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10 smart year-end tax moves
4. Charity
begins at home
Your tax-beneficial giving doesn't have to stop with contributions
to nonprofit organizations.
If you have a large estate and want to reduce
the tax burden on it, you can give up to $11,000 (cash or property)
to each child or grandchild each year without being subject to the
federal gift tax. Your spouse can do the same, bringing your limit
up to $22,000.
Actually, such tax-free gifts aren't limited
to relatives, but many taxpayers with numerous assets opt to keep
the wealth within the family. While this strategy doesn't provide
a direct deduction to the giver, it does reduce your taxable estate
and shifts any tax potential to your kids. The recipient doesn't
have to pay any tax on the cash gift itself, but any income it generates
is taxable. However, in many cases the kids or grandkids getting
the monetary gift are taxed at a lower rate than you are.
Even though federal lawmakers have eased
the estate tax burden, many still find this is a good estate-planning
tool.
5.
Maximize medical deductions
You've got another Dec. 31 deadline to meet if you want to get the
most out of itemized medical deductions.
Medical
and dental expenses can help take a chunk out of your tax bill,
but only if you have enough of them. IRS rules say you can't count
these deductions unless they exceed 7.5 percent of your adjusted
gross income. If you make $50,000 that means you get no tax benefit
until your medical costs exceed more than $3,750.
You still have time to reach the earnings cutoff.
If you've been putting off that elective surgery and can afford
it, schedule the procedure before the year's end to bump your medical
bills up to the deductibility threshold.
The eligible expenses must be those not covered
by any insurance or other reimbursement plan, such as a flexible
spending account (more on this in tip 8). And make sure there's
a solid medical reason for the procedure. Cosmetic nips and tucks
don't count here!
But you can include any dependent's medical
treatments, as well as the installation costs of special, doctor-prescribed
therapeutic equipment or medically necessary improvements to your
home. And if you must travel for medical treatments, you can include
the cost of meals at a hospital and deduct this year's mileage at
a 12-cents-per-mile rate.
6. Make early miscellaneous
payments
Miscellaneous deductions -- union or professional
dues, tax preparation and investment advisory fees, legal and accounting
fees, job-related equipment and educational expenses, or subscriptions
to business publications -- also can help cut your taxes.
They, too, must meet a percentage of your adjusted
income to count. In this case, 2 percent.
If you're near the threshold this December,
prepay some of these expenses. Buy the uniform you were going to
get in January, extend your business journal subscription another
year, pay the registration fee for that job-related computer class
you plan to take in February. Bunching
these miscellaneous expenses and paying early could save you some
tax bucks.
Here again, remember the AMT. Miscellaneous
deductions aren't allowed if you have to figure your taxes under
the alternative method.
7. Teachers, go shopping!
Up to $250 you spend on materials to make the learning experience
better for your pupils is tax deductible. And teachers aren't the
only ones eligible for this bit of a tax break. The educator
expenses deduction also can be claimed by teacher aides, counselors,
even principals, as long as they work at least 900 hours in a public
or private school for kids in grades kindergarten through 12.
Even better, you don't have to itemize to take
this break. It's available directly at the bottom of the long Form
1040 and the amount you claim helps reduce your income amount. Less
income usually means a lower tax bill.
All you've got to do is buy $250 worth of classroom
supplies by Dec. 31.
8.
Flex your spending account muscle
Do you have a flexible
spending account at your job? Does it still have money in it?
Does your benefit year operate on a calendar basis? If you answered
"yes" to all these questions, then you're running out
of time to maximize this valuable fringe benefit.
Flexible spending accounts allow workers to
put away pretax cash to help pay out-of-pocket child or dependent
care expenses or uncovered health costs. Not only can these accounts
help you meet extra costs, the account contributions are taken out
of your paycheck before taxes are calculated.
These accounts are particularly beneficial when
your medical expenses don't add up to the percentage-of-income threshold
discussed in tip 6. Plus, the IRS has decided that you now can use
the account money to pay for over-the-counter medications.
But there's a downside. If you don't use your
account money in the benefit year that it's contributed, it can't
be carried over to the next year.
While your eventual tax bill won't be affected
if you don't spend all your flexible account money, you'll be wasting
this tax-advantaged option if you don't spend it in the next few
weeks. So don't lose it, use it!
9. Start or add to a company
retirement account
Give yourself a holiday gift of future financial security by starting
or adding to retirement savings accounts. In many cases, you get
an immediate tax break and begin building a nest egg sooner.
If you're eligible to participate in your company's
401(k) retirement plan and its rules allow you to enroll now, do
it. If you're already contributing, think about upping the amount.
The money you contribute reduces your taxable income.
Since it's so late in the tax year, your increased
retirement account contributions probably won't help you cut your
coming tax bill. But you'll definitely have a head start on reducing
next year's taxes.
10. Check
and adjust your paycheck withholding
Finally, stop giving Uncle Sam free use of a part of your hard-earned
money. Most of us pay the bulk of our annual tax bill through payroll
withholding, and it's important that the amount be as accurate
as possible.
If you don't have enough
taxes taken out of your paycheck, you could end up owing the IRS
at tax-filing time. Worse, you could face penalties
and interest if the shortfall is large (more than $1,000).
Going too far the other way
with your withholding is not a good idea either.
Sure, over-withholding means you'll get a refund check when you
do file. But that also means that the federal government instead
of you has had access to your cash all these months. If you had
been collecting the cash, you could have stashed it in a savings
account, where it would have earned a little of bit interest and
provided you with some extra money to spend on holiday gifts.
It's
too late now to do anything about this year's withholding, but it
is a good time to look at your situation and see what adjustments
you can make for the coming year. It's especially important if circumstances
in your life have changed -- you got married, had a child or bought
a house. All of these affect your taxes and can be accounted for
through payroll withholding.
If you find that too much tax is being taken
out, put cash back in your pocket by increasing exemptions on your
W-4 to reduce withholding. If you're not
having enough withheld, you can prevent a huge tax bill on April
15 by reducing exemptions. It's easy to make the changes; just ask
your payroll office for a new W-4, fill in the correct number of
allowances and turn it in. The changes should show up on your next
paycheck and you've got a head start on making sure that 2004 is
a better tax year.
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