Soukup, Bush & Associates, CPAs, PC, Fort Collins, CO

To Our Clients and Friends:

Thanks to taxpayer-friendly legislation, which lowered individual income tax rates as well as the rates on qualified dividends and most long-term capital gains, you now have available some excellent tax planning opportunities. These reduced rates are still in effect for 2004, so it's important to take advantage of all available tax benefits before a change in the tax law.

With that thought in mind, the summer is always a good time to start evaluating your tax planning options. To get you started, we've listed some ideas to consider.

Your Investments Most long-term capital gains from 2004 sales are now taxed at a maximum federal rate of only 15%. Even better, long-term gains that fall within the 10% and 15% brackets are taxed at only 5%. Qualified dividends from most domestic corporations and many foreign firms are taxed at these same low rates. For this year, a married joint filer can have taxable income as high as $58,100 (after reductions for personal exemptions and deductible items) and still be eligible for the ultra-low 5% rate on long-term gains and dividends. These favorable rules have several implications for you.
Holding on Longer Can Lower Your Taxes. If you hold appreciated securities in taxable accounts, owning them for at least one year and a day is necessary to qualify for the preferential long-term capital gains tax rates. In contrast, short-term gains are taxed at your ordinary rate, which can be as high as 35%. Make sure you consider this important distinction when evaluating your investment portfolio. Whenever possible, your goal should be to meet the more-than-one-year ownership rule for appreciated securities held in your taxable accounts. (Of course, while the tax consequences are

important, they should not be the only consideration for making a buy or sell decision.)

Generally, when you sell stock or mutual fund shares, the shares you purchased first are considered sold first, which is good news if you are trying to qualify for the long-term capital gain rate. But, there may be situations where you're better off selling shares that have been held a year or less rather than those held longer. Selling recently purchased shares at little or no gain (because you purchased them at a higher price) may be better than selling shares held for more than one year if that sale would produce a significant gain. Whenever you want to sell shares other than those you purchased first, you must properly notify your broker as to the specific shares you want the broker to sell for you.
Sell Losers with Tax Savings in Mind. It's also important to consider the best time to trigger capital losses. Capital losses can be used to offset any capital gains for the year. Note that capital loses are only allowed to the extent that the losses equal all capital gains plus $3,000. In other words, capital losses can only offset up to $3,000 of ordinary income.

Warning: Beware of the wash-sale rule when considering sales to trigger tax losses. You cannot deduct the loss if you purchase substantially identical securities within the period beginning 30 days before and ending 30 days after the date of the loss sale.
Consider Giving Appreciated Securities to Your Children. A great way to reduce the tax hit on an appreciated security is to give it your child (or grandchild). The child (grandchild) can hold the security until the year she turns 14 and then sell without being subject to the "kiddie tax." The resulting capital gain will probably be taxed at only 5% (assuming the current tax rate structure is left in place). Remember that giving the security to your child is considered a gift. However, you can use your annual $11,000 gift tax exclusion ($22,000 for married couples.)

If You Own a Business . . . For business owners, 2004 is a very important year for tax planning for a number of reasons.
Ability to Write-Off $102,000 of Asset Purchases. The Section 179 depreciation deduction is $102,000 for both new and used business equipment and software placed in service during tax years beginning in 2004. This means you may be able to immediately deduct the cost of most or all of this year's equipment and software additions. A key point is that heavy sport utility vehicles, pickups, and vans used over 50% for business currently qualify for the ultra-generous Section 179 deduction. But this could change any day, because Congress is expected to enact a reduced $25,000 Section 179 deduction cap for these vehicles. The good news: the reduction probably won't apply to heavy vehicles purchased and put into business use before the change is signed into law. So, now could be a great time to buy a Durango, Tahoe, or Expedition, etc. for your business (many other models qualify as well).

Ability to Claim First-year Bonus Depreciation. In addition to the generous Section 179 deduction, you can also claim first-year bonus depreciation equal to 50% of the cost of most new (not used)

equipment and software acquired and placed in service by December 31, 2004. Note, that the bonus depreciation benefit will expire at year-end, unless Congress takes further action. So you may want to purchase assets before December 31 to lock in some extra tax savings for this year.

