, but you can't give $3,000 to each.

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