Here's a list of some of the tax opportunities, and challenges, that you may need to consider as part of your year-end tax planning for 2002:

• An additional first-year 30 percent deprecation bonus for property acquired after September 10, 2001 and before September 11, 2004. An election out of the deprecation bonus can be made with respect to any class of property;
• Operating losses arising in tax years ending in 2002 and 2001 can be carried back five years. Taxpayers can elect out of the extended carryback rule and instead carry the losses forward 20 years;
• Tax rates remain the same in 2003 as in 2002. They are not scheduled to drop again until 2004, when rates above 15 percent bracket will drop by 1 percent to 26, 29, 34, and 37.6 percent, respectively;
• Starting in 2002, the annual contribution limit for individual retirement accounts (IRA's) increases to $3,000, with those 50 and older allowed to make additional "make-up" contributions of $500;
• Starting in 2002, education IRA's can accept up to $2,000 each year, up from $500 in 2001; qualified state tuition programs are also made much more generous;
• The estate tax began its slow decease starting in 2002, requiring many taxpayers to draft new will provisions while adopting new gift-saving strategies.

In addition to pressing year-end issues generated by recent legislation, many "tried-and-true" year-end tax strategies have particular relevance this year. Here is an overview of some of the more important techniques that may be used:

• Time your income and deductions so that your taxable income is about even for 2002 and 2003. If you anticipate being in a higher tax bracket for 2003 (even with the drop in the tax rates caused by the 2001 Tax Relief Act), accelerate income into 2002 and defer taking deductions until 2003. Income can be delayed through setting up deferred compensation arrangements, postponing year-end bonuses, maximizing deductible retirement contributions, and delaying year-end billings.
• Maximize the value of itemized deductions between 2002 and 2003. Some taxpayers achieve this balance by taking the standard deduction one year and paying all bills that generate itemized deductions in the other year (care must be taken, however, not to run afoul of prepayment rules). Other taxpayers must carefully watch whether their itemized deductions for medical expenses will exceed the 7.5 percent adjusted gross income floor, or their miscellaneous itemized deductions exceed the designated 2 percent floor. Still others may need to balance income if they anticipate exceeding the income level above which certain itemized deductions must be reduced ($137,300 in 2002 (for joint returns), rising to $139,500 for 2003).

• Compute whether you are in danger of being subject to the alternative minimum tax for 2002 or 2003 (a growing number of "average" taxpayers are). If necessary, investigate whether certain deductions should be more evenly divided between 2002 and 2003 and whether certain deductions won't qualify - or won't be valuable - for AMT purposes.
• Time the recognition of capital gains and losses to minimize net capital gains tax (and maximize deductible capital losses). This involves an often complicated process of determining short-term gains (taxed as ordinary income), long-term gains, short-term losses, long-term losses, depreciable gain, and gains and losses from collectibles, and then determining how you might vary the mix before year-end to maximize existing losses and minimize existing gains. Unfortunately, the maximum capital gains tax rate was not reduced along with the regular income tax rates in the 2001 Tax Relief Act. Adding to the confusion, there is now an 8% capital gains rate for 15% income tax bracket taxpayers realizing long-term capital gain from property held for more than five years, and an 18% rate available beginning in 2006 (but often subject to making a tricky 2001-2002 election) for taxpayers in the higher brackets.

In addition, changes in circumstances, such as marriage, divorce, the birth of a child, death, retirement or and economic windfall (or set back) through the stock market, earnings or inheritance, may signal a special need for year-end tax planning. Once January 1, 2003 rolls in, however, it will be too late to alter most of your bottom-line tax liability for 2002 due to these, or other "more ordinary" events.

Some "year-end" tax strategies can be implemented in a matter of days, but others may take a month or more to customize properly to fit particular needs. If you are interested in investigating what year-end tax planning will work best in your situation, please contact our office as soon as is practical. The more time you give us to plan, the more options we will be able to consider for minimizing your tax liability. If you have any questions in the meantime, please do not hesitate to call.