Focus on Personal Finance
You Can Still Save on 2002 Taxes
Here are three money-saving ideas you can use right now.

BY RICHARD J. ALPHONSO, JD, CPA/PFS, M.S.T., AND ANITA S. FRANK, CPA 

It's that time of the year again -- time to take advantage of significant tax breaks that can substantially reduce your 2002 tax liability. In this month's column, we'll highlight three actions you can take right now to decrease your income taxes for this year.

1. FUND A DEFINED-BENEFIT PLAN

Because of the poor investment climate over the past 3 years, investors have seen their retirement dreams fade as precipitously as their investment portfolios. If you're approaching retirement, you may need to take steps now to increase your retirement plan savings. If you have an existing defined-benefit (DB) plan, chances are you can put in a larger, tax deductible contribution this year to assure adequate, actuarially determined funding for your plan and make up for investment losses.

If your practice doesn't currently have a DB plan, strongly consider establishing one for you and your employees prior to Dec. 31. With a calendar-year DB plan, you have until next Sept. 15 to fund the contribution and still take the deduction for 2002.

Under the terms of a DB plan, the closer the employee is to retirement age, the greater the required contribution to the plan. That's because the account balance must be adequate to fund the benefit when the employee reaches retirement age and the time available for growing the account is limited.

Here's where the current year income tax benefit comes in: As an employer, you can deduct from taxable income the amount necessary to fund the plan. The maximum annual benefit that can be funded has been increased to $160,000, or 100% of the average annual compensation for the employee's highest-earning 3 years, whichever is less. Of course, all employees must be covered, but it could be an excellent choice if you're older and closer to retirement age than your rank-and-file employees.

2. DEDUCT PLAN START-UP COSTS

If you establish any new retirement plan in 2002, you may be entitled to an income tax credit of 50% of the costs of establishing and administering the plan. The credit is available for new plans that became effective after Dec. 31, 2001 for businesses with not more than 100 employees. The credit is limited to $500 in any tax year and may be claimed for qualified costs incurred for 3 years, beginning with the first year the plan becomes effective. To qualify for the credit, you may not have maintained a qualified retirement plan during the prior 3-year period.

3. TAKE ADDITIONAL DEPRECIATION

Under general depreciation rules, the cost of business-use property such as furniture, equipment, automobiles, and leasehold improvements can be depreciated over the period of years that the property is expected to provide useful service. Thanks to the Job Creation and Worker Assistance Act of 2002, 30% of the cost of certain business-use property has been granted an "additional depreciation" deduction in 2002.

You'll gain a greater income tax benefit by purchasing needed business assets before year-end. This applies to tangible property and qualified leasehold improvements. These transactions must be entered into after Sept. 10, 2001 and before Sept. 11, 2004. For example, if you purchased $100,000 of qualifying property in 2002, the additional depreciation under this provision is $30,000. The remaining cost of the property, $70,000, can be depreciated over the useful life of the property, beginning in 2002. Note: If you purchased qualifying property between Sept. 11, 2001 and Dec. 31, 2001, you should amend your 2001 tax return to report the additional 30% depreciation.

Make sure that you consult with your tax advisor to ensure that you've done everything you can to reduce your tax bill before the end of the year.

Richard J. Alphonso, JD, CPA/PFS, M.S.T., and Anita S. Frank, CPA, are president and tax manager, respectively, of The Financial Advisory Group, Inc., in Houston. The Financial Advisory Group {(713) 627-7660} provides personalized fee-only financial planning, investment management and business consulting services.