ALSO
-
Successful Investing
Don't Neglect
Year-End
Tax Saving Strategies
By Andrew Leckey
The
sand in the hourglass is running down, but there's time to outmaneuver
Father Time and avoid taxpayer remorse for the 2002 tax year.
If you dilly-dally
until you actually file your return before seriously pondering
your options, not even a spell cast by the earnest young wizard
Harry Potter can save you money.
"While there are
a lot of things you should have thought about earlier in the
year, they're all still doable," said Barbara Steinmetz,
certified financial planner with Steinmetz Financial Planning,
Burlingame, CA. "For example, if you're in a position to
postpone income into next year and your calculations indicate
it would be of benefit to you, it makes sense to do so."
Many Americans saw
incomes tank or lost jobs. Seek to recognize income in the years
your marginal tax rate is comparatively low, while paying deductible
expenses when your tax rate is high.
Some interest and payments,
such as your Jan. 1 mortgage payment, can be accelerated. Typical
deferral methods for interest income include opening certificates
of deposit or Treasury bills that won't mature until next year.
If you're an employee due a bonus, make sure it falls in the
most advantageous year. If self-employed, time your expenses,
such as for office supplies.
Consider having discretionary
medical procedures done before yearend because you can deduct
medical expenses over 7.5 percent of adjusted gross income. By
the way, the IRS ruled that obesity is a disease and weight-loss
programs a valid medical expense.
Warning: The dreaded,
complicated alternative minimum tax, which can kick in when you
have hefty tax deductions, will hit 2.6 million tax returns in
2002, versus 1.8 million last year, according to the Tax Policy
Center. It's expected that by 2010, one-third of taxpayers will
be paying this higher AMT rather than the lower regular tax.
You could be a candidate this year if married and filing jointly
and your taxable income is at least $112,850, or if you're single
with income of at least $67,700.
"We're looking
at what clients can do from an investment standpoint since we
always want them to realize all the losses that they can,"
explained Sean Sebold, certified financial planner with Sebold
Capital Management in Naperville, IL. "The government allows
us a $3,000 write-off for losses every single year."
Excess losses can be carried forward for use in a future year. If your capital losses are likely to exceed capital gains by more than $3,000, consider selling profitable investments to take advantage of the extra losses.
While Congress failed to pass a bill designed to increase the loss deduction to $8,250, it's likely to resurface next year.
"If you have a worthless security, you're considered to have sold it as of the last day of the year for nothing and have a capital loss," explained Martin Nissenbaum, national director of personal income tax planning for Ernst & Young in New York. "It can't simply be worth `less,' as is the case with WorldCom, but must be worth absolutely nothing."
Avoid buying mutual funds toward the end of the year, for you may receive a taxable dividend payout that covers the entire year even though you were a shareholder only briefly.
Retirement accounts are a key strategy because they're now more generous.
"In the 2002 tax year, you can add an increased amount to your 401(k) plan and individual retirement account," said Dale Walters, certified financial planner and CPA with Keats, Connelly & Associates in Phoenix, AZ. "If you're over age 50, there's a catch-up provision for both."
Maximum IRA contribution is $3,000 annually, up from $2,000. Individuals age 50 or older can contribute an additional $500 above normal limits. So long as you're 50 or older on or before Dec. 31, you can put money in any time during the year. IRA limits gradually increase over seven years.
The limit for employee contributions to 401(k), 403(B) and 457 plans rises to $11,000 this year, up from the prior limit of $10,500 for 401(k) and 403(b) plans and $8,500 for 457 plans. Workers 50 and older will be eligible to contribute $1,000 more than the regular limit in 2002.
"A great way for self-employed taxpayers to reduce income is to set up a Keogh retirement plan before yearend 2002 and get the deduction by putting money into it," said Nissenbaum.
The maximum allowed contribution for "money purchase" Keoghs and Simplified Employee Pension (SEP) plans increases to $40,000 in 2002, from $35,000. Maximum pension benefit a retiree can receive under a "defined benefit" Keogh pension plan increases to $160,000, from $140,000.
For self-employed individuals with no employees or who work only with their spouse, Nissenbaum recommends the new "solo" 401(k) that combines Keogh and 401(k), permitting you to put in 25 percent of compensation income plus the $11,000 401(k) maximum contribution.
