Generally,
it’s a good idea to defer as much income into 2005 as possible if you
believe that your marginal tax rate for 2005 will be equal to or less than
your 2004 marginal tax rate. Deferring
income into 2005 could also increase various credits and deductions for 2004
that are being phased out as your adjusted gross income increases. If you
believe that deferring taxable income into 2005 will save you taxes, consider
the following strategies:
Self-Employed
Business Income. If you are
self-employed and use the cash method of accounting, consider delaying
year-end billings to defer income until 2005.
Caution! If you
have already received the check in 2004, deferring the deposit does not defer
the income. Also, you may not
want to defer billing if you believe this will increase your risk of not
getting paid.
Installment
Sales.
If you plan to sell certain appreciated property in 2004, you might be
able to defer the gain until later years by taking back a promissory note
instead of cash. If you qualify,
the gain will be taxed to you as you collect the principal payments on the
note. Planning Alert! Although the sale of real
estate and closely-held stock generally qualify for this deferral treatment,
some sales do not. For example,
even if you are a cash method taxpayer, you cannot use this gain deferral
technique if you sell publicly-traded stock or securities.
Also, you may not want to take back a promissory note in lieu of cash
if you believe that your chances of getting paid are at risk.
Caution! As the law is currently written, the general, maximum
long-term capital gains rate will increase from 15% to 20% after 2008. This
increase in the long-term capital gains rate should be considered before
agreeing to accept an installment note with payments due beyond the 2008 tax
year.
Real
Estate Swaps.
If you want to sell investment or business real estate
but plan to use the proceeds to purchase other investment or business real
estate, consider a like-kind exchange. You could have the purchaser of your
property buy the property you want and trade it to you. This way there should
be no gain on the exchange. Tax
Tip. In certain
cases, the IRS rules will permit tax-free treatment even if you acquire the
real estate you want before you transfer your existing realty. This is
commonly referred to as a reverse like-kind exchange.
Planning Alert!
Although like-kind exchanges may appear simple, they are not.
It is easy to convert what appears to be a tax-free exchange into a
fully taxable transaction. Tax-free
exchanges present wonderful tax planning opportunities but please do not
attempt one without calling us first.
Deferred
Compensation.
There are established ways to defer the taxation of 2004 compensation
until 2005. These deferred
compensation rules are extremely complex.
Planning Alert!
The American Jobs Act of 2004
imposes
new restrictions on non-qualified deferred compensation plans, effective
for compensation amounts deferred after 2004.
Please call us before participating in a deferred compensation
arrangement with your employer. We
will help explain the new rules.
Required
Distributions From Retirement Plans After 70 Or Death. If
you want to postpone the distributions (and therefore the taxation) of amounts
in your traditional IRA or in a qualified retirement plan as long as possible,
it is critical that you name the appropriate beneficiaries. You should
generally name an individual or a qualified trust as the beneficiary.
Caution! If your estate is the beneficiary of your IRA or
qualified plan account, your heirs will generally miss out on substantial tax
deferral opportunities after your death. In addition to naming an individual
or individuals as your beneficiary, you should also name a contingent
beneficiary in case your primary beneficiary dies before you.
If you do not name a qualified beneficiary or if your estate is your
beneficiary and you die before reaching age 70, your entire retirement account
generally must be distributed and taxed within five years of the year
of your death. This will cause your beneficiaries to lose valuable tax
deferral benefits. Planning
Alert!
The rules for maximizing the tax deferral possibilities for IRAs and
qualified plan accounts are complicated.
However, we will gladly review your beneficiary designations and offer
planning suggestions.
Tax Tip. If
you are the current owner of a Roth IRA, you’ll have no minimum required
distributions after you reach age 70. However, distributions must be made to
your heirs after your death.
Also,
if you are the beneficiary of the IRA or qualified plan account of someone
that has died, there are certain planning techniques you should consider as
soon as possible. Tax Tip.
If the decedent named multiple beneficiaries or included an estate or
charity as a beneficiary, we should review the situation as soon as possible
to see if there is anything we can do to avoid certain tax traps. The rules
for rearranging IRA beneficiaries for maximum tax deferral are complicated and
are subject to rigid deadlines. Acting before certain deadlines pass is
critical. The best tax results can generally be achieved by making any
necessary changes no later than the end of the tax year in which the owner of
the IRA or retirement plan dies. If you need assistance, please call our
office as soon as possible so we can advise you.
IRS
Grants Relief for Late IRA Rollovers. If you receive a distribution from your IRA or
qualified retirement plan, and you want to avoid taxation, you typically
must roll the distribution over into a new IRA or qualified retirement plan
within 60 days. Tax Tip. You generally are allowed only
one tax-free rollover of an IRA each year. If an IRA account is rolled
over more than once each year, the amount involved in the second rollover is
taxed and could be subject to a 10% penalty. However, there are no limits on
the number of times you may have direct trustee-to-truste@
transfers of your account between IRA trustees. If you wish to change your IRA
trustee (e.g., move your IRA from one financial institution to another),
please call us and we will assist you with a trustee-to-trustee transfer.
If
you have taken money from your IRA or a qualified plan and intended to roll
over the funds within 60 days, but failed to do so, please give us a call. The
IRS has issued special procedures for applying for an extension of the 60-day
rollover period if you satisfy certain criteria and has granted several
taxpayers extensions during 2004. We will help you apply for an extension of
time to complete the rollover. Caution! The IRS generally allows
extensions only where the taxpayer intended to rollover the funds at the time
of withdrawal and illness, death, bad advice, or misunderstandings of the law
caused the taxpayer to fail to complete the rollover within the 60-day period.
Obtaining an extension of the 60-day rollover is a time-consuming process. The
best policy is always to complete the rollover within the 60-day period. Or,
better yet, don’t rollover at all. If you wish to change plan trustees,
then simply transfer the funds using a trustee-to-trustee transfer. In a
trustee-to-trustee transfer, the check for the amount transferred should be
written to the new trustee, not to you.