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Whether you are flying high with savvy invest-ments, rebounding from recent losses, or still struggling to get off the ground, you can save on your taxes if you make the right moves before the end of the year. But be careful.
Some because easy-to-follow advice that you read in newspapers, or hear on TV, can backfire.
Before you do anything, consider making income tax projections for this year and next. Once you have the numbers you can see how any actions you take will affect your tax bill each year. With that information in hand, these tips can help you hang onto some of it.
Defer Income
Most folks on salary don't have much choice on when they get paid. But if you are one of the lucky ones in line for a year-end bonus, consider asking your employer to give it to you in January.
If you are self-employed you might want to delay billing to the new year.
Note,it only makes sense to defer income if you think you will be a lower tax bracket next year.
Last- Minute Deductions
Contributing to charity is a noble way to get a deduction. You can make the process easier on yourself if you donate appreciated stock or property rather than cash from the proceeds of a sale. You may be able to give more to the charity, and you avoid paying capital gains.
Be sure to give yourself plenty of time because it can take several weeks to transfer stock or property.
Young taxpayers who may not have itemized deductions before should try bundling miscellaneous deductions such as tax preparation fees, job-hunting expenses, and professional dues to meet the IRS threshold of 2% of adjusted gross income.
Your miscellaneous deductions must add up to more than that, and you only get to deduct the amount above that level. Paying some of next year's expenses in December might give you enough expenses to put you over the line.
Accelerating major deductions such as state income taxes, property taxes, and mortgage interest may help, especially during a high-income year. But if your income is too high, look out -- there are phaseouts for itemized deductions.
Sell Loser Stocks
You may have a mix of winners and losers in your portfolio. If you have a big capital gain, consider selling some of the losers. You can erase your tax liability on the gain with a corresponding loss.
You can apply a max of $3,000 in net capital losses against ordinary income, reducing the amount of income on which you must pay taxes. Any additional losses in excess of $3,000 can be rolled over to subsequent years.
Contribute Maximum to Retirement Accounts
Tax-deferred retirement accounts are great investments. They can grow to a substantial sum because they compound over time free of taxes.
Company-sponsored 401(k) plans may be the best deal because employers often match contributions.
Bump up your 401(k) contribution so that you are putting in the maximum amount of money allowed ($11,000 for 2002).
If you think you can't afford it, run the numbers. You may be surprised!
Also consider contributing to an IRA for yourself and spouse. Your $3,000 contribution is fully deductible if you did not participate in a company-sponsored retirement plan or if your income falls below $34,000 in 2002 for single filers and $54,000 for married couples.
If you are age 50 or over on 12/31/02 it goes up to $3,500 - its an opportunity to "catch up" your contributions.
Self-employed people should set up Keogh plans by December 31. Once the plan is in place, you can contribute up to $40,000 until the tax filing deadline for your 2002 return.
Flexible Spending Accounts
If your company provides flexible spending accounts, sign up. These programs deduct money from your paycheck on a pre-tax basis to pay for health care expenses not covered by insurance.
You typically can contribute a maximum of $3,000 annually to a healthcare FSA and $5,000 annually to a dependent care FSA.
The exclusion of account contributions from taxable income in effect produces big tax savings.
The catch is that you forfeit any money left.
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