SAVING YOUR TAX DOLLARS
OUR TOP TEN
PERSONAL INCOME TAX SAVING TIPS FOR 2003
(Click on Number to Go Directly to a Specific Tip)
1. ACCELERATE OR DEFER INCOME
2. MAXIMIZE “ABOVE-THE-LINE” DEDUCTIONS
3. CONTRIBUTE TO YOUR RETIREMENT PLAN
4. MAXIMIZE ITEMIZED DEDUCTIONS
5. PAY OFF NONDEDUCTIBLE INTEREST
7. CLAIM ALL THE EXEMPTIONS YOU CAN
8. DON’T FORGET ABOUT DEPENDENT CARE
9. CONSIDER ESTIMATED TAX PAYMENTS
10. WATCH OUT FOR THE A.M.T.
1. ACCELERATE OR DEFER INCOME If you expect your tax bracket
to be higher next year, accelerating income into 2004 may make sense. On the other hand, if you expect to be in a lower tax bracket in the upcoming year, deferring income may provide tax savings. Even if your marginal tax rate remains the same, deferring income to a later year is generally advantageous because it can allow you to invest the taxes deferred until the following year.
In addition to wages, salary and tips, sources of income may include interest, dividends, profits and losses from businesses, capital gains and losses, rents, royalties, partnerships, S corporations and trusts, taxable Social Security benefits, withdrawals from individual retirement accounts (IRAs), and state and local income tax refunds. Top
2. MAXIMIZE “ABOVE-THE-LINE” DEDUCTIONS The “above-the-line” adjustments to your income that determine your adjusted gross income (AGI) are an important tax planning tool for a number of reasons: 1) you can take them in addition to the standard deduction or itemized deductions, and 2) AGI determines your eligibility for various deductions, exemptions and credits. Possible adjustments include certain retirement plan contributions, certain moving expenses, self-employment tax (50%), self-employed health insurance costs (60%) and penalties on early withdrawals of savings.
3. CONTRIBUTE TO YOUR RETIREMENT PLAN The deduction for contributions to IRAs, simplified employee pensions (SEPs) and Keogh plans is above-the-line, so you can take it in addition to your standard deduction or itemized deductions. Furthermore, traditional IRA, SEP and Keogh plan earnings accumulate tax-deferred. You can deduct contributions to a traditional IRA of up to $3,000 ($3,500 for those 50 and over) or 100% of your earned income, whichever is less. In addition, the Taxpayer Relief Act of 1997 gives you the Roth IRA option as well as more opportunities to make penalty-free withdrawals from your IRA.
Most 401(k) plans allow employees to contribute pre-tax dollars, up to the maximum allowed by law ($12,000 in 2003, up from $11,000 in 2002). Not only do plan contributions reduce your taxable income, the earnings also accumulate tax-deferred. When compared with saving on an after-tax basis, the power of deferred compounding is significant. Under Savings Incentive-match Plans for Employees (SIMPLEs), eligible employees may elect to have their employers contribute up to $8,000 of their salaries ($9,000 for those 50 and over) rather than pay them cash, similar to a 401(k) plan. The employee excludes the contribution from income, and certain other rules apply. Top
4. MAXIMIZE ITEMIZED DEDUCTIONS Claiming itemized deductions will save you taxes if your total itemized deductions exceed the standard deduction. Itemized deductions include medical expenses, interest expenses, state and local taxes, charitable contributions, casualty and theft losses, gambling losses, and miscellaneous expenses (which include unreimbursed employee expenses, tax preparation fees, investment fees and expenses, safe deposit rental charges, and expenses incurred to protect income and capital). If your AGI exceeds certain limitations, the amount of your allowable deductions for certain interest expenses, state and local taxes, charitable contributions, and miscellaneous expenses will be reduced by 3% of your AGI over the threshold amount. The reduction cannot exceed 80% of otherwise allowable deductions.
Many itemized deductions, such as medical expenses, casualty and theft losses, and miscellaneous expenses, are subject to limitations or phase out, which reduce or eliminate their benefit. By claiming several deductible expenses in one tax year, you may be able to exceed the applicable floor. Top
5. PAY OFF NONDEDUCTIBLE INTEREST You can maximize your interest deduction by paying off nondeductible interest (such as that on credit cards and personal loans) with money from a deductible class (such as home equity loans). This may be a very good time to take out a second mortgage and pay off those credit cards once and for all. Top
6. GIVE TO CHARITY Giving to charity is one tax reduction strategy that allows both you and others to benefit. Since charitable contributions are fully deductible (subject to income limitations), as long as your itemized deductions exceed the standard deduction, the more you donate to charity, the more tax benefit you receive. You must receive documentation from the charity for each contribution of $250 or more, including the value of anything you received in return. Canceled checks are no longer sufficient proof.
Your “non-cash” donations are deductible too. Our clients often overlook items that they have donated to church rummage sales and to charitable organizations like Goodwill and The Salvation Army. To help you value your non-cash gifts to charity, we are enclosing with these strategies a copy of our “Guidelines for Non-Cash Charitable Donations”.
7. CLAIM ALL THE EXEMPTIONS YOU CAN Make sure you determine whether certain relatives in addition to your spouse or children qualify for a personal exemption as dependents on your tax return. Possible dependents include parents, nieces, nephews or other relatives whom you may be supporting. The exemptions are reduced and eventually eliminated for taxpayers with AGI above certain thresholds, but these reductions only affect the high-income taxpayers. The exemptions for children may also qualify you for the Federal child tax credit. Top
8. DON’T FORGET ABOUT DEPENDENT CARE Be sure to take advantage of claiming a credit for a portion of the cost of caring for your children or other dependents when the care provided allows you to go to work. The credit can amount to as much as $4,800 if two or more children are involved. There are several rules that will determine whether and how much credit you can claim. If you qualify, you’ll need to provide the name, address and taxpayer identification number for each child care service provider.
9. CONSIDER ESTIMATED TAX PAYMENTS You may be penalized if your withholding and estimated tax payments don’t meet the minimum required amounts. To avoid such penalties, during the current year you can pay 90% of your current year’s tax liability or 100% of your prior year’s tax liability (105% if you are a high-income taxpayer). This is beneficial if you expect your tax to increase in 2004, because you can defer any tax due in excess of your 2003 tax liability until April 15, 2005. Top
10. WATCH OUT FOR THE A.M.T. If your alternative minimum tax (AMT) liability exceeds your regular tax, you must pay the AMT. AMT used to be a problem for only the very rich and tax-sheltered taxpayer. For 2003, however, many people with normal deductions will have to worry about this tax because, while regular tax brackets are adjusted for inflation, AMT brackets are not. Also, many tax credits are not considered for AMT purposes. The new tax act does not provide much relief at all. Another tax bill that is working its way through congress as this is being written, may help us with respect to some of the AMT excluded tax credits. Unfortunately, the bill is not expected to do a thing for the AMT bracket creep problem.
To calculate AMT income, various tax preferences and adjustments are added back to your taxable income and a $35,750 exemption ($49,000 for married filing jointly and $24,500 for married filing separately) is deducted. The exemption starts to phase out once AMT income exceeds certain levels. If you are likely to be subject to the AMT, time the receipt of income and the payment of certain deductible expenses to ensure you get the maximum benefit. For example, if you expect to pay the AMT in 2003, you may not benefit from prepaying your fourth-quarter state estimated tax in December, since you cannot deduct state taxes for AMT purposes. You may be able to claim a credit in future years for AMT paid, depending on which adjustments generated the AMT.
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