![[Home]](images/home2.jpg){kind=small}
![[NEWS]](images/newsselected.jpg){kind=small}
![[Services]](images/services2.jpg){kind=small}
![[Links]](images/links2.jpg){kind=small}
![[Site Map]](images/sitemat2.jpg){kind=small}
LOISELLE,
GOODWIN & HINDS
CERTIFIED PUBLIC ACCOUNTANTS
![[Dividing Line Image]](images/Turquoise_and_Gray.gif){kind=small}
The following is a summary of the most important tax developments that have recently occurred that may affect you, your family, your investments, and your livelihood. Please contact us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.
New guidance offered on Health Savings Accounts (HSAs). As of Jan. 1, 2004, eligible individuals may set up tax-favored HSAs if they are covered under high deductible health plans (HDHPs) and not covered under any other non-HDHPs (except for certain permitted insurance or coverage). In general, an HDHP can't pay non-preventive-care benefits before the minimum annual deductible is satisfied. The IRS has recently clarified the types of preventive care that can be provided under an HDHP. Preventive care includes periodic health evaluations (in connection with routine exams) and routine prenatal and well-child care. It does not include any service or benefit intended to treat an existing illness, injury, or condition. Individuals with non-HDHP prescription drug benefits won't be eligible to establish HSAs after 2005. For 2004, individuals may incur qualified medical expenses before they set up their HSAs, as long as certain requirements are met.
Rules liberalized for qualified dividends. More dividends reported on 2003 returns should qualify for the favorable 15% or 5% capital gain rates as a result of some changes the IRS has made. In general, the IRS has changed the holding period test for qualified dividends. A taxpayer must hold dividend-paying stock for at least 61 days during the 121-day period (instead of the prior 120-day period) beginning 60 days before the ex-dividend date. As a result, stock bought on the day before the ex-dividend date and stock sold on the ex-dividend date can meet the test.
Under another IRS change, partnerships, S corporations, estates and certain trusts with tax years that began in 2002, may be able to pass through dividends received in 2003 to their partners, shareholders and beneficiaries as dividends qualifying for the lower tax rates. Entities affected by these changes may have to file amended returns for their 2002 to 2003 fiscal years.
Opportunity to continue deferral of tax by exchanging savings bonds ending. August 2004 will be the last month Series HH savings bonds are issued. Thus, after Aug. 31, 2004, current holders of Series EE/E savings bonds will lose the opportunity to defer reporting accrued interest on their EE/E bonds by exchanging them for HH bonds, which can permit tax deferral on accrued interest to continue for another 20 years after the exchange. Whether or not an individual holding EE/E bonds should exchange them before Sept. 1, 2004, to continue the deferral for up to 20 years depends on a number of factors such as: (1) amount of interest that is actually deferred from reporting; and (2) the interest rate on the bonds.
IRS crackdown on abusive life insurance policies in certain retirement plans. The IRS has issued a broad-based attack aimed at shutting down “abusive” transactions involving life insurance policies in special retirement plans. These arrangements purportedly enable businesses to generate large tax-deductible contributions to retirement plans and tax-free retirement distributions and death benefits. For example, special policies are made available only to highly compensated employees. The insurance contract is designed so that the cash surrender value is temporarily depressed, and the contract is distributed to the employee for the amount of the current cash surrender value during the period that the cash surrender value is depressed. The contract is structured so that the cash surrender value increases significantly after it is transferred to the employee. Use of this “springing cash value” life insurance gives employers tax deductions that far exceed what the employee recognizes in income. The IRS's crackdown on these policies involves complex rules under which:
Simplified procedures for correcting some depreciation mistakes. Generally, a taxpayer has adopted a method of accounting if it deducted an incorrect depreciation amount (other than a mathematical or posting error) in two or more consecutive tax years. This type of error is corrected by filing Form 3115 under the automatic change procedures. The IRS has made it easier for taxpayers to fix some depreciation-deduction mistakes by waiving the “two-year”adoption-of-method-of-accounting rule in specific instances. A taxpayer who used an incorrect depreciation method on assets placed in service during the preceding year may change to a correct depreciation method by filing Form 3115 under the automatic approval procedures. Alternatively, the taxpayer may make the change by filing an amended return for the placed-in-service year before it files its return for the tax year following the placed-in-service year. The waiver of the two-year rule is generally effective for a Form 3115 filed for tax years ending after Dec. 29, 2003.
Most depreciation changes are accounting method changes. Under new IRS guidance, most changes in computing depreciation (or amortization) are accounting method changes if made after Dec. 29, 2003. In general, only an adjustment in the useful life of a depreciable or amortizable asset is not an accounting method change. In addition, in general only changes from an impermissible to a permissible depreciation (or amortization) method require a "Code Sec. 481(a)" accounting adjustment (to prevent items of income or expense from being duplicated or omitted) for changes made in tax years ending after Dec. 29, 2003.
However, the IRS is giving a break to taxpayers who make depreciation changes for earlier years. In general, changes in computing depreciation or amortization will not be considered a change in method of accounting if made for property placed in service in tax years ending before Dec. 30, 2003.
Back to Archive