Our Top 10 Tax Tips


1. Accelerate income. Deferred compensation is attractive when future top rates will be significantly lower than current rates. That is no longer the case. Regular income tax rates now start at 10 percent, and the top rate in 2005 will be 35 percent. Those are historically low rates. Who knows what the future will bring? Take the money now!

2. Seek investments that pay ordinary dividends or distribute long-term capital gains. The maximum tax rate on both is only 15 percent in 2005.

3. Shift income to children and grandchildren. In 2005, the lowest income tax bracket is 10 percent, 25 percent lower than the highest bracket. Be sure that each child and or grandchild has enough income to take full advantage of the $800 exemption and low rates without becoming subject to the tax on investment income of a child under age 14.


4. Investigate the availability of High Deductible Health Plan (HDHP) coverage combined with a Health Savings Account (HSA). Contributions to the HSA are tax deductible and withdrawals to pay medical expenses are not taxed. The Bush administration is determined to encourage the broadest use possible of this new tax-favored medical care benefit, and we expect many insurance companies and banks to offer these plans at competitive rates in early 2005.


In 2005, IRA contributions of up to $4,000 are permitted for anyone with sufficient earned income, and the limit increases to $4,500 for a person that has attained age 50 before year-end. In 2006, the base limit remains $4,000 but the additional amount that can be contributed by a person over 50 increases to $1,000 so that the total contribution can be as much as $5,000. The limits continue to increase in years after 2006.

5. Make your maximum allowable IRA contribution as early as possible each year. Tax deferred accumulation of income begins the day you fund the IRA, and early funding will provide greater account value at retirement. You can make your 2005 IRA contribution as early as January 4, 2005. Consider funding your IRA account with fixed income securities such as bonds. This way you will be deferring taxes on what would be otherwise be taxed at ordinary income tax rates. By contrast, if you fund your IRA account with stocks or equity based mutual funds, you could be converting long term capital gains which are taxed at low rates into ordinary income taxed at higher rates when you begin to take IRA distributions.


Participants in 401(k), 403(b), and 457 plans can take advantage of expanded limits on contributions. The general limit on contributions to such plans in 2005 is $14,000 with an extra $4,000 allowed for individuals over age 50 by year-end. It gets better – – employees will be allowed to defer up to 100 percent of their compensation up to the deferral limit, if the plan permits it.

6. Defer the maximum allowed by your employer’s 401(k) plan – that should also assure you of receiving maximum benefit from any employer matching contribution and will help you receive the maximum tax advantage possible.

7. A non-working spouse might consider working to boost the family retirement assets – reentering the work force for the primary purpose of making a maximum 401(k) deferral, the lesser of $14,000 or total compensation in 2005, and making a significant improvement in the family retirement assets.


Coordinated rules for Section 529 plans, Coverdell Accounts, Hope credits and Lifetime Learning credits allow all of those sources of funding higher education expenses to be of greater utility to many families. Planning which education costs to pay from what funding source, and when to pay them, is necessary in order to gain maximum benefit from all available tax advantaged education assistance programs.

8. Take advantage of the Education Expense Deduction. In addition to all other assistance provisions, and requiring careful coordination with them for maximum benefit, a deduction of up to $3,000 is allowed for college tuition costs. If your adjusted gross income does not exceed $65,000 for singles, or $130,000 for married taxpayers filing joint returns, you qualify. No deduction can be claimed for expenses of a student for whom a Hope or Lifetime Learning credit is also claimed.

9. Fully fund Coverdell Education Savings Accounts – Contributions of up to $2,000 per child are allowed each year, and the benefit is not phased out until contributors have adjusted gross income in a joint return between $190,000 and $220,000. Tax-free withdrawals are also allowed for qualified elementary and secondary education expenses. If you begin funding early enough, and maximum fund all available programs, you can use the Coverdell account for pre-college costs and coordinate a Section 529 Plan with the Hope credit and Lifetime Learning credit for higher education expenses.

10. Fund a Section 529, Qualified Tuition Program (QTP) – tax-free distributions can pay for many higher education expenses. In addition, QTP distributions can be coordinated with Hope and Lifetime Learning credits as long as each is used to cover different expenses.