Bunch Expenditures for Deductible Items. If your 2004 itemized deductions are likely to be just under (or just over) the standard deduction amount, it may pay for you to adopt the strategy of bunching together expenditures for itemized deductions every other year, while claiming the standard deduction amount in intervening years. This year's standard deduction for married joint filers is $9,700. The magic number for single filers is $4,850, while the figure for heads of households is $7,150.

For example, say you're a joint filer whose only itemized deductions are $3,000 of annual property taxes and $7,000 of annual home mortgage interest. If you prepay your 2005 property taxes before December 31 of this year, you could claim $13,000 of itemized deductions on your 2004 return ($3,000 of property taxes for this year, plus another $3,000 for the 2005 bill, plus $7,000 of mortgage interest). In 2005, you would only have the $7,000 worth of mortgage interest, but you can claim the standard deduction amount, which will be $9,700 plus an inflation adjustment.

This strategy allows you to cut your taxable income by a meaningful amount over the two-year period. You can then repeat the drill all over again in 2006 and 2007. You get the idea. You probably have other deductible items that can be bunched together every other year to lower your taxes in this fashion. Examples include the interest from your January home mortgage payment, charitable contributions, and state income tax payments.

Watch Out for the Alternative Minimum Tax It's critical to evaluate all tax planning strategies in light of the AMT rules before actually making any moves. Because the AMT rules are so complicated, you may want our assistance here.

Making Annual Gifts Still a Tax-smart Idea. Most estate tax experts doubt the federal estate tax will actually be repealed. Therefore, if you have a healthy-sized estate, reducing it by making annual gifts continues to be a tax-smart strategy. You can give each of them up to $11,000 each year. So can your spouse. These gifts will reduce your estate tax exposure without

any adverse gift tax effects. Making multiple gifts over multiple years can dramatically reduce your exposure. So the sooner you start an annual gifting program, the better. Annual gifts can also be a good way to gradually transfer ownership in a family business to the younger generation. The same goes for real estate investments. Contact us for more information on the best ways to make gifts for someone in your situation.

Identity Theft

In the past five years, approximately 27.3 million Americans were victims of identity theft according to a Federal Trade Commission (FTC) study. In the same study, Colorado ranked eighth in the number of identity theft victims for 2003. And in April of 2004, Colorado lawmakers failed to pass a bill that would specifically make identity theft a crime in Colorado. Instead, authorities must use current criminal impersonation, theft or forgery laws to prosecute identity thieves. What can we do to protect ourselves from this growing crime?

How to Protect Yourself

When ordering preprinted checks only put your initials and last name of the check. The thief won't know how to sign your name but the bank will. And never put your social security number on a preprinted check. You should leave your home address and phone number off your checks too, instead use a PO box number, if you have one, or use your work information.
If any checks have been stolen, immediately notify your bank. Although most state laws hold banks responsible for losses from a forged check, you may be held accountable if you were not responsible in notifying your bank of the lost or stolen check.
Photocopy the entire contents of your wallet, including the front and back of all your credit cards. Keep this information safe but accessible. If your wallet is stolen you'll be able to cancel your accounts immediately by calling the numbers on the back of the card.

Don't put the credit card number on your check when you're paying the credit card bill. Only use the last four digits of the number.
Don't carry your Social Security Card with you. And someone asks for your SSN, always be skeptical.
Check your credit report from all three major credit reporting agencies once a year. Make sure the information is correct and check for suspicious activity. The websites for the three major credit reporting agencies are:
Shred all documents that you dispose of that may contain personal information, such as credit card applications, insurance forms, physician statements, and bank statements.

If you're a Victim of Identity Theft

Immediately place a fraud alert on your credit report by calling any one of these three fraud alert phone numbers:

Equifax 1-888-766-0008

Experian 1-888-397-3742

TransUnion 1-800-680-7289

Once one of the numbers above is called, the other credit reporting agencies will be notified to attach a fraud alert to your credit report. This will alert creditors to verify your identity when a request for credit has been submitted.

Use your credit report to determine what accounts, if any, have been opened or accessed without your consent and close them immediately. Also check your bank accounts, phone, utilities and other lender accounts to see if any unauthorized transactions have occurred.
File a police report. This will verify when you took action to give notification of the theft.

Conclusion

As we said at the beginning, this letter is intended to give you just a few ideas to get you thinking about tax planning for 2004. Please don't hesitate to call if you want more details or would like to schedule a tax planning strategy session. We are at your service!

Summer 2004 Newsletter