Issue Date: November 3, 2002
7 year-end tax strategies
Yes, I know the deadline is five months away -- and yes, you have to think about it now.
Turkeys in the grocery stores, frost on the kudzu -- the year is drawing to a quick close, so it's time to make sure that come April 15 you'll write Uncle Sam a check for as little as possible.
"Assuming you're not going to be in a higher income bracket next year, the basic concept is to accelerate expenses and defer income," says Jeff Schnepper, author of How to "Pay Zero Taxes 2002" (McGraw-Hill, $14.95). "That not only gives you [instead of the government] the use of your money, but with rates going down, a deduction this year is more valuable than a deduction next year."
Some serious money is involved: More than $300 million in deductions and credits went unclaimed in 2001 because taxpayers simply didn't ask for them. That's more than $600 a person.
"People tend to overestimate their income and underestimate their expenses; that results in [paying] too much tax," says Brenda Schafer of H&R Block. Here's what you need to know about this tax year to avoid losing out:
-- If you have a job: Reducing your taxable income is a surefire way to pay less in taxes. Tried-and-true strategies: Max out your 401(k) contributions (some companies let you make catch-up contributions if you didn't contribute enough earlier this year) and contribute to IRAs (you have until April 15). Keoghs, Education Savings Accounts and 529 plans must be funded by year's end.
-- If you itemize (vs. taking the standard deduction): Use the "spend now, earn later" strategy to pull deductible expenditures into the 2002 tax year. Make the January mortgage payment and any real estate taxes in December. If you pay estimated quarterly taxes, make the Jan. 15 payment then, too. As for medical expenses, which need to reach 7.5% of your adjusted gross income to be itemized, schedule elective treatments (dental, optical, orthodontic) before the end of the year. Ditto for miscellaneous deductions (subscriptions to professional journals, for instance), which must reach 2% of your income to count.
-- If you plan to give: Donate clothes to the Salvation Army or write a check to the food pantry before Jan. 1 to take a 2002 tax deduction. As always, you need a receipt for any gift valued at more than $250. If you want to give but don't have the cash at hand, Schnepper notes, charge the contribution to a credit card. "It's deducted in the year in which you make the contribution, as opposed to the year you repay it."
-- If you have stock losses: First, sell those stocks you don't expect to rebound. If you lost money on stocks you sold this year, you can use those losses, dollar for dollar, to offset any money you made on other 2002 investments. If you still show losses after that, you can deduct up to $3,000 more against any other income you earned (such as your salary). Any remaining 2002 losses can be carried forward to offset gains and income in future years. One thing not to do with stocks that tanked is donate them to charity, because you can't claim the loss on your tax return.
-- If you are repaying a student loan: You can write off up to $2,500 in interest this year (the amount varies according to your income). If you haven't paid that much in interest yet -- and you have a little extra cash -- you may want to prepay to take the full deduction.
-- If you sold a house: Thanks to the 1997 tax changes, people who have lived in their primary home for at least two of the last five years can take a profit, tax-free, of up to $250,000 for singles and $500,000 for couples. Until this year, however, people who stayed in their homes for a shorter time were out of luck unless they sold for health reasons, a job location change or what the IRS called "unforeseen circumstances." The IRS is soon expected to define "unforeseen." Good news: If that definition includes divorce, the death of a spouse and acts of war, as expected, it will reduce the tax burden on a great many people by allowing them a prorated percentage of the exemption.
-- If you are thinking about refinancing: Completing the deal by year's end may result in big deductions on this year's return -- particularly if you've previously refinanced. How? Any points you pay to your lender can be deducted over the life of your loan. That generally means a small annual tax savings. But when you go back to the well, any points you paid on your first refinance that you haven't yet written off can be deducted all at once.
Finally -- although this isn't strictly a tax issue -- if you didn't spend the annual allocation in your flexible spending account, use it or lose it. So schedule checkups, buy new glasses and get your teeth cleaned in the next few weeks.
Contributing Editor Jean Sherman Chatzky is the author of "Talking Money" (Warner Books, $24.95). Additional reporting by Brian B. Reid.
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