CROW, SHIELDS & BAILEY, PC

VOLUME 2 ISSUE 8

December 2001

Tax Planning

The $1.35 trillion Tax Relief Act of 2001, which was signed into law June 7, 2001, creates many opportunities, and pitfalls, for the average taxpayer. However, if you are above the average in assets, income, education expenses, retirement savings, or estate goals, you may face an even more complex array of tax planning options.

The first task in dealing with the new law is to line up your potential tax benefits with the phase-in schedules determined by Congress. Most tax benefits under the new law don’t come into effect immediately, but are phased in gradually over a five to ten-year period.

For example, tax rates won’t be fully reduced until 2006; marriage penalty relief isn’t scheduled to start until 2005; the $1,000 child credit won’t be fully phased in until 2010; phaseout of the restrictions on itemized deductions for higherbracket taxpayers won’t begin until 2006; and estate tax isn’t on the timeline for repeal until 2010. To further complicate matters, this tax law was written to come within its budget by officially making all its tax benefits, including lower tax rates and estate tax repeal, disappear starting in 2011. Consensus seems to be growing that a future Congress will not resist the temptation to tinker with these provisions.

The bottom line is to have a tax plan that remains nimble, take advantage of phased-in benefits when they happen, and do not be locked into a strategy that forecloses an adequate response to future tax law changes. Here are some initial considerations in dealing with each of the major areas of tax relief provided by the Tax Relief Act.

Tax cuts. By this time, you no doubt are aware of the advance refund checks received this summer as the first part of the massive tax rate cuts. At $600 for joint filers ($300 for single taxpayers and $500 for heads of household), the payoff this year is minuscule compared to potential tax savings over the next ten years.

For starters, the 28, 31, 36 and 36.9 percent rates dropped one full percentage point starting July 1st of this year. Under the new law, they will gradually fall through 2005 until they reach their permanent level at 25, 28, 33 and 35 percent starting in 2006. Immediate consideration should be given to accelerating deductions to offset income taxed at the higher rates, and deferring income until it can be taxed at the lower rates. Consideration should also be given to a variety of options, including deferred compensation, family income shifting, Roth IRA conversions, the value of capital gains strategies and the potential reach into your pockets of the alternative minimum tax.

Estate tax relief. The new tax law makes estate planning considerably more complicated over the next decade. The estate tax technically will be repealed, but only for the tax year 2010. In the meantime, estate tax relief comes gradually in the form of a one percent drop in the highest estate tax rate each year until it levels off at 45 percent in 2007, and a very gradual increase in the amount of an estate that is exempt from estate tax. Your present estate plans therefore should not be discarded, but they should be fine-tuned to take full advantage of the rising exemptions while protecting your heirs against steep estate and income tax consequences potentially on the horizon.

Child-related tax relief. The new tax law will eventually double the child tax credit from $500 to $1000. For 2001, however, there is only a $100 increase, and no taxpayer will get the full $1,000 per child credit until 2010. Other child-related relief, in the form of an increased adoption credit and a tax credit for employer-provided child care facilities are also available.

Marriage penalty relief. Marriage penalty relief, which doesn’t start until 2005, will eventually raise the standard deduction for married taxpayers to double that of single filers, and will expand the 15 percent bracket for joint filers. However, if you itemize deductions rather than take the standard deduction, you will only share in half of the marriage penalty relief and will need to make alternative plans.

Education relief. The new law contains substantial tax relief for a family’s education expenses, relief that will often require coordination to get the right mix of benefits. A new, $3,000 per year above-the-line college tuition deduction will be available starting in 2002, and will expand thereafter. Education IRAs expand immediately for 2002 to allow contributions of up to $2,000 each year (rather than the present $500 level). And, for the first time, you will be able to use education IRA funds to cover elementary and secondary school costs. In addition, an enhanced student loan interest deduction starts in 2002, with fewer restrictions.

Retirement savings/pension relief. Finally, you may want to revise your retirement savings plans since the new tax law allows considerably more tax-sheltered retirement savings. The contribution limits to both traditional and Roth IRAs will rise from the current $2,000 cap to $3,000 for 2002-2004, $4,000 for 2005-2007, and $5,000 for 2008 and thereafter. Special catch-up contributions for those age 50 or above to all plans other than SIMPLEs also increase by an additional $500 in 2002-2005 and $1,000 in 2006 and subsequent years. Those who have 401(k) retirement savings accounts will be able to contribute up to $15,000 each year by 2006. Other reforms will make it easier for small businesses to set up retirement plans for their employees.

