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March, 2003


by Andrew D. Schwartz, CPA

Have you considered purchasing a hybrid electric vehicle (HEV) for your next car?  Not only are they good for the environment, but they'll also save you quite a bit of money. 

HEVs combine a combustion engine with an electric motor and currently include the Honda Civic (HEV), Honda Insight, and Toyota Prius. 

As an incentive for you to purchase one of these environmentally friendly vehicles, the government currently offers you a $2,000 tax deduction if you purchase an HEV by the end of this year.  Depending on your tax bracket, this could mean a tax savings of between $200 and $762. 

To claim the deduction, simply report the $2,000 deduction on line 34 of your 1040, and write the words "Clean Fuel" in the margin.  If you're a sole proprietor and use your car in connection with your business, you're allowed to claim this $2,000 deduction on your Schedule C.

Anyone considering purchasing an HEV should be aware that the Clean Fuel deduction is slated to decrease by $500 per year starting in 2004, and will be completely phased out on January 1, 2007. 

You'll also save money with an HEV since they get such great gas mileage.  According to the Office of Transportation Technology (www.ott.doe.gov), HEVs get about 50 miles per gallon.  Let's say you turn in your SUV that gets 15 miles per gallon for an HEV, and you generally drive about 15,000 miles per year.  With gas prices approaching $2.00 per gallon, your annual gas bill will decrease from $2,000 to only $600 - a savings of $1,400 per year. 

So whether you're green (in the environmental sense), or just like your wallet full of green $$$, an HEV might be the car for you.



by Andrew D. Schwartz, CPA

How would you like to get a higher return on your investment portfolio without taking on any more risk? Believe it or not, it's easy to do.  All you need to do is set up your various investment accounts to take full advantage of the current tax rules. 

Maximizing your contributions into your retirement accounts such as IRAs, 401(k) and 403(b) accounts, and self-employed retirement plans is a great first step.  Amounts contributed to these accounts are generally tax deductible and always grow tax deferred.  That means you won't owe any taxes on the investment earnings until you begin withdrawing money from your pre-tax accounts.  And thanks to the recent tax law changes, you can contribute quite a bit of money into these accounts - up to $12,000 into your 401(k) or 403(b) plan this year, or up to $40,000 into your self-employed retirement plan.  Higher limits apply if you'll be 50 or older by December 31, 2003.

To illustrate the power of tax-deferred investing over your working years, let's assume you have the choice of contributing $10,000 to a 401(k) plan each year for 25 years, or you can take the $10,000 as a bonus, pay the applicable taxes, and then invest whatever's left.  If you choose the 401(k) plan route, your account will grow to be worth more than $1,000,000 after 25 years, assuming a 10% rate of return.  If you choose to pay taxes along the way, your investment portfolio won't even grow to $500,000 over the same period of time.

Next, take a look at your tax-free investment opportunities.  These include Roth IRAs for your retirement and Education Savings Accounts (ESAs) and 529 Accounts for your child's education.  You don't get a tax deduction for contributions made into these accounts, but you'll owe no taxes on amounts withdrawn, as long as certain conditions are met. 

If you haven't taken full advantage of these tax-free investment opportunities for 2002, there's still time.  You have until April 15th to contribute the maximum of $3,000 ($3,500 if you were 50 years old by December 31, 2002) into a Roth IRA or up to $2,000 per child into an ESA for 2002, subject to certain income limitations.

Investing in tax-favored accounts is only half the battle. It's also important to give some thought as to the specific investments you'll hold within your taxable accounts and your tax-advantaged accounts. 

As a rule of thumb, try to hold those investments that pay out the least amount of interest and dividends within your taxable accounts.  Examples of tax-wise investments for your taxable accounts include index funds, individual stocks, and "tax-efficient" mutual funds.  These investments generally pay little or no dividends each year.  Remember, while the tax rate on interest and dividends can be as high as 38.1% this year, the long-term capital gains tax rate for most individuals is only 18%, as long as the investment is held for more than 5 years before being sold.

You might also consider switching some of your fixed-income and money market investments to tax-exempt bonds, bond funds and money market accounts.  Since the earnings on these investments generally isn’t subject to federal income taxes, this strategy could help you increase the after-tax return on your fixed-income investments.  Most of the mutual fund companies offer a variety of tax-exempt investment choices. 

Finally, in your tax-advantaged accounts, hold those mutual funds, bond funds, and other investments that historically pay out large dividends each year, since you aren't being taxed on the investment earnings within these accounts.

By maximizing contributions to tax-advantaged accounts, and giving some thought to the investments you hold in each of your accounts, you should be able to increase the after-tax return of your investment portfolio without taking on any more risk.



For more information, go to our February, 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.




Income Taxes

Saving and Investing


  • To have your returns completed by 4/15, please get us your information by 3/24/03

  • Use your tax refund to pay off some debts, fund an IRA, and/or invest.


2002 & 2003 TAX FACTS

  • For 2002, the standard deduction for a single individual is $4,700 and for a married couple is $7,850. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes, real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses. Our February, 1998 newsletter addressed the issue of itemizing your deductions.
  • For 2002, the personal exemption is $3,000. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes has increased to $87,000 in 2003 from $84,900 in 2002.
  • The standard mileage rate is $.365 per mile in 2002, and has decreased to $.36 per mile for 2003. Deducting automobile expenses was addressed in our February, 1996 newsletter .
  • The maximum annual contribution to a 401(k) plan or a 403(b) plan has increased to $12,000 for 2003 from $11,000 in 2002.  And if you'll be 50 or older by December 31, 2002, you can contribute an extra $2,000 into your 401(k) or 403(b) account this year.
  • The maximum annual contribution to your IRA is $3,000 for 2003 and 2002.  And once you turn 50, you can contribute an extra $500 into your IRA this year.


copyright - 2003 - The MDTAXES Network

Tax and financial planning calendar for March, 2003

The Millionaire Next Door.  Find out the habits of America's wealthy. You'll be surprised at who comprises the bulk of America's millionaires.

Organize Your Finances with Quicken 2001 in a Weekend

Both these books are available at Barnes&Noble.com.

If you have a friend, colleague, or family member who is always bragging about things they have done to cut their taxes, then check out our new gift items with the saying - "Everything is deductible...until you get audited!"

Interact with our CPAs everyday on The MDTAXES Message Board

Join our Live Tax Chat on the first Wednesday of each month at 9 pm (eastern time)


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