Steps Taken Now Can Save You in 2001
NEW YORK (AP) _ ’Tis the season of elves and eggnog, late-night parties and New Year’s resolutions. And, experts say, tax strategizing.
Some simple steps taken before the end of this year can save you money when you file your income tax return next April.
The average taxpayer probably can handle his or her own review. But people with complicated tax returns _ or significant changes in their lives, such as leaving a salaried job to become self-employed _ might consider seeing a tax professional now rather than later.
``A year-end tuneup can be very worthwhile,″ said Sal Romo Jr., president of the California Society of Enrolled Agents, which represents licensed tax preparers. ``If you wait until April, it’s probably too late to do anything to minimize the tax bite.″
The goal, of course, is to pay as little in taxes as possible while avoiding any penalties and interest. When it comes to deductions, which you can use to reduce your taxable income, ``timing is everything,″ said Robert K. Doyle, a certified public accountant in St. Petersburg, Fla.
Many families take advantage of the standard deduction, which for Year 2000 taxes will be $7,350 for couples filing jointly or $4,400 for a single person. Itemizing deductions can sometimes cut taxes more, and one way to get enough is to ``bunch″ tax-reducing activities, Doyle said.
If you’re a homeowner, consider accelerating your mortgage payments so you cover January’s before the end of this year, Doyle advises. Pay your state taxes and local real estate taxes now instead of in the spring. And think about doubling the contribution you normally would make to your university or favorite charity, then plan to skip such donations next year.
``That would mean for Year 2000, you’ll have 13 mortgage payments (to deduct) along with taxes and higher charitable contributions,″ Doyle said. ``Then, for 2001, you go back to using the standard deduction if necessary.″
Other things to consider:
STOCK LOSSES: You can use losses on stocks and mutual funds to offset capital gains. And you can write off up to $3,000 of losses against your income.
So should you run out immediately and sell the losers in your portfolio? ``I wouldn’t sell a stock simply to generate a tax offset,″ says enrolled agent Romo. ``But if I was going to sell it for other reasons anyway, it could be a good idea to offset.″
CHARITY: More and more people are making charitable contributions that involve such property as stocks or used cars. But donations should be made with care, Romo warns.
``If you have stock that’s appreciated, it’s better to donate the stock rather than selling the stock and donating the proceeds,″ he said. Sell the stock yourself, and you face taxes on the proceeds; donate it, and you can write off the market value.
As to items such as cars, consult your tax preparer or reference books such as the Kelley Blue Book to determine the fair market value of the vehicle at the time of the contribution.
SAVINGS: Have you put the maximum allowed into your 401(k) retirement account? You can contribute 15 percent of your salary, up to $10,500 pretax dollars, and the earnings grow tax-deferred.
If you don’t qualify for a defined contribution plan, consider setting up an Individual Retirement Account. The traditional accounts allow you to set aside $2,000 in pretax dollars a year, and earnings aren’t taxed until you begin withdrawing your money after age 59 1/2. Money put into a Roth IRA isn’t deductible, but retirement withdrawals will be completely tax-free.
MEDICAL BILLS: If you have high medical expenses, try to pay the bulk of your bills before the end of the year to qualify for a write-off, says Brenda Schafer, senior tax research coordinator at H&R Block Inc. in Kansas City, Mo.
Also, do look at opening a flexible spending plan account, which some employers offer to help workers set aside money for medical expenses and child care, Schafer said. Such accounts are funded with pretax dollars, which you withdraw as needed. The drawback is that any unused money is forfeited to the Internal Revenue Service at year’s end. For lower-income families, taking advantage of the federal child care credit could be a better deal.
MARRIAGE PENALTY: Thinking of getting married over the holidays? For tax purposes, it might be worthwhile to postpone the nuptials until January, Schafer said. That puts off for a year the impact of the ``marriage penalty,″ which forces a couple filing jointly to pay more tax than they’d pay as single individuals.
On the Net:
Internal Revenue Service: www.irs.gov
National Association of Enrolled Agents: www.naea.org
H&R Block Inc.: www.hrblock.com