Tax relief -- the changes in the tax laws

This month's article is the first of two parts on the important changes in the tax laws. Those tax laws affect not only individual small businesses, but every business and individual taxpayer in the United States.

Phase-in schedules

Most tax benefits under the new law don't come into effect immediately, but are phased in gradually over the next 10 years. The first task in dealing with the new law is to line up your potential tax benefits with the phase-in schedules that were determined by Congress.

For example, tax rates won't be fully reduced until 2006; marriage penalty relief isn't scheduled to start until 2005; the $1,000 child credit won't be fully phased in until 2010; phase-out of the restrictions on itemized deductions for higher-bracket taxpayers won't begin until 2006; and estate tax isn't on the time-line for repeal until 2010.

To further complicate matters, this tax law was written to come within its budget by officially making all its tax benefits, including lower tax rates and estate tax repeal, disappear starting in 2011. And consensus seems to be growing that a future Congress will not resist the temptation to tinker with these provisions.

The bottom line for most of you is to have a tax plan that remains nimble, to take advantage of phased-in benefits when they happen, while not being locked into a strategy that forecloses an adequate response to future tax law changes.

Here are two considerations in dealing with each of the major areas of tax relief provided by the Tax Relief Act.

Tax cuts

You no doubt have read about the advance refund check you will be receiving later this summer as the first part of the massive tax rate cuts. At $600 for joint filers ($300 for single taxpayers and $500 for heads of household), the payoff this year is minuscule compared to your potential tax savings over the next 10 years.

For starters, the 28, 31, 36 and 36.9 percent tax rates drop one full percent on July 1. They will gradually fall through 2005 until they reach their permanent level of 25, 28, 33 and 35 percent in 2006. You should consider accelerating deductions to offset income taxed at the higher rates, and defer income until it can be taxed at the lower rates.

Consideration should also be given to deferred compensation, family income shifting, Roth IRA conversions, value of capital gains strategies and the potential reach into your pockets of the alternative minimum tax.

Estate Tax relief

The new law makes estate planning considerably more complicated over the next decade. The estate tax technically will be repealed, but only for 2010. In the meantime, relief comes gradually in the form of a 1 percent drop in the highest estate tax rate each year until it levels off at 45 percent in 2007.

There is a very gradual increase in the amount that is exempt from estate tax (rising only to $1 million in 2002-2003, $1.5 million in 2004-2005, and $2 million in 2006-2008, before taking a jump of $3.5 million in 2009. Congress can change anytime up to that date.

Your present estate plans should be fine-tuned to take full advantage of the rising exemptions while protecting your heirs against steep estate and income tax consequences potentially on the horizon.

Next month we will discuss additional tax relief issues that are part of the Tax Relief Act. As always, we advocate the use of a professional in reviewing your tax matters as related to your individual, corporate, educational, pension, estate or any other tax measures. We suggest now, even more, that you review the issues surrounding your taxable income and your personal financial issues with qualified advisers.

Melvin J. Van de Ven, CPA, CVA is a partner in the certified public accounting firm of Schott & Van de Ven in Cape Girardeau. He can be reached by email at mvandeven@schottvandeven.com.