Please call our office today to schedule an appointment for year end tax planning

Businesses Getting Results

Join our Businesses Getting Results (BGR) program and start building your business. The BGR program is designed specifically to help you grow your business. It covers each aspect of your business and offers a step-bystep approach to help you achieve your goals.

BGR is membership program for business people who wish to improve a wide range of aspects of their business in a simple and convenient way. As a member of BGR we will meet once a month for an hour and a half to work on a different business strategy or idea. We will review and discuss the topic on hand, and find ways to implement the strategy in your business.

Each meeting also gives you the opportunity to meet and do business with other BGR members, who are business owners just like you. You will be able to combine the shared experience in the group to work on the specific issues your business is faced with. BGR is about giving you a support network for implementing new strategies and ideas - you do not have to face the challenges alone. You hear about other people’s experiences and learn from them.

Our first meeting in Mobile was a big success and we are currently planning our first program in the Gulf Shores area. If you would like to join our BGR program in Mobile or Gulf Shores, please contact Danny Rickert.

With the recent passing of the Economic Growth and Tax Relief Reconciliation Act of 2001, there has been a great deal of attention paid to the repeal of estate taxes. At first glance, it appears that taxpayers need not worry about taxes depleting their hard-earned life savings when they pass them down to their heirs. However, a closer examination of the act reveals a much different picture.

First, as is the case with many of the tax cuts included in the act, the repeal of estate taxes does not take place immediately. In fact, it will be 8 1/2 years before the full effect of this legislation is implemented. The reduction of estate taxes is accomplished in two forms. First, the top estate tax rate affecting estates over $3 million is gradually reduced from 55% in 2001 to 45% in 2009. Second, the applicable exclusion amount, the amount that a taxpayer can leave to heirs without federal estate taxes, is gradually increased from $675,000 in 2001 to $3.5 million in 2009. These reductions begin in tax year 2002 and are phased in as follows:

In 2010, estate taxes are repealed; therefore, taxpayers dying in that year should be able to leave all of their assets to their heirs without estate tax consequences. However, in order to meet budget constraints, Congress could not make this repeal permanent. As a result, the repeal of estate taxes will expire on January 1, 2011 causing the laws to revert back to the tax system which was on the books prior to this act leaving us with a maximum marginal tax rate of 55% and an applicable exclusion amount of $1 million. Of course the repeal could also be extended by a future congress and president between now and 2011.

Considering the changes in estate tax laws over the next nine years and the uncertainty regarding the ultimate future of estate taxes, many taxpayers are asking what they can do to ensure the proper distribution of their assets while minimizing estate taxes. The simple answer to this question is that it depends on when you are going to die. While this may seem morbid, it is true that a taxpayer passing away in 2005 will have different planning needs than an individual who passes away in 2010 or 2011. Furthermore, the same will or revocable trust may distribute the decedent’s assets differently depending on the estate tax laws in effect at the time of death. For example, a will drafted to pass the maximum allowed without estate taxes to a trust, with the remainder passing to the decedent’s spouse (a common strategy to reduce potential estate taxes), may result in no assets passing to the surviving spouse if the decedent passes away in 2010.

Since very few taxpayers are willing to plan the date of their death to minimize estate taxes, it appears that the best plan is including flexibility in your estate plan to allow for changes in the future to comply with changes in estate tax laws. Now more than ever, it is important to review your estate planning documents on a regular basis and update them for changes in your personal situation as well as applicable estate tax laws.

Compass Marketing got its start in 1989 by the founder and then sole employee, Gary Ellis. At the outset, Gary singlehandedly ran Compass by selling ads, planning editorials, taking photographs, and basically doing whatever else was needed to keep the company thriving. Today, this Gulf Shores-based company has grown to include 25 associates with additional offices in Orlando, Florida and Birmingham, Alabama. Gary considers himself fortunate to be surrounded by professionals that enabled the company to expand in such exciting new directions.

Compass tourism marketing specialists produce a lot of cool projects: from the production of vacation guides, magazines, magazine inserts, newspaper inserts, and other custom publishing projects, to marketing program development for single clients or groups of advertisers. The Compass team consistently provides clients with successful business solutions whose superior level of quality is recognized in the industry. In fact, just this year, Compass was named the "Media Advocate of the Year" for the state of Alabama, and was given the "Shining Example Award," from the Southeast Tourism Society, illustrating that Gary is not the only one who understands the value of this team.

