Income-tax relief passed in 2001 is beginning to bear fruit this year, and Spokane-area tax accountants say taxpayers still can take action to benefit from the measures now and in the future.
The Economic Growth & Tax Relief Reconciliation Act of 2001, signed into law in June of that year, includes personal tax-rate decreases and some tax-deduction increases that start to take effect this year. In general, tax rates will continue to ratchet down during the next four years, and some deductions will increase in increments over the next decade.
Meanwhile, an economic stimulus bill that passed earlier this year with a number of tax benefits specifically aimed at businesses, also includes a few additional small breaks for individuals.
As this year winds down, a lot of things are coming into play now, says Kelli Franco, tax senior manager at the Spokane office of Seattle-based Moss Adams LLP.
Steve Williams, tax manager at Williams & Webster PS, of Spokane, says hes encouraging clients to take advantage of new higher limits on the amounts they can contribute to individual retirement accounts. Annual contribution limits for both conventional IRAs and Roth IRAs have increased to $3,000 this year from $2,000 last year. Also, people 50 years old and older are able to contribute to such accounts $500 more than younger taxpayers starting this year.
Even if contributing to a conventional IRA could reduce a clients taxable income this year, Williams says in many instances he still suggests that the client consider contributing to a Roth IRAs because of the Roth IRAs long-term tax benefits. A Roth IRA is funded with after-tax income, but the amount invested in it and accrued gainsno matter how largearent taxed when theyre withdrawn. Also, they can be passed down to ones heirs, who also will owe no taxes on them.
The maximum that taxpayers can contribute to an IRA will continue to increase over the next decadeto $4,000 in 2005 and to $5,000 in 2008. In 2006, the additional allowed contribution by people 50 years old and older will be bumped up to $1,000.
Similarly, the maximum annual contributions into educational-services accounts jumps to $2,000 this year, from $500 in 2001, so parentsor grandparentscan put more money toward whats referred to as educational IRAs. Such accounts operate similarly to conventional IRAs or Roth IRAs, except that funds withdrawn from them must be used for school-related expenses, rather than retirement.
Also starting this year, money from educational-savings accounts can be used for private-school tuition for kindergarten through 12th grade students. Previously, money from such accounts could be used only to pay for post-secondary education tuition and fees.
In addition to considering additional IRA contributions, taxpayers should evaluate their investment portfolios to see whether they can make changes that would give them tax benefits, says Chris Hesse, director of taxation at LeMaster & Daniels PLLC, of Spokane.
In the current struggling economy, Hesse says, a lot of people likely have investments that have decreased in value in the past year. He says if they sell those investments now for losses, those losses can be written off on this years taxes.
Of course, that doesnt mean people should sell investments simply to reap the tax benefits, Hesse says. Selling an investment still has to make sense in the overall investment philosophy, he says.
Dropping tax rates
Income-tax rates will decrease again this year at a rate consistent with last years decrease. Taxpayers are receiving the extra money differently this year, Williams says.
Last year, most Americans received tax-rebate checks$300 for individuals and $600 for couples. This year, the tax tables have been modified, so rather than receiving a lump-sum check, a taxpayer should have had less money withheld for federal income taxes from his or her paychecks during the year and should have had more disposable income.
Theoretically, Williams says, if a persons pay and other payroll deductions didnt change this year, he or she is receiving a minimum of an additional $25 a month in take-home pay.
Williams says personal tax rates will decrease yet more between now and 2006. If its feasible, taxpayers should defer income to later years, so they can pay a lower tax rate on that income.
He says relatively few taxpayers can afford to defer income, but some circumstances allow for it. For example, some retirees could hold off on withdrawing money from conventional IRAs for a few years.
Other changes include the repeal of estate taxes, which will be phased out gradually between now and 2010, although as of now the phase-out isnt effective after that. Also, marriage-penalty relief is on the horizon, with discrepancies between tax rates for married couples and single filers being eliminated over a five-year period from 2005 to 2009.
New this year
In addition to laws passed last year, a few new tax benefits were approved and put into play this year, as part of the Jobs Creation & Workers Assistance Act, says John Webster, a principal at Williams & Webster accounting firm here.
One provision, called the educator-expenses adjustment, allows teachers and other educators to deduct up to $250 from taxable income for school supplies they purchased, but for which they werent reimbursed.
Another provision allows a taxpayer who pays school tuition, but makes too much money to qualify for education credits, to take up to a $3,000 tuition-and-fees gross-income adjustment on his or her tax return. Like the educator-expenses adjustment, the tuition-and-fees adjustment is taken from taxable income.
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