NEW TAX LAW

Another busy year of tax legislation is sure to keep us all on our toes. At the forefront of the third major tax cut package in three years - the Jobs and Growth Tax Relief Reconciliation Act of 2003 - is significant dividend tax relief and capital gains tax reduction, not to mention marriage penalty relief, a temporary reprieve from higher alternative minimum tax (AMT) liability, and numerous other changes. With retroactive, temporary and phased-in/phased-out effective dates there is nothing straightforward about the new rules.

EFFECTIVE DATES OF MAJOR PROVISIONS
PROVISION	‘03	‘04	‘05	‘06	‘07	‘08	‘09	‘10	‘11

Rate reduction

Child credit

Marriage penalty

AMT exemption

Capital gains rate

Dividend rate reduction

Bonus depreciation

Section 179 expensing

Below is a brief summary of current tax law, some planning tools to help reduce your 2003 tax bill, and ideas to assist with your tax and financial planning in the year 2004.

Individual Tax Rates

The new tax law accelerates individual marginal tax rate cuts that were not set to kick in until 2006 and beyond. The lower 2003 tax brackets are 10%, 15%, 25%, 28%, 33% and 35%.

Alternative Minimum Tax

Although not the complete overhaul that is needed, 2003 tax law did raise the Alternative Minimum Tax (AMT) exemption amount. The exemption for married couples rises to $58,000 (up from $49,000), and the exemption for single taxpayers rises to $40,250 (up from $35,750). Unfortunately, this change is only effective for 2003 and 2004 tax years. Despite the increase in the exemption amount, a record number of taxpayers will be affected by AMT this year, and careful tax planning is required to minimize the impact.

Personal Exemptions

Personal exemptions, indexed for inflation, increased from $3,000 to $3,050 in 2003. The phase-out thresholds for exemptions increased by inflation to $209,250 for married filing jointly and $139,500 for single taxpayers.

Standard Deduction

The 2003 standard deduction amounts increased by inflation, from $4,700 to $4,750 for singles, and from $6,900 to $7,000 for head of household. The big jump comes for married couples where the increase is 21%, from $7,850 to $9,500.

Strategy

The basic strategy to accelerate deductions and defer receipt of taxable income is still a winner. However, new tax law makes it attractive to take advantage of lower capital gain and dividend tax rates. Gifting appreciated investments to children over 13, and family in a lower tax bracket, represents the ultimate application of new tax law. Although the capital gains reduction is not set to expire until the end of 2008, with all the changes over the last few years, it’s tempting to take advantage of new rates while we can.

Social Security

FICA taxes remain 7.65% (15.3% for self-employed persons). The maximum Social Security limit for 2003 is $87,000. For 2004, the limit increases to $87,900. Medicare tax payments continue on all wages.

Retirees over age 65 may work without any reduction in Social Security benefits. However, the earnings limit still applies to workers under 65. In 2004, benefits are reduced $1 for every $2 earned over $11,640 for those age 62 to 64. In the year age 65 is reached, benefits are reduced $1 for every $3 earned over $31,080.

The age at which full benefits are available has been increased from 65 to 67. This affects everyone born after 1937, and varies based on the year of birth. While early retirement at age 62 is still possible, benefits are reduced.

There is no change in the computation of how much Social Security will be taxed for year 2003. For those with "provisional" income above $44,000 ($34,000 if single), you will be taxed on 85% of those benefits. The 50% tax rate remains for income between $32,000 and $44,000 ($25,000 and $34,000 if single). This differential in the tax rates makes it very important to plan receipt of income to take advantage of the 50% rate.

Children

As in the past, children 14 and over will be taxed on their income at their lower tax rate. Income shifting, and hiring your children in your business, are still good techniques. For children under age 14:

Retirement Issues

Although economic conditions and a turbulent market continue to make it hard to think about setting aside funds for your future, retirement contributions (whether 401(k), 403(b), profit sharing, pension, SEP, SIMPLE or IRA) still provide a major opportunity to reduce your tax bill.

If you have an employer sponsored salary deferral plan, in most situations, we recommend that you maximize your contributions. Contribution limits for year 2003 are $12,000 for 401(k) and 403(b) plans. For 2004, the limit increases to $13,000. If you are over age 50, additional annual “catch-up” contributions of $2,000 are allowed for 2003, and $3,000 for 2004.

For business owners, the maximum you can contribute to a qualified retirement plan is the lesser of $40,000, or 25% of your compensation. The maximum compensation level for computing your contribution remains $200,000.

