Merry Christmas

December Newsletter

 IT’S NOT TOO LATE TO CUT YOUR 2002 TAX BILL

--12 VERY LAST MINUTE MOVES

You can cut your 2002 tax bill with steps taken as late as December 31. here are a dozen last-minute ideas you can use to reap very last-minute tax savings… 

• Charge deductible expenses on your credit card.  Expenses such as medical bills, charitable contributions, business supply purchases, etc. are deductible on your 2002 return if made by year-end—even if you don’t pay the credit card bill until next year.

Impact: You get a deduction now for payments you won’t make until later.

Caution:  This rule applies only to general-use cards (Visa, Master-Card, etc.), not to store cards. 

• Prepay state taxes by year-end. State income taxes paid by December 31 are deductible in 2002 even if you aren’t required to pay them until next year. Examples…

ü      A fourth-quarter estimated payment for 2002 that’s not due until January 2003. 

ü      Any State balance you’d other-wise pay with your state return on April 15, 2003. 

State property taxes due in 2003 may also be deducted when prepaid by the end of 2002, if local law allows. 

Caution: If you are subject to the alternative minimum tax, prepaying state taxes may not be a good idea. 

• Adjust wage withholding from your last paycheck. If you have underpaid your taxes for 2002 to date, avoid penalty by increasing your wage withholding at the end of the year.

Key: Withholding is treated as if it takes place evenly over the year even when it is increased at year-end. This lets you retroactively avoid penalty for underpaying taxes in the early quarters of the year with the extra withholding.  

In contrast, if you make up the shortfall by making an estimated tax payment for the fourth quarter, you won’t escape the penalty for early quarters. 

If you’ve over paid your taxes for the year, you don’t have to wait until you file your retuan to get a refund. Reduce your withholding to cut the taxes taken from your last paychecks and get your refund in advance. 

Change your withholding by filling a new Form W-4 with your employer. 

• Exhaust flexible spending accounts (FSAs). FSAs have become a popular employee benefit. Employees use them to save a portion of pay on a tax-free basis that then can be used to pay medical or dependent-care expenses. Paying the costs with pretax dollars is equivalent to making them deductible.

Key: If you have an FSA, spend all that you have contributed to it by December 31. Any unspent funds at year-end will be forfeited.  

Consume unspent amounts by scheduling medical and dental visits buying prescription eye-glasses, tec. by year-end. 

• Time payment of deductible medical and miscellaneous expenses. Pay these before or after year-end—in the year they will produce the greatest tax benefit.

Key: Medical expenses are deductible only to the extent that they exceed 7.5% of adjusted gross income (AGI). Miscellaneous expenses (such as investment expenses, legal fees, and employee business expenses) are deductible only to the extent that they exceed 2% of AGI. 

Strategy: “Double up” payments in one year to maximize deductions… 

ü      If you won’t go over the AGI floor in 2002, paying an expense before year-end won’t get you any deduction. Defer paying it until after year-end, when it may help you get over the floor for next year. 

ü      If you are already over the AGI floor for 2002, accelerate as many payments as possible into this year in order to maximize the deduction. 

• Time business income and expenses payments. If you have business income that you report on a cash basis, delay sending out year-end invoices. That way, you won’t receive income until after year-end. You’ll reduce 2002’s taxable income.

However, pay every deductible expense you can before year-end. And incur discretionary expenses-such as purchasing supplies, making repairs to property, etc.—In order to maximize your deductions this year. 

• Make charitable contributions by year-end—and be sure to receive written acknowledgements of them. A canceled check is not enough to prove a contribution of more than $250—and the IRS may disallow deductions for perfectly legitimate contributions if you lack acknowledgment letters from the charitable recipients of them.

If you plan to make charitable gifts of property rather than money, be sure to follow the IRS’s strict rules relating to documentation and appraisals. If you fail to follow the rules, you may very well lose deductions for otherwise legitimate donations. 

• Make gifts by year-end. You can make gifts of up to $11,000 each to as many recipients as you wish free of gift tax this year. The limit is $22,000 if you make gifts jointly with your spouse.

Gifts can reduce income taxes by moving income-producing assets to recipients who are in lower tax brackets and reduce future estate taxes as well. If you don’t use the annual gift tax exclusion by year-end, you lose it.  

Making gifts by check? Do so long enough before year-end to have the checks clear the bank by December 31—to avoid a possible IRS challenge. 

• Defer interest income into next year. Take funds from a savings account that pays current interest and use them to by Treasury bills or CDs that mature—and pay interest—after year-end.

Not only will you avoid realizing some interest income in 2002, but you may get a higher interest rate on your savings. 

• Set up and top off contributions to retirement accounts.  Retirement plans for the self-employed must be set up by December 31 to receive contributions for 2002. IRAs for 2002 can be set up as late as April 15, 2003. But for all kinds of accounts, it’s best to make contributions as soon as possible to maximize tax savings earned within the plan account.

Make your contribution for 2002 by year-end. Make your contribution for 2003 at the beginning of 2003. And take advantage of the new increased contribution limits for all kinds of plans. 

For both 2002 and 2003, there’s a new $3,000 limit for IRAs and Roth IRAs as well as an additional catch-up contribution of $500 if you reach age 50 before the close of the year. 

• Convert a regular IRA to a Roth IRA. If the value of your IRA has fallen due to the stock market slump, the tax cost of a conversion to a Roth IRA in 2002 may be less than it might be in the future after the market recovers.

In a conversion, you must pay tax on the value of your regular IRA. But then you will obtain the tax-free treatment that is given to Roth IRAs.  

Another benefit: Roth are free from many of the restrictions that apply to regular IRAs—such as the minimum distribution rules.  

• Buy business equipment by year-end. If you own a business, you can get large tax benefits from new equipment that is placed in service as late as December 31. 

Up to $24,000 of equipment may be deducted immediately. For amounts greater than that, a half year of depreciation generally is available even for equipment placed in service just before year-end. Congress also has legislated 30% bonus depreciation—an additional first-year deduction for equipment placed in service this year.

~Happy Holidays ~

Janell Israel & Associates, Ltd.