Dividend holding period corrected

The 2003 tax law lowered the tax rates on dividend income, but investors had to have owned the dividend-paying stock for at least 61 days of a 120-day period surrounding the ex-dividend date. A technical correction to the law will change that holding period requirement to 61 days of a 121-day period. The IRS allowed the pending change to be used on 2003 tax returns.

The strategy is simple in concept, and has long been a staple with high-income taxpayers: shift your high tax bracket income to other family members who are in lower tax brackets. The family will then pay lower taxes on this shifted income. Here are a few income-shifting strategies that you may want to consider.

* Transfer gains. If you own stock or mutual funds that you've held for more than one year and that have increased in value, consider gifting them to your children for subsequent sale. If you claim the gains, you'll generally be taxed at a 15% rate. But it's likely that your children will be able to realize the gains at a tax rate of 5% or less. As the law currently stands, low-bracket taxpayers will pay 0% on long-term capital gains in 2008.

Beware of the kiddie tax if you're gifting assets to children under age 14, but don't overlook this strategy if you have older children.

* Hire your children. If you have an unincorporated business, hiring your kids can save significant tax dollars. You'll not only get a tax deduction for the wages you pay your children, but also you'll avoid the self-employment taxes you'd pay on that income if it were taxed to you.

Your kids can earn up to $4,850 in wage income, completely avoid the kiddie tax, and not pay a dime in income taxes. Because they're working for you in an unincorporated business, they won't pay any payroll taxes on their wages if they're under 18 years old. If your business is incorporated, you'll be required to pay payroll taxes on the kids' wages, but the income tax savings can still be substantial.

Remember that if you do hire your kids, they must actually perform services, the wages paid must be reasonable, and the appropriate payroll forms must be completed.

* Shift education credits. Maybe you're unable to claim either the Hope or lifetime learning credits for your college age children because your income exceeds the allowable limits. If that's the case, and your kids have taxable income from work or investments, consider dropping them as dependents from your tax return. It's possible, depending on your income, that you're losing the benefit of dependency exemptions for your children anyway. If you elect not to claim them as dependents, they can then claim the education credits on their individual income tax returns, even if you pay the college bills.

* Establish IRA accounts. With income from wages, your child can establish an IRA account and contribute up to $3,000. If it's a traditional deductible IRA, your child can earn up to $7,850 in wages without paying any income taxes.

You could also consider a non-deductible Roth IRA. While not currently deductible, the contributions can grow substantially over the years. The earnings and distributions are completely tax-free once the child reaches age 59½.

You'll note that in all of the strategies mentioned above, children are used as examples. But don't forget that substituting other lower-income family members (such as retired parents or grandchildren) will also allow for the shifting of income and will provide similar tax benefits. For example, if you're helping to support your parents, you might consider giving them dividend-paying stocks or mutual funds. Instead of your paying 15% on the dividend income, your parents could pay 5% and use the balance to pay their expenses.

Translating the concept of income shifting to actual tax savings can get complicated, but it's certainly worth the effort. Don't hesitate to call us. We'll help review your specific situation and help you choose the best income-shifting strategy. We can be reached at (781) 453 - 8700.

Luxury vehicle depreciation limits released for 2004

The IRS has released the luxury vehicle depreciation caps for vehicles first placed in service in 2004. For automobiles, the limits are —

* $2,960 for year one (2004)
* $4,800 for year two
* $2,850 for year three
* $1,675 for each succeeding year

Business start-up costs require special tax treatment

According to the tax law, you are allowed to take a tax deduction for ordinary and necessary business expenses if you are engaged in a trade or business. What about the expenses involved in investigating the potential for a new business? The tax law calls these expenses "startup costs" and says they are not deductible prior to the start of a business. In fact, if your investigation does not lead to actually starting a business, these costs may never be deductible. If your investigation leads to actually starting a business, you may elect to amortize (write off) these startup costs over a period of 60 months, beginning with the month the trade or business started.

* Typical costs. Startup costs are those expenses that would have been deductible if incurred by an operating business. Typical startup expenses include expenditures for market or product research to determine the feasibility of starting a business, site selection, advertising, consultant's fees, and necessary travel before the business actually started.

Interest, taxes, and research and development costs incurred during a startup period need not be amortized; they may be deducted when incurred or paid.

Startup costs that must be amortized do not include purchases of depreciable property. You may find it advantageous to identify these costs in order to obtain faster write-offs.

* Tax election. To amortize startup costs, you must make an election to do so on the tax return for the year in which the business actually started. Any eligible expenses that are not amortized under the startup rules may be capitalized.

Studies show health care will be major cost in retirement

The Employee Benefits Research Institute, a Washington nonprofit organization, estimates that health care costs for retirees will be five times higher than most individuals think they will be.

The cost of health care has risen an average of 14% a year over the past several years. Even if cost increases slow to an annual 10%, individuals could face medical bills of $90,000 if they live to age 80, $206,000 if they live to age 90, and $376,000 if they live to age 100. Employers are cutting benefits for retirees, and Medicare, even with supplemental insurance, isn't covering all health care costs. What this means to individuals is that they need to save more themselves for their health costs during retirement.

They come by mail, by phone, and by e-mail. Sometimes you hear about them from a friend or relative. They're hot investment tips, prizes you've won in contests that you never knew you entered, or ways to avoid paying taxes. One thing they all have in common — these scams require you to pay out cash now in order to receive the promised return. Perhaps it's the spread of the Internet, perhaps it's the economic times, but scam artists are busier than ever and there is no shortage of unsuspecting victims.

* Investment scams. The spread of the Internet and e-mail, which makes it possible to target millions of potential victims quickly and inexpensively, has caused a surge in investment scams.

You may receive an invitation to earn double-digit returns in "prime securities," supposedly secret investments known only to major banks. Unfortunately, there's no such market.

You may be offered the chance to start your own home-based business with promises of fantastic earnings. Too often, these turn out to be pyramid schemes where profits are based primarily on your recruiting others to join the program.

Another common scam is the "pump and dump" scheme. A promoter will plant favorable stories on Web sites and in chat groups about a stock he owns, leading to a buying surge and a rise in share price. He then sells at the pumped-up price, leaving investors to discover too late that the stories were complete fabrications.

* Tax scams. Scams are not limited to investment opportunities. The IRS recently warned taxpayers about the latest tax scams. These include abusive trust schemes, where scam artists offer to set up a series of trusts that they claim will shield virtually all your income from taxes. Of course, you pay several thousand dollars in upfront fees for the promoter to set up the trust.

Other tax scams offer to show you how to deduct personal household costs as business expenses or to sell you the "secret" of opting out of the tax system.

If you invest in one of these tax scams, you could find yourself facing civil and even criminal penalties. The IRS currently has over 800 promoters of tax shelters under investigation.

* Protect yourself. Never invest in anything unless you have the full details in writing and you understand the investment. Remember that if something seems too good to be true, it almost certainly is. Never disclose credit card or bank data to anyone over the phone unless you have initiated the contact and know with whom you are dealing.