The maximum IRA deduction is $3,000 for both 2003 and 2004. If you are over age 50, an additional annual “catch up” contribution of $500 is available for 2003 and 2004.

For 2003, Individual Retirement Accounts (IRAs) are not deductible if you and your spouse are covered by a company retirement plan and your joint income exceeds $70,000 for married filing joint and $50,000 for singles. However, a deductible IRA is allowed if one spouse is covered by an employer-sponsored plan, but the other is not, as long as adjusted gross income is less than $150,000.

If you are prohibited from deducting IRA contributions for 2003, you may still make nondeductible contributions. Earnings on these contributions accumulate tax-free until they are withdrawn. If you make nondeductible IRA contributions, keep a record of the contributions using tax Form 8606 to be certain you are not taxed on the money when it is withdrawn.

Don't forget that non-working spouses are allowed to contribute a full $3,000 to an IRA account, whether deductible or not, as long as the other spouse has sufficient earned income. This is an excellent opportunity to shelter additional income and allow earnings to accumulate tax-free.

If your adjusted gross income is below $150,000 ($95,000 for singles), a Roth IRA should be chosen instead of a nondeductible traditional IRA contribution because earnings on a Roth IRA escape taxation when withdrawn. In addition, if your adjusted gross income for 2003 will be below $100,000 you may want to consider converting traditional IRAs to Roth IRAs.

Education Accounts

The Coverdell Education Savings Account (formerly the Education IRA) is like a Roth IRA for children. For 2003, the contribution limit for children under the age of 18 is $2,000 per year, and you have until April 15,2004 to make your 2003 contribution. You obtain no deduction, but the money grows tax-free, until it is withdrawn tax-free for college expenses. Qualified education expenses include elementary and secondary expenses as well as post-secondary expenses. You may not participate if your income is greater than $220,000 ($110,000 if single), but the child, or a relative (in a lower tax bracket), can contribute to a Coverdell Account on the child's behalf.

Section 529 plans, can be an alternative way to save for college. Annual contribution limits are much higher, there are no income limitations, and under new tax law, withdrawals are tax-free. However, we urge caution. This law “sunsets” in 2010, so income will be taxed unless Congress acts to extend the law. Because we cannot count on this, a Coverdell Education Savings Account is generally a better choice if your child will complete college after 2010.

Investment Matters

It’s safe to open your investment statements again - 2003 was a much better year for the stock market. But, investing is a bit more complex now because of changes in the taxation of dividends and capital gains.

Starting in 2003, dividends are taxed at a top rate of 15% (or 5% if your tax rate is 15% or less). Likewise, capital gains are taxed at 15% (or 5% if your tax rate is 15% or less) for transactions after May 5, 2003.

In the past, we warned against after-tax investments in the month of December. This is because mutual fund companies distribute capital gains to shareholders no matter how long they have owned the fund. Therefore, you could receive an entire year of capital gains tax burden (distribution) even if you did not receive any cash, and even if you only owned the fund for a few weeks. However, now, buying funds in December might be a very good strategy. Most funds have not fully recovered from the losses they racked up during years 2000-2002. Therefore, you can buy a fund and benefit from capital losses racked up in the past. If you want to know whether a fund has carryover losses, Morningstar (an independent rating service) records this information on their analysis reports.

Record keeping is important when you purchase and sell investments. If you purchase mutual funds or stock at different price levels, the IRS will assume the first-in, first-out method of determining gain (loss) for tax purposes, unless you specify (and document) a different method. Your choice can affect your tax bill. In general, when stock prices are rising, the last-in, first-out method results in the lowest tax bill.

Also remember that brokerage costs decrease your taxable gain, and bonds purchased between interest dates also require an interest adjustment for tax purposes. If you have questions, call your broker or us. Short-term

and long-term gains and losses continue to be netted together, and net long-term losses are deductible to a maximum of $3,000 per year, with an indefinite carry-forward.

One popular year-end strategy is to sell stocks or mutual funds where there are losses and buy similar (not the same) stocks or funds to maintain your position. However, beware; if you transfer mutual fund assets from one group to another within a "family of funds", say from a bond fund to a stock fund, you will usually avoid the brokerage commission, but you have created a taxable event and will pay taxes on any gain realized.

Miscellaneous Deductions

Mortgage Interest/Home Equity Loans

The Internal Revenue Service allows one extra payment of monthly interest in one year. Therefore, if you make your January loan payment before December 31, it can be deducted this year. Be sure to verify that your

lender has reported this payment correctly when they mail you the form at year-end. Because of mail delays, send your payment on or before December 20, 2003 to allow enough time for it to be credited to your account before year-end.

