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2004 TAX TO-DO LIST

May 07, 2004

Another tax season has come and gone; only the extensions linger. Extensions, and the void in the pocketbook caused by missed tax planning opportunities in 2003.

Now we have 7 months and change to get things right in 2004. Some ideas:

-HEALTH SAVINGS ACCOUNTS. This IRA-like vehicle gives qualifying taxpayers an opportunity to put away up to $5,000 annually for retirement or medical expenses tax-free, without regard to participation by other employees. Amounts used for medical expenses come out tax free; otherwise their tax treatment is similar to IRAs. The HSA gives employers another vehicle to address health insurance costs. They require that your health insurance be obtained under a "high-deductible" plan.

More on HSAs:

IRS ISSUES Q&A DISCUSSION OF HEALTH SAVINGS ACCOUNTS
HAMMERING HENRY ON HSAs
HSA INSIDER.COM

-LIGHTEN UP ON MUNIS. Reduce taxes by lightening up on tax-exempt bonds? How can that be? Remember, the goal is to fill up the old cigar box with cash, not to have the lowest number at the bottom of the tax return. For taxpayers in high-tax states, like Iowa, municipal bonds can make an alternative minimum tax problem worse; they are usually taxable on your state return, increasing state taxes, which are non-deductible for AMT. As a result, the after-tax yield on the bonds may be less than you think it is. Only after tax dollars make it to the cigar box.

Note: the "cigar box concept" of financial analysis is attributable to Mr. David Widener, also known as "The Sage of Bettendorf."

-PLAN YOUR CAPITAL EQUIPMENT PURCHASES. The "Bonus Depreciation" provisions are scheduled to expire at the end of this year. Bonus depreciation lets you recover up to 60% of the cost of new five-year property (like computers) in the year of purchase. You will only be able to recover 20% of the cost for property placed in service in 2005, absent a change in the tax law. If you are going to be making a capital expenditure anyway, you are better off doing it this year than next year.

Note: The $100,000 section 179 expensing limit expires at the end of 2005.

-MONITOR YOUR CAPITAL GAINS AND LOSSES. For many of us, capital gain taxes are largely optional. Some of us have investments in our portfolio that are actually worth less than what we paif for them. If we sell an investment at a gain, these loser investments can be sold to provide an offsetting loss. Capital losses can also offset up to $3,000 of ordinary income. Watch out for the "wash sale" rules, though - these will disallow losses if the same stock is purchased within 30 days before or after the day the loss shares are sold.

-MONITOR YOUR BUSINESS INCOME AND ACT ACCORDINGLY. Many businesses are now run as "pass-through" entities, such as S corporations, where business income is taxed on the owners returns. Other taxpayers have sole proprietorships or rental properties that are reported on their 1040s. If you are having a good year, now is the time to begin budgeting tax payments and putting tax-reduction moves in place. If you're having a bad year, it is time to make sure you make lemonade out of your lemon results by planning how to make the best use of your tax losses.

-PLAN YOUR PROPERTY CONTRIBUTIONS. Many taxpayers start thinking about charitable donations of real estate around December 28 or so. Charitable contributions of real estate, or any other property over $5,000 except marketable securities, can only be deducted after a qualified appraisal is obtained. By arranging the appraisal now you can find out what the deduction will be ahead of time and plan your tax year accordingly.

Appraisals must be made no earlier than 60 days before the contribution, and no later than the due date (with extensions) of the return for the contribution year.

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