With the holidays right around the corner, you are probably not thinking much about taxes these days. But this is the best time to review your tax situation and perhaps save a few dollars before next April rolls around.
Start by reviewing the amount of taxes withheld from your paycheck. You probably received a small increase in your paycheck in June, when employers implemented new withholding tables that reflect the $350 billion tax cut that became effective May 5.
You can fatten your paycheck by increasing the number of exemptions, particularly if you are a parent.
The tax cut boosts the child tax credit to $1,000 from $600 per child. Parents who claimed the credit on their 2002 tax returns are receiving an advance payment of $400 per child, reflecting the higher credit. Parents who gave birth or adopted a child this year will have to wait until they file taxes in 2004 to claim the $1,000 credit.
The tax-law changes also end the so-called “marriage penalty” by raising the standard deduction for married couples filing jointly to twice the standard deduction for single taxpayers for 2003 and 2004.
Effect on investments
There’s help, too, for the self-employed, or those who receive a significant amount of income from investments, and pay estimated taxes quarterly.
If you pay estimated taxes, consider recalculating the amount due October 15 and January 15, 2004. You may find that you owe much less because taxes on dividends have dropped to 15 percent from a top rate of 38.6 percent. The rate on long-term capital gains has fallen to 15 percent from a maximum of 20 percent.
You must have held the stock for more than 60 days to get the 15 percent dividend rate and more than one year for the capital-gains rates.
To make the tax cuts more meaningful, consider itemizing your deductions rather than 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 these taxes, you cannot claim the deduction until the next tax year.
Also look at your out-of-pocket medical expenses to see if you are near the limit to make them deductible. 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 2004 to qualify in the next tax year.
Only about one-third of the 130 million individual tax returns filed nationwide last year were itemized, according to the IRS.
Hiring a tax preparer
If all these changes have you thinking about getting someone else to prepare your tax returns, a word of caution from the Internal Revenue Service.
Avoid a preparer who boasts of being able to obtain larger refunds for you than other preparers. And stay far away from preparers whose fees are based on a percentage of the amount of your return.
Never trust a preparer who won’t sign your return or give you a copy for your records. In addition, never sign a blank tax form or one filled out in pencil, the IRS says.
Before letting someone do your return, ask for that person’s credentials, references, and background. Ask if that person can represent you in case you’re audited.
Be especially leery of preparers who encourage clients to claim special credits related to slavery or land stolen from American Indians.
“Crooked tax returns are a significant problem, and we’re taking aggressive steps to control it,” says Rod J. Rosenstein, deputy assistant attorney general for the tax division, in an interview with The Wall Street Journal.
“The bottom line is: if it sounds too good to be true, it probably is. So seek a second opinion,” Rosenstein adds.