July, 2004 Tax Tip
Always Stay on Top of Your Tax Situation
Once the April 15th filing deadline has passed most taxpayers tend to forget about their current year tax situation until the very end of the year or, worse, in January or later of the following year. In fact, the best time to raise tax questions with your tax professional before taking actions that will have tax consequences when you file this year’s return next April 15th.
There are two critical pieces of tax information you always need to know – your present tax bracket and the amount of additional income or drop in deductions that will move you into the next tax bracket. It is important to remember that your tax bracket is the tax rate that applies to each additional dollar of income you earn. It is an important consideration if you are thinking of making decisions, investment or otherwise, that will increase your income. Your tax professional should certainly be able to assist you with this information or you can try to do it yourself.
Start with your 2003 return and find your taxable income (Line 40 of Form 1040). Then adjust it for anything you know will be different for 2004, such as wages, differences in deductions or exemptions, etc. Next, find where your “adjusted” income puts you in the tax brackets for 2004 (if you don’t have the 2004 brackets you can use the 2003 brackets as a guide). Your 2004 bracket also determines the tax rate you pay on capital gains. If you are in the 10 or 15 percent bracket, your capital gains tax rate is 5 percent. If you are in a higher bracket, it is 15 percent.
Where this gets a bit tricky if you are doing this yourself is that your actual tax is not necessarily determined by your tax bracket alone. As your income increases, other factors may come into play. Additional income may cause you to lose some deductions, exemptions and credits. If you are receiving Social Security benefits, it also is important to know whether any extra income will make more of your benefits taxable. Then there is also the possibility of the dreaded alternative minimum tax (AMT) rearing its ugly head. The AMT is grabbing more and more taxpayers under its clutches every year. Therefore, your “true” tax bracket may indeed be higher than the tax bracket you think you are in.
I would be happy to assist you in keeping on top of your tax situation and answering any tax questions you may have.