Sunday, December 16, 2001
After trimming tree, trim tax bill
Act now to lower payments
By Amy Higgins
The Cincinnati Enquirer
Eight days left to spend in the 2001 Christmas shopping season and 15 days left to save on your 2001 income taxes. And thanks to the federal tax cuts passed this year, slicing that tax bill may be easier than finding the perfect gift for Dad.
Steps to cutting your 2000 tax bill due in April are largely the same as every year. But following these steps can be more meaningful than ever because of the falling marginal tax rates.
Defer income. Even if you can put off collecting just a few weeks, you can save. What was once the 28 percent tax bracket, for example, fell to 27.5 percent earlier this year and will fall to 27 percent in 2002. Higher brackets also will complete their 1 percentage-point drop, to 30 percent, 35 percent and 38.6 percent, respectively.
The savings won't be huge, but for a lot of people, money saved is money saved, said Ellen Boling, tax director at the Cincinnati office of Deloitte & Touche.
Bundle itemized deductions. Making deductible payments such as mortgage interest, local taxes, charitable contributions before the end of the year also locks in tax savings at the higher rates, Ms. Boling said. Whereas in years past, taking the deduction early just meant saving the same amount one year instead of another, the falling rates mean you'll save more this year than next.
Itemized deductions somebody might pay within the next quarter, we suggest they accelerate into December, Ms. Boling said. Accelerating them to this year means you get a little bit bigger write-off this year.
She cautioned taxpayers to be careful, however, that too many deductions could make them eligible for the Alternative Minimum Tax, which limits write-offs to ensure that people don't deduct away their whole tax bill.
Also, accelerating these payments won't work and aren't a good idea if the itemized deductions still don't outweigh the standard deduction, said John W. Roth, analyst at tax information publisher CCH Inc. If you know you are going to itemize next year, however (maybe you are planning on buying a house), then you may want to delay certain deductible payments to write off later.
Sell loser stocks. If you have a taxable account but not a crystal ball, you likely have a few stocks that have fallen with the 21-month bear market. Sell and take the tax deduction. Any losses first go to offset any gains. But the losses could outweigh the gains. Tax rules say you can deduct $3,000 in losses a year from ordinary income again giving you a chance to lock in savings at the higher tax rates. Losses in an IRA, 401(k) or other tax-sheltered account don't get any tax benefit, however.
Delay paying school expenses or funding education accounts. The tax laws taking effect in 2002 heavily favor educational spending, both for current expenses and savings plans. Distributions from states' Section 529 plans, for example, are exempt from federal income tax. Also, new deductions are allowable in 2002 for some higher education expenses and student loan interest payments. Still, if you can afford to make educational plan contributions in both 2001 and 2002, do so now to maximize the limits for both years, Ms. Boling said.
Open an IRA for your teen-age children. Granted, it won't save you money come April, but it's a good idea, Mr. Roth said. A holiday-season job might provide the perfect opportunity to open a child's retirement account. Contributions also can be made as holiday presents. While the amounts might not seem like much now, the magic of compound interest for 40 years can make them significant.
If kids are provided with a Roth IRA when they're in high school or college, they can have decades of tax-free earnings buildup to enjoy later in life, Mr. Roth said.
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