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Tax Tips:
- With the introduction of the Tax Relief Act of 2001, wherever possible, you should attempt to defer income to later years as tax rates will gradually decrease over the next five years. Make sure you see the article on the Tax Relief Act on this website for additional information.
- The opposite holds true with deductions, if possible, you should attempt to accelerate all deductions into tax years with the higher effective tax rate. For example, you may be able to give more to charity and thus avoid paying capital gains. Be sure to give yourself plenty of time because it can take several weeks to transfer the stock or property. However, be careful of phaseouts of itemized deductions at higher income levels.
- Sometimes accelerating deductions can cost you money if it triggers the alternative minimum tax. Originally designed to make sure wealthy people paid their fair share of taxes, the AMT is now creeping into the middle class.
- You may qualify to file form 2106 if you have expenses for your job or business that are unreimbursed. Many taxpayers have this and don't even realize it. This is an itemized deduction and subject to the 2% exclusion of your Adjusted Gross Income (AGI).
- If you have self-employed income from a schedule C or you were issued a form 1099, you should strongly consider making a SEP contribution rather than and IRA contribution. A SEP contribution (Simplified Employee Pension) is fully tax deductible and can usually be larger in amount than an IRA. Further, the SEP gives you other options an IRA doesn't.
- There may be no better investment than tax-deferred retirement accounts. 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, so start early). If you think you can't afford it, run the numbers. Amazingly enough, these payroll deductions can increase your take-home pay because they reduce your taxable income.
- A Roth can outperform regular IRAs because you don't pay taxes on your withdrawals. The catch is that you can't deduct your contributions. It makes sense to convert to a Roth if you have many years to go before you take out your funds. You also should be in the same or higher income tax bracket when you retire so that you pay taxes when you are in your lowest bracket.
Another reason to convert to a Roth is to pass on money to your heirs. Unlike a regular IRA, there are no mandatory withdrawals. And your heirs will not be liable for income taxes.
- To avoid paying large taxes on dividends or capital gains from a mutual fund (even if the fund lost money for the year) sell before the fund's distribution date, you can avoid paying those taxes. You need to wait 31 days to buy the same fund back again although you can buy a similar fund with another fund family immediately. On the other hand, if you intend to buy a fund, wait until after the distribution date. Otherwise, you will end up with a tax bill right away without actually participating in the fund's gains.
- If you are self-employed or have self-employed income, you may be eligible to deduct part of your health insurance premiums directly against your income. This could be a big tax saver.
- If you receive a 1099 in one year for money you physically receive in the following year, you do not have to pick it up until that following year. You should be sure to note this properly on your return.
- You can deduct certain educational expenses. In general if the education is required by your employer or is to improve your skills in your existing profession you can write it off. Nowadays, with the need for higher education, this is a deduction that can save big bucks. You should consult with us or your tax advisor on this issue.
- You can deduct a credit charge in the year it was charged, rather than when you pay the bill. So if you charge a deductible expense on December 20th, but don't pay the credit card bill until January 17th, you should take the deduction for the prior year.
- If you make a charitable contribution of $250 or more, you should obtain written acknowledgement from the charity and keep it with that year's tax file. You do not have to enclose the receipt with your filing to the government.
- If you have a child you must have his/her social security number in order to claim an exemption. This is true regardless of your child's age. You can contact Social Security at 1-800-772-1213. Make your life easy and just fill out the forms in the hospital when the baby is born.
- If you owe money on your return and you can't afford to pay it, enclose what you can afford now and file the return with a balance due. Many taxpayer's do not realize that the penalty for "Failure to File" is 10 times greater than "Failure to Pay."
- The top long term capital gains rate is 20%. You may wish to cash in on some of your paper profits before year end. If you have paper losses, you may wish to sell them along with your profits and offset these together. Your should aim for a total combined capital loss of $3,000 for the year.
- If your company provides flexible spending accounts, sign up before the end of the year. These programs deduct money from your paycheck on a pre-tax basis to pay for a wide range of health care expenses not covered by insurance and for childcare or elder care. You typically can contribute a maximum of $3,000 annually to a health care FSA and $5,000 annually to a dependent care FSA. The tax exemption in effect produces "savings" of as much as 40% or more.
The catch is that you forfeit any money left in your account at the end of the year. So budget carefully and be sure you use up all the money.
- Did you know the following are deductible medical expenses if you can itemize? Birth control pills, abortion costs, transportation for medical care, drug rehab. The following are not: Health club dues, stop smoking programs, weight loss programs, medication without prescription, cosmetic surgery. Note the IRS threshold of 7.5% of AGI.
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