ORIGINALLY WRITTEN CYNTHIA MARTENS
The holidays are over and the April 15 deadline to file tax returns for 2002 looms ahead.
Are you aware of the changes in the tax laws affecting your return? And what are you doing to make sure your personal financial planning is in order for the new year?
Tax preparers are saying the biggest news to affect tax preparation for 2002 is that the maximum retirement-contribution limits have all been increased from the previous year.
These changes are due to the tax cut in 2001, when Congress passed the Economic Growth and Tax Relief Reconciliation Act. And tax payers should continue to see increases in contribution limits in the future.
“In the past, the IRA contributions used to be $2,000 per person,” said Hugo G. Dahlstrom, CPA and owner of accounting firms in McPherson and Newton. “Now, it’s $3,000 plus an additional $500 for people age 50 or older.”
Additional changes include the following mentioned by Dahlstrom and Bryce Wichert, CPA with Adams, Brown, Beran & Ball in Hillsboro:
- ”Teachers are allowed to take an above-the-line deduction of $250 for any school supplies they’ve purchased that they paid out of their pocket,” Wichert said.
– Students enrolled in vocational and post-secondary schooling in 2002 need to be aware of tax changes related to the cost of their education and interest expense on their student loans, Wichert said.
Dahlstrom added, “And that really depends on if it’s a large benefit when they’re taking the credit or taking the deduction away from their Adjusted-Growth Income.”
AGI is figured as the gross income minus allowable adjustments, such as IRAs and interest on higher-education loans. AGI is the key to determine eligibility for certain tax benefits and the phasing out of eligibility of other exemptions, deductions and allowances.
– The contribution limits have been raised on retirement plans, Dahlstrom said. “There’s a form called SEP, which is a Simplified Employee-Pension plan. The limits have really raised.”
In the past, the limits were about $22,000. But this year, eligible tax payers can contribute up to about $40,000, depending on their income level.
“You’d probably want to put higher contribution levels into retirement plans,” Dahlstrom said. “But I’d always recommend-especially with the new tax-law changes-that you talk to your tax advisor before making a decision.”
– The personal-exemption amount on 2002 taxes has been raised from $2,900 to $3,000 for each dependent claimed, Wichert said. “It’s a deduction for each tax payer, spouse and any dependents who are claimed on their return. Basically, you get a deduction per person.”
– The standard deduction has also been raised from $7,600 to $7,850 for the married filing jointly return, Wichert said. “And for single individuals, it went from $4,550 to $4,700.”
After reviewing 2002 tax changes, Wichert looked toward 2003 and said tax payers need to be aware of a tax-law change for this year.
The mileage allowance for business use of an automobile will be lowered from 36 1/2 cents in 2002 to 36 cents in 2003.
“That’s one thing that may not be so good in 2003,” he said. “I think it went down because the gas prices have kind of gone back down.”
The computer age has touched all areas of life, and that includes the way tax payers file their returns. Individuals can choose from more tax software available to help them prepare their taxes on their own.
“And you can also do your tax return online or call it in over the phone,” Wichert said. “I think those type of things are self-explanatory for somebody with a fairly simple return.”
But Wichert also cautioned tax payers to seek professional help for more complicated returns.
“With some of these new laws and changes, some of the items get more complex,” he said. “So sometimes it’s to your advantage to seek out professional help with your taxes to make sure you take advantage of all the new tax-saving strategies out there that these new laws have created.”
Both firms contacted said they are seeing more tax payers electronically filing their taxes as opposed to traditional paper filing.
“Electronically filing is a process where most tax preparers electronically file over the internet to the IRS,” Dahlstrom said.
Professional tax preparers have to go through a process of qualifying to be eligible to e-file.
“It’s been proven that (e-filing) eliminates unnecessary errors between the IRS and the tax payer, and it really speeds up the process of the refunds,” Dahlstrom said.
“If you’re doing electronic transfer of funds and filing a return, I’ve seen people get refunds within five days,” he said. “And a paper return could take 30 to 45 days, depending on when you file during the filing period.”
Tax payers who plan to use a professional tax preparer should contact them as soon as they receive their W-2 and 1099 forms.
Wichert said it takes about two weeks to prepare an individual’s taxes, and he encourages them to get their information in to him before April 1 to avoid penalties after the April 15 deadline.
Dahlstrom said he likes to see new clients by the middle of March. “I know where most of my (regular) clients stand with me well before April 1, and I can budget my time.”
When asked if the downward economy and stock-market trends of 2002 affected tax preparation, Wichert said: “I haven’t really seen too much affect on that other than interest income and capital-gain incomes are down. That’s because people haven’t earned the kind of money they used to on their investments.”
One caution was voiced by Dahlstrom as tax payers begin the new year.
“I think people need to be aware that the IRS is looking at increasing compliance to tax laws in the near future both at the state and federal level,” he said.
“They’ve gotten away from it in the last six to seven years. But I think there’s some abuse, and they’re trying to see if, in fact, that’s the case. I’ve recently read where the state is looking at trying to collect on back taxes and looking at non-reporting of income tax.”
Tax planning for 2002 isn’t something to start today-it should have been implemented at least a year ago.
But that means now is the time to get a financial plan in order to be prepared to handle investments and tax issues on 2003 tax returns.
“You start talking about tax issues, and everybody wants to save money on taxes,” said Andy Shewey, financial advisor with American Express Financial Advisors in Hillsboro.
“After the markets have gone sideways and down for three years, people start getting frustrated,” Shewey said. “They’re not comfortable because all at once, things aren’t going forward, they’re going backwards.”
In order to be prepared for next year’s taxes and have a financial plan for investments, tax payers can contact a financial advisor to get help on at least three different levels.
These levels can be categorized as transactional, consultative and partnering.
At the transactional level, an individual’s investment portfolio is reviewed and an advisory fee is not charged.
They want to do some basic planning, Shewey said. “So you plan how you can diversify and develop some tax strategy. But you really don’t know the entire situation and what they want to accomplish.”
The advisor makes suggestions to invest money and doesn’t charge a planning fee but earns a commission from the investment.
At the consultative level, a financial plan is developed and there is an advisory fee for financial analysis and advice.
The client and advisor usually meet once or twice a year to review the financial plan. And the plan is updated every two to four years.
“When I get into financial planning, we focus on goals which can also include planning for retirement, college and reducing their taxes,” Shewey said.
At a more concentrated level, partnering is fee-based planning on an annual basis.
“But I want to be careful that people understand that every time they walk in the door, they’re not charged a fee,” Shewey said.
“I still meet with people on a regular basis, but they don’t get charged when they come in and review things. Where a fee is involved is if we do some level of planning.”
Shewey said financial planning in 2002 was affected by the investment environment in general. And of particular concern was the fluctuations in the stock market.
His advice to his clients during these times depends on each individual’s situation and.
He may advise his clients to keep their financial plan as is, to make some minor changes or to cash out their investments.
“On the one end, we’re not doing anything different because the markets have been so awkward that we don’t want to bail out,” Shewey said.
“In the middle ground, we’re doing things more conservatively, or we’re diversifying more. Which sometimes means real-estate investments or a true-fixed account.” Or the clients agree to wait until their investment has regained its original value before doing anything with it.
At the extreme end, if clients need the money, they may have to turn their investment into cash.
“If they need the money, we just have to make some tough decisions about which investments need to be withdrawn,” Shewey said.
And for 2003, consulting a financial advisor can mean being better prepared when taxes roll around once again next year at this time.
A financial plan gives the tax payer direction, Shewey said.
“And that’s what planning is all about-if there’s a way to save you tax money on your investments,” he said.
“Can we do some things to help you get there?”