Charitable

If payment for a charitable contribution is mailed or charged to a credit card before December 31, the deduction can be taken this year.

There is a bonus if you donate (to a qualified charity) stocks or mutual funds that have increased in value. You can deduct the full fair market value of the security and avoid paying capital gain tax on the appreciation. This only works if you have held the investment for more than 12 months.

Remember, if your gift is worth $500 or more, and is a non-cash item, you need a receipt and some additional information about the donation, such as how you determined the worth of the donated property, what it cost, and how you acquired the property. If the gift is over $5,000, an appraisal is required.

You must obtain a receipt from charities for all gifts over $250. Your canceled check is no longer enough support for the deduction. Also, if the gift is non-cash, the receipt will have to describe the gift in detail, but it need not confirm its value.

Finally, if you receive something in exchange for your donation, say a meal or a complimentary ticket, the charity must tell you in writing what portion of your donation is deductible.

Miscellaneous

Only medical expenses in excess of 7.5% of adjusted gross income are allowed as a deduction, so you will generally need a major illness to receive any benefit. The standard rate for use of your car for medical reasons, or when computing deductible moving expenses is 12 cents per mile for 2003, and increases to 14 cents per mile for 2004.

Casualty losses, such as flood damage are allowed, but only if they exceed 10% of adjusted gross income.

Miscellaneous deductions (such as IRA fees, subscriptions to trade magazines, tax and investment advice, safe deposit box fees and employee business expenses) must exceed 2% of adjusted gross income before they are deductible.

Other

Rental Properties

Most rental real property is considered a passive investment. For adjusted gross income under $100,000, up to $25,000 in passive loss is still deductible, but only if the taxpayer actively participates in managing the property. For adjusted gross income over $100,000, the deduction is phased-out, with no deduction available for taxpayers having income over $150,000.

However, you can deduct all rental real estate losses from regular income if you spend over half your total working time (at least 750 hours a year), on realty development or management. In this case, the $25,000 limit does not apply.

Self-Employed Health Insurance

The deduction for health insurance premiums for self-employed individuals finally increased to 100% for 2003 and thereafter.

Estate Planning

All individuals are eligible to give $11,000 per year to as many persons as they wish and avoid gift taxes (as long as lifetime gifts do not exceed $1 million). Couples can give up to $22,000 per year to one individual and avoid these taxes.

Tuition and medical expenses paid on someone’s behalf also avoid gift and estate tax, regardless of the dollar amount, as long as the payments are made directly to the educational or medical institution.

Most people do not realize that proceeds paid to beneficiaries from your insurance policies may be included in your taxable estate. In addition, proceeds from a retirement plan are taxed twice when you die, once as part of your estate, and once on the beneficiary’s tax return.

The estate tax exclusion amount remains $1 million for 2003, increasing to $1.5 million in 2004. While many states have adopted federal rules, some (like Wisconsin) have not. If you haven’t had an estate planning attorney review your situation in the past 3 years or so, now would be a good time to do so.

Business Planning

The deduction for business meals and entertainment continues to be 50%, but you may not claim any part of club dues, even if your membership is solely for business reasons. In addition, business travel deductions are limited

to expenses for yourself and your employees. You are not allowed to claim expenses for a non-employee spouse, dependent or other individual traveling with you.

Receipts are not required (but are recommended) for business expenses under $75. However, upon audit you do need some evidence to support the expense.

The standard mileage rate was 36 cents per mile for 2003. This rate increases to 37.5 cents per mile for 2004.

Form 1099 is required for all purchases of services over $600, unless you paid the money to a corporation. One exception - Form 1099 needs to be issued for legal services, even if the law firm is a corporation.

Use Tax

With significant budget deficits and spending cuts, Wisconsin and most other states have a stronger focus on "Use Tax". Blanket mailings, or in some cases auditors, are being sent to ask individuals and businesses (including sole proprietors) to pay back-taxes and penalties. If you make frequent or significant out-of-state purchases without the payment of sales tax, we strongly encourage you to report the tax on these purchases on your state tax return.

This is only a brief outline and is intended to be used as an annual reminder, not as a substitute for counseling on your particular tax situation. If you have any questions, please contact your personal advisor, or call us for clarification.

YEAR-END TAX PLANNING STRATEGIES - 2003