Taxes


	*Preparing for your* future...**

Taxes

We all love to hate the thought of taxes. How many of us enjoy paying Uncle Sam? We can't stop the tax bills, but we want to help you with a review of some of your alternatives.

Retirement Plans
First, as you might expect, participation in your employer's retirement plan offers the most immediate opportunity to save on taxes. Here are some of the benefits and things to consider with your participation:

	You contribute to the plan on a pretax basis. Your contributions come off the top of your salary before your employer withholds income taxes.
	Your funds grow tax deferred in the plan. You don't pay taxes on investment earnings until you withdraw your money from the plan.
	You'll pay income taxes and possibly an early withdrawal penalty if you withdraw your money from the plan.
	Taking a lump-sum distribution. This is often a bad idea, because you'll pay income taxes and possibly a penalty on the amount you withdraw. Plus, you're giving up continued tax-deferred growth.

Worksheets

1040EZ Tax Estimator

How Much Tax Will You Pay

	Your funds grow tax deferred in the plan. You don't pay taxes on investment earnings until you withdraw your money from the plan.
	Leaving your funds in the old plan, growing tax deferred (your old plan may not permit this if your balance is less than $5,000). This may be a good idea if you're happy with the plan's investments or you need time to decide what to do with your money.
	Rolling your funds over to an IRA or a new employer's plan if the plan accepts rollovers. This is often a smart move because there will be no income taxes or penalties if you do the rollover properly (your old plan will withhold 20 percent for income taxes if you receive the funds before rolling them over). Plus, your funds will keep growing tax deferred in the IRA or new plan.

Figuring the Correct Withholding Amount
If you fail to estimate your federal income tax withholding properly, it may cost you in a variety of ways. If you receive an income tax refund, it essentially means that you provided the IRS with an interest-free loan during the year. By comparison, if you owe taxes when you file your return, you may have to scramble for cash at tax time--and possibly owe interest and penalties to the IRS as well.

When determining the correct withholding amount for your salary or wages, your objective should be to have just enough taxes withheld to prevent you from incurring penalties when your tax return is due. (You may owe some money at the time you file your return, but it shouldn't be much.) You can accomplish this by reading and understanding IRS Publication 505 and 919, properly completing Form W-4 (and accompanying worksheets), and providing an updated Form W-4 to your employer when your circumstances change significantly.

Two factors determine the amount of income tax that your employer withholds from your regular pay: the amount you earn and the information you provide on Form W-4. This form asks you for three pieces of information:

	The number of withholding allowances you want to claim: You can claim up to the maximum number you're entitled to, claim less than you're entitled to, or claim zero.
	Whether you want taxes to be withheld at the single or married rate: The married status, which is associated with a lower withholding rate, should generally be selected only by those taxpayers who are married and file a joint return. Other people (including those who are married and file separately) should generally have taxes withheld at the higher, single rate.
	The additional amount (if any) you want withheld from your paycheck: This is optional; you can specify any additional amount of money you want withheld.

To claim the correct number of allowances, you should complete Form W-4's worksheets. These include a personal allowances worksheet, a deductions and adjustments worksheet, and a two-earner/two-job worksheet. IRS Publication 505 (Tax Withholding and Estimated Tax) explains these worksheets.

Federal Gift Tax and Federal Estate Tax
Under pre-2001 Tax Act law, no gift tax or estate taxes were imposed on the first $675,000 of combined transfers (those made during life and those made at death). The tax rate tables were unified into one--that is, the same rates applied to gifts made and property owned by persons who died in 2001. Like income tax rates, gift and estate tax rates were graduated. Under this unified system, the recipient of a lifetime gift received a carryover basis in the property received, while the recipient of a bequest, or gift made at death, got a step-up in basis (usually fair market value on the date of death of the person who made the bequest or gift).

The 2001 Tax Act increased the gift tax applicable exclusion amount to $1 million for 2002 and each year thereafter. The top gift tax rate is 49 percent in 2003, 48 percent in 2004, 47 percent in 2005, 46 percent in 2006, 45 percent in 2007 through 2009, and 35 percent in 2010 (the top marginal income tax rate in 2010 under the 2001 Tax Act). In 2011, the gift tax rates revert to pre-2001 Tax Act levels. The carryover basis rules remain in effect.

However, under the new law, many gifts can still be made tax free, including:

	Gifts to your U.S. citizen spouse (you may give up to $112,000 in 2003 tax free to your noncitizen spouse)
	Gifts to qualified charities
	Gifts totaling up to $11,000 (in 2003) to any one person or entity during the tax year or $22,000 (in 2003), if the gift is made by both you and your spouse (and you are both U.S. citizens)
	Amounts paid on behalf of any individual as tuition to an educational organization or to any person who provides medical care for an individual

Federal Estate Tax
Under the 2001 Tax Act, the estate tax applicable exclusion amount increases in steps until it reaches $3.5 million in 2009. Top estate tax rates are 49 percent in 2003, 48 percent in 2004, 47 percent in 2005, 46 percent in 2006, and 45 percent in 2007 through 2009. The estate tax is repealed in 2010, but due to a quirk in the new law, the estate tax applicable exclusion amount and rates revert to pre-2001 Tax Act levels in 2011.

When the estate tax is repealed in 2010, the basis rules will be changed to those similar to the gift tax basis rules. The step-up in basis rules return in 2011.

Many of the estate tax deductions remain in effect, and some have even been improved, but the qualified family-owned business deduction will be eliminated for persons dying after 2003.

[ 401K ] [ Debt Management ] [ IRA's ] [ Asset Allocation ] [ Autos ] [ College Planning ] [ Mortgages ] [ Taxes ] [ Trusts ] [ Insurance ] [ Wills ] [ Glossary ]

Preparing for your future...