Making your New Year's tax resolutions

The new year has started, and the chore of collecting last year's tax information is about to start.

While accurately recapping last year is a necessity, you can add value to the process of cleaning out drawers and reviewing your checkbooks.

As you look back at 2002, take time to look forward and ponder if, and in what amounts, you can or should be saving in tax-preferenced investments.

The actual investments you should make are for another article and deserve a great deal of attention.

The potential tax deductibility and tax deferral is a gift from the Congress that none of us should overlook whether you are 25, 45 or 60, self employed or working for a mid- or large-sized company.

In addition to retirement plans, tax preferenced education savings plans can be a valuable, often overlooked benefit.

If your company has a 401K plan, try to contribute as much as you can; while this may be difficult in this period of economic slowdown and uncertainty, even a modest amount can, over a period of years, add up to a significant sum.

The IRA, while unglamorous due to its relatively small allowable contributions, can create a significant nest egg over a period of years; and, the amounts you can contribute have again increased this year.

Creation of a Roth IRA, as well as potentially converting your regular IRA to a Roth, contain significant tax benefits; but, there are income limitations and tax expense computations that must first be made to determine if you qualify for the Roth or Roth rollover.

For a small businesses, seriously consider establishing a SEP (Simplified Employee Pension) or a SIMPLE plan; both are relatively easy and cost efficient to establish and will provide you and your employees with a valuable fringe benefit.

Switching now to tax-advantaged funding of education, we will review the Section 529 plans as well as Coverdell Education Savings Accounts.

Section 529 plans allow a parent or grandparent to gift up to five years of gifts (or $55,000) into such a plan.

The donor thereby has reduced their taxable estate; but the donor still is the owner for purposes of naming/changing the beneficiary.

Additionally, as long as the monies are used for higher education, the earnings escape taxation; this can add up to a very significant benefit, especially if the funds are in the plan for 10-15 years.

Should the funds not be used for higher education, the earnings will be subject to income tax and a 10% penalty at that future time.

However, the beneficiary can be changed at any time should the donor/owner so decide.

Coverdell ESA's allow for a parent or grandparent to transfer up to $2,000 per year.

The earnings are tax-free if used for elementary or secondary education, including books, supplies, computers, room and board etc.

All of these 2003 planning items are not difficult to implement.

However, careful tax planning and computations must be made for every individual or business considering adopting one of these opportunities.

When you review your 2002 taxes with your tax professional in the coming months, consider making these topics a main point of discussion.

Jim Pfrommer is a shareholder in Pfrommer & McCune,CPA's of Reno