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After the holidays, it’s always time to ponder tax breaks

Denver Business JournalOn the Money
From the January 7, 2004 print edition

The third largest tax cut in history is now in effect. If we thought dealing with the frenzy of the holidays was “taxing,” now it’s time to attempt to make sense of a new government fiscal policy.
However, it’s indeed not all bad. Many of the changes are automatic and although the size of this “Jobs and Growth Tax Relief Reconciliation Act of 2003” is smaller than many previous actions, the benefits are basic and profound; in many ways reflective of our changing workforce demographic.
Here is a summary of the changes and how they might provide benefit. (As always, this is general information. Please consult your own tax advisor, licensed certified public account, or attorney.)
Automatic benefits – Regular tax rates are reduced. The top rate of 38.6 percent is now 35 percent. That means by doing nothing, there will be an additional $5,400 available to the taxpayer earning $150,000.

Without providing a extended treatise regarding actual taxes, vs. withholding, vs. refunds, etc., this year would be a good time to examine payroll withholding against actual tax liability to make sure as much money as possible is in the right place at the right time.

Another “automatic” benefit is that long term capital gains rates are reduced to 15 percent. That simply means that investments will bring 5 percent more back to their owner. Once again a reminder that every situation is unique and demands individual attention.
Family matters – Since the holiday season is still fresh in our minds often meaning consideration of children and parents, here are some highlights as they apply to families that may bear exploration.

In 2003, parents may give as much as $22,000 to each of their children without paying a “gift” tax.
There are increased benefits available in there areas of: child credits, dependent care, and adoption credits. Credits available to parents for the ever increasing costs of higher education also continue to enlarge and are well worth the time it takes to explore. For example, deductions for student loan interest, Roth IRAs, Coverdell ESAs, HOPE and lifetime learning credits could hold some unexpected treasure.
The infamous “marriage penalty,” (that is when a couple filing joint returns experiences a greater tax liability than would occur if each of the two people were to file as single individuals), may be on the way out. Given the combination of greater standard joint deduction and the changes in actual tax brackets, the difference is shrinking. Although not completely eliminated, it is less of a disparity than in previous years.
On the other hand, Liz Pulliam Weston of CNBC reminds us that for most middle- and upper-income people, there are plenty of financial benefits to marriage, regardless of their income tax situation. Including: Workplace health and pension benefits coverage, Social Security retirement and survivor benefits, Lower insurance rates, and Automatic inheritance rights. Die without a will, and your spouse gets your stuff.
For business – The link between business and family taxes are closer than first appearance. After all, most of the money that changes hands within a family comes from commercial activities. In partial summary, the changes include:
A reduction in mileage deduction- 36.5 cents a mile was the standard mileage rate for 2002. However, this rate decreases to 36 cents a mile for business miles you drive in 2003. In other words, drive less.
If you were self-employed in 2002, you must pay the Social Security part of self-employment taxes up to $84,900. The ceiling will increase to $87,000 for 2003. This is not necessarily good news for small business owners now. But, Social Security may yet be rescued

Child care facilities and services for your employees provide a tax credit of 25% of the qualified expenses you paid for employee child care and 10% of qualified expenses you paid for child care resource and referral services. A very positive change as the demographics of our workforce changes.
For self-employed persons, you can deduct 100% of the amount you paid for medical insurance for yourself and your family. This is an increase over the 70% allowed in 2000. Also, remember that unincorporated business owners may employ their children and fully deduct those costs.
While tax code and law remains one of the most complex and daunting areas of financial life (therefore very tempting to just ignore), this year’s changes contain enough potential benefits that if any of the above are applicable to you, a little time invested now could result in substantial benefit.

© C. Stephen Guyer for American City Business Journals Inc. All rights reserved.