In 1998, Compass Marketing began their relationship with Crow, Shields & Bailey. At Compass Marketing they are fanatical about providing excellent customer service and exceeding client expectations - just the kind of folks we like to be associated with. To get the full profile on this group of professionals, visit their web site at www.compassbiz.com.

The Tax Man!

The 2001 tax law has generated a plethora of questions, many of which have no answer. Phase-ins, phase-outs, myriad effective dates, sunset provisions, and a maze of downright contradictory and confusing language have taken their toll on tax practitioners everywhere, and Tax Man is no exception. Generally more of a Republican than a Democrat, but actually a Libertarian at heart, Tax Man wonders what has become of the tax system in this country. Is there no end to this insanity?

In an effort to blow the cobwebs of “civilization” from his head - silly tax laws, plane crashes, collapsing buildings, anthrax, and who knows what - Tax Man has turned off his computer satellite modem to concentrate on his canoe trip to Chandeleur. A huge cypress log on the beach at Petis Bois becomes the perfect raw material for his canoe. A month of burning and scraping out the inside has formed a decent craft. On his first sea trial the boat capsizes - an outrigger is needed for ballast. That done, and after sun drying some trout for fish jerky and making other provisions, he heads south for the Chandeleur Island chain. Realizing the weather can quickly turn nasty this time of year, he prays for fair weather. What an adventure!

Trey and Emma Mayhall have announced that they are expecting their first little "bundle of joy" on May 11, 2002.

Lindsey Stuardi, Eric Kennedy and Steve Hellman sat for the CPA exam on November 7, 2001.

Ginger Askew's grandson, Ethan Edward Smith turned one year old in October. There was a huge family celebration in Texas to celebrate the event.

Emilee Shuler, daughter of Deborah Martinsen, has been selected to represent Causey Middle School on their first Scholar's Bowl team.

Business Valuations
What is a Certified Valuation Analyst (CVA)?

The CVA is an elite accreditation for CPAs who, for many reasons, are uniquely qualified to provide business valuation and litigation consulting services. As a general rule, CPAs, through their extensive training combined with experience in tax, auditing, accounting for small businesses, and financial analysis, have an excellent background for dealing with the complexities involved in providing business valuation services. Few professionals provide the breadth of experience and development the public accounting profession produces, and thus, a CVA is, the preferred choice in selecting the right valuation professional to serve your needs. Business valuations are most commonly required in conjunction with any of the following situations:

• Sale of a business
• Merger or acquisition
• Initial public offerings
• Adequacy of life insurance
• Liquidation or reorganization
• Litigation support
  Divorce
  Wrongful death
  Economic loss analysis
  Partner disputes
  Dissenting shareholder actions
  Disruption of business
• Buy/sell agreements
• Financing
• Estate and gift taxes
• Family limited partnerships
• Gifting programs
• Incentive stock option programs
• Employee Stock Option Plans (ESOP)
• Charitable contributions
• Succession planning
• Bankruptcy and foreclosure
• Franchise valuation or evaluation
• Mediation and arbitration
• Lease versus buy decisions

For more information on our business valuation
services, contact Gina Russell, CPA, CVA.

A Holiday Message

This has been a year we will remember for a long time. Our election process was reformed due to the unprecedented presidential election of last November. The economy slowed down and the bear financial markets continued as companies cut labor forces and reported weak earnings. Interest rates hit a forty year low, which might help the economy but not senior citizens and others dependent on interest income to make ends meet. And of course, on the now infamous date of September 11th we witnessed a tragedy that we thought only a creative Hollywood writer could have concocted. And so we now begin a strange, unprecedented war against terrorism, one that may last a long time.

But there is a silver lining. We are experiencing a growth in patriotism not seen since World War II. Our Country has been challenged and we are standing firm. Our leaders have been strong and helped unite our world allies behind the anti-terrorism cause. Americans have gone back to work and tried to bring their lives back to normal. We trust that God is ultimately in charge and that He will bring order to all of this chaos. The experiences of the last year have humbled us all. We have a greater appreciation of the things that really matter: our families, our freedom, our country and our renewed faith in God.

We thank you and all of our friends and associates for your continued loyalty and support. We value our relationship and hope that this will be your best Christmas and Holiday Season ever. After all, we have much to be thankful for - perhaps more than we ever realized.

Kenny Crow