February 2005 Email Newsletter

WHAT'S NEW IN TAXES

2005 Donations For Tsunami Victims May Be Deductible In 2004

Americans are contributing generously to help victims affected by the tsunami disaster in Asia. The IRS issued a reminder to taxpayers about the deductibility of charitable contributions.

If you hope to deduct your contribution, note the following:

* Make sure that you are giving to a legitimate organization. Don't be fooled by names that sound impressive or are intended to sound like familiar charities. (Before making a contribution, you may want to find out how much of your contribution will go to victims and how much goes to the administration costs of the charity.)

* Be sure the organization is considered tax-exempt by the IRS. Contributions made to foreign charities may not qualify for deductibility.

* Only if you itemize deductions on your tax return will you be able to take a deduction for your contribution, and any gift of $250 or more requires a receipt from the charity. A cancelled check is not sufficient.

* Be aware that legislation signed last month allows you to deduct tsunami relief donations made by January 31, 2005, on your 2004 tax return. Normally, charitable contributions are deductible for the year in which they are made. Congress accelerated the deduction hoping it would encourage additional giving to the relief effort.

Add These Items To Your 2005 Recordkeeping

Keeping good records helps you get every tax deduction to which you're entitled. This year there are some new rules; be sure your recordkeeping takes them into account.

* New rule #1. There's a new itemized deduction for state and local sales taxes on your federal income tax return. You can now choose to deduct sales taxes instead of state and local income taxes paid.

If you plan to purchase big ticket items this year, or if you are taxed in a state with no or low income tax, you should keep your sales tax receipts. Here's why: The IRS provides sales tax deduction tables which can be used instead of keeping receipts throughout the year, but you can add to the table amount sales taxes paid on big ticket items such as motor vehicles, airplanes, boats, homes, mobile homes, and home building materials. When you file your 2005 tax return, you can then choose to deduct either sales taxes or state and local income taxes, whichever gives you the bigger deduction.

* New rule #2. Teachers may deduct up to $250 for the classroom supplies they purchase with their own money. Again, keep receipts so you don't miss this tax break. It's a deduction that can be taken whether you itemize or take the standard deduction.

* New rule #3. If you donate a vehicle to a charity in 2005, you can no longer estimate the vehicle's fair market value to determine your deduction. You'll have to get the valuation amount from the charity, and if they sell your vehicle at auction (as most charities do), that amount is limited to the actual selling price of the vehicle.

WHAT'S NEW IN FINANCIAL STRATEGIES

You Can Put More In Your Medical And Retirement Accounts In 2005

* HSAs.
Health Savings Accounts (HSAs) allow taxpayers with high-deductible health insurance plans to set aside tax-deductible funds to pay for unreimbursed medical expenses. For 2005, the amount that an individual can put into an HSA increases to $2,650, and the amount for family coverage increases to $5,250. Those who are 55 or older can put an additional $600 into an HSA this year.

* IRAs.
Though the amount that taxpayers could put into other retirement plans has increased annually for the last several years, the annual IRA contribution limit remained at $3,000 ($3,500 for those 50 or older). That changes this year. In 2005 you can put up to $4,000 into an IRA (traditional, spousal, or Roth) if you're under age 50 and up to $4,500 if you're 50 or older.

Roth IRA Conversion Rules Change In 2005

A little-known tax rule took effect on January 1, 2005. This new rule, which applies specifically to people over the age of 70½, will make it easier for seniors to convert their IRAs to a Roth IRA.

Roth IRAs were instituted as part of the 1997 Tax Act. Unlike traditional IRAs, Roth IRAs are tax-free, which means that you don't pay taxes on money withdrawn from your Roth as long as certain conditions are met.

Along with the introduction of these tax-free retirement savings accounts came the opportunity to convert your traditional IRAs to a Roth. Yes, you pay taxes on the money converted. But that money grows tax-free from that day forward.

Not everyone is eligible to convert their IRAs to a Roth IRA, however. To qualify, your adjusted gross income (AGI) can't exceed $100,000. That threshold applies to single individuals and to married couples alike.

* The new rule. Here's where the new rule helps seniors. Starting this year, your annual required minimum distribution (RMD) from your IRAs is excluded when determining if your income exceeds the $100,000 threshold. Let's say you'll turn 75 this year and your IRA accounts are worth $300,000. Based on your life expectancy as reflected in the Uniform Lifetime Table, your RMD for 2005 would be $13,100. While this distribution is taxable to you, it no longer counts when determining eligibility for a Roth conversion.

* To convert or not? Should you consider converting your IRAs? Perhaps you should if you think that the tax rates will be higher in the future and you have enough money set aside to pay the taxes due on the conversion without invading your new Roth account.

Another advantage is that you get to keep the money invested within a tax-advantaged account longer. That's because, unlike traditional IRAs, there are no required minimum distributions for Roths.

Converting to a Roth can also help you out with some basic estate planning. By paying all of the income taxes due on your IRAs right now, you'll deplete your estate by the taxes paid. Plus, you reduce the income taxes your heirs will ultimately pay since Roth distributions are tax-free to the beneficiaries of an inherited Roth as well.

The downside includes the potential of pushing yourself into a higher tax bracket, having your personal exemptions and itemized deductions phased out, and paying taxes on a higher percentage of your social security benefits.

To find out more about this tax law change, and whether converting your IRAs to a Roth might make sense for you, please give us a call.

THOUGHT OF THE MONTH

Never be afraid to try something new. Remember that a lone amateur built the Ark. A large group of professionals built the Titanic.

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The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.