BY JOE BRISBEN
Now that snow has covered Iowa, I am looking for the first signs of spring. I would like to see the greening of grass and the emergence of daffodils. However, all I have seen so far are seed catalogues, the opening of spring training for Major League Baseball, and tax forms from the Internal Revenue Service and the State of Iowa’s Treasurer.
There sit those tax forms, waiting for my W-9 report from my employer, my 1099 report from my broker, other reports, and me to stop procrastinating.
I am lucky that my employer is closed on Martin Luther King’s birthday and President’s Day, for that is when I can find the time to fill out those forms—or at the least the form from my tax preparer so that she can fill out the forms online, thereby saving me time and postage.
Nevertheless, I am a Certified Financial Planner, and I have some tips with which I think your accountant might agree and that might decrease your obligations to the IRS:
1. If you are self-employed, see if you can claim expenses for an office in your home.
2. One of the great compromises ever made between the federal government and state and local governments is that the federal government does not tax the interest on municipal bonds, and that state and local governments do not tax the interest on treasury obligations, so:
Don’t forget to exclude interest from your U.S. government bonds on your state tax return. Also, if you have mutual funds invested in U.S. government bonds, don’t forget to exclude that portion of your mutual fund dividends from your state tax return.
3. Conversely, don’t forget to exclude interest from your municipal bonds on your federal tax return. If you have mutual funds invested in municipal bonds, don’t forget to exclude that portion of mutual fund dividends on your federal tax return.
In Iowa, interest on bonds issued by the Iowa Board of Regents and the Iowa Finance Authority (which is Governor Tom Vilsack and his cabinet) are exempt from both state and federal taxes.
In addition, the federal government has decreed that interest on bonds issued in Guam, the Virgin Islands, and Puerto Rico are also exempt from both state and federal taxes, so:
4. Don’t forget to exclude interest on these types of bonds on both your federal and state tax returns.
5. If you have been investing in stocks for the dividends, you should love this provision: Under the new tax laws, your dividends are now taxed at 15 percent instead of your marginal tax rate.
Let’s talk a little about IRAs. For 2004, if you are married and filing jointly and you both earned less than $55,000, you can each contribute $3,000 to an IRA. If you are more than 50 years of age, you can contribute $3,500 each. You can still contribute to an IRA if you both earn up to $65,000, but a portion of that is discounted the more you earn. If you are single, the limits are $45,000 to $55,000.
Consult your IRS manual or your friendly neighborhood tax preparer for how much you can contribute to an IRA.
If you cannot contribute to an IRA but still want to set aside some money for compounding tax free, consider a Roth IRA. The contribution limits for a Roth are also $3,000 and $3,500 for folks above 50 years of age. Some good news is that for 2005 the limits increase to $4,000 and $4,500, so:
6. Make sure you can make contributions to an IRA to reduce your taxable income.
7. If you used your car to do volunteer work for a charity or some other nonprofit organization and kept track of the miles you drove, claim a mileage deduction.
8. Take advantage of the maximum exclusion of retirement income on your state return.
Finally, here’s a tax tip for 2005: If you become more than 701/2 years of age during 2005, don’t forget to take your required minimum distribution (RMD) from your IRA.
But don’t take my word for it. See your friendly neighborhood tax preparer soon.