Search For:

Share This

Plan Your Tax Deductions

End-of-year tax planning can save dollars when April
15 rolls around.

With a little effort, you may be able to defer taxable
income to a later year and speed up deductions into the current one. Or you
could accelerate income into this year and defer expenses, if that makes more
sense.

Estimate tax bill

The best place to start is by looking at your tax
return for 2001 and estimating your tax bill for 2002.

You can also determine whether your tax payments
have been enough to avoid underpayment. Compare what’s already been withheld
and any estimated tax payments you’ve made with your anticipated bill.

Underpaying your federal tax by more than $1,000
triggers a penalty, so if you haven’t withheld a sufficient amount, add to your
employee withholding by revising your W-4 form or make an estimated tax payment
before year’s end.

To itemize or not?

Only about one-third of the nearly 130 million individual
returns filed nationwide were itemized, according to the Internal Revenue Service.
This means that a lot of people should take the time to determine if they need
to act now to take advantage of certain itemized deductions that could help
reduce their tax bills for 2002, instead of taking the standard deduction.

For example, if you have the money, pay your estimated
state income tax and/or local property taxes before year’s end. If you wait
until January to pay those taxes, you cannot claim the deduction until the next
tax year.

Before you do anything, be sure to consider whether
you will be subject to the Alternative Minimum Tax. The AMT was established
to ensure that high-income people who take many deductions and credits will
pay a minimum amount of taxes.

The levy is increasingly hitting middle-class taxpayers
who may have everyday deductions; an estimated 6 million by 2005, up from 500,000
in 1998, may be affected.

The IRS estimates that a family with five children,
and wages of $70,000 with standard deductions, could incur a bit of extra tax
because of AMT, which disallows interest on home-equity loans, dependent exemptions,
and local taxes.

Cluster medical bills

Out-of-pocket medical expenses are deductible only
if they exceed 7.5 percent of your adjusted gross income. Therefore, you should
total them before year’s end to see if you are near the limit. If you are, accelerate
elective medical procedures into this year to increase your deduction. Otherwise,
postpone any non-essential costs and try to bunch the expenses in 2003 to qualify
next tax year.

Be generous

Consider donating appreciated stocks to charity.
You can deduct the fair market value, and you will not owe taxes on your gains.

If you want to give away assets that have fallen
in value, sell first and then donate the cash. You will be able to deduct the
investment loss (up to $3,000) as well as the charitable gift.

You can give anyone up to $11,000 a year without
triggering the gift tax. Married couples can give any one person up to $22,000.

 

More Tax Planning Tips

Self-employed and small-business owners have to
establish their simplified retirement pension plans by December 31, but the
plans don’t have to be funded until April 15, 2003.

Update IRA beneficiaries. These designations often
change as years pass and family circumstances change.

Update your estate plan. There have been many changes
in the federal estate-tax laws in the last few years that create new opportunities.
Ask an expert for details.

There’s tax help available on the Internet at www.irs.gov.

Share This
Don't Leave! Sign up for Kentucky Living updates ...
  • This field is for validation purposes and should be left unchanged.