Top 10 tax resolutions for 2004

Along come the holidays and before you know it, the end of another tax year. Besides checking your holiday list, check out my year-end list of tax tips:

1. Time to whip out the checkbook. Pay all your deductible expenses before year end either with a check dated in 2003 or by credit card. If your state income tax payment is due in January, pay it in December to secure the deduction this year. The same goes for real estate taxes, mortgage interest and charity. If you still owe your accountant for last year's taxes, I'm sure he'd appreciate his check by now and he'll let you deduct it this year. If your business reports its taxes on the cash basis of accounting, prepay all that you can. Next year's tax rates aren't going down so you're better off with the deduction this year. As you take these last-minute deductions, note which ones you can utilize again in the coming year. With a little planning, you may be able to get more out of them in 2004.

2. A place for everything and everything in its place. It's been my experience that organized clients pay less in taxes since they have a good set of records. Go to the office supply and buy yourself files for this year and for next. Get your 2002 tax return and organize your files by the major categories on the return. When you get done, you'll have files for wages, interest, capital gains, individual rental properties, charity, mortgage interest, taxes, etc.

In January, you'll start receiving correspondence labeled "Important Tax Documents." Of course, these are important and I suggest you put them in their corresponding 2003 file. Start out with a fresh set of folders for 2004.

3. Go corporate. If you operate a business that is not incorporated, you may want to consider the advantages of incorporating in the New Year. Not only do corporations give you shelter from some financial risks, they also give you flexibility for saving on taxes. But the time to set up the corporation is now, to have it in place at the beginning of the year. If you wait until January to set up the new corporation, you won't have a tax identification number or bank account for a few weeks in January and that starts to cut into your tax savings and complicates your tax filings in 2004. I discuss the advantages of an S corporation in this previous column, and in this column I elaborate on why incorporating gives greater advantages than either a partnership or sole proprietorship.

4. Adjust your tax withholding. Did you owe or get a big refund on your 2002 income taxes? Do you expect the same thing to happen this coming filing season on your 2003 taxes? The culprit is an incorrect Form W-4, especially for working married couples. Although there was some reform of the marriage penalty, don't count on much help if you itemize your tax deductions. The Internal Revenue Service has an easy-to-use withholding tax calculator that tells you the number of allowances to claim on your Form W-4. To use it you should have a copy of your 2002 income tax form handy and estimates of the same items for 2004. Armed with this information, make the changes on your W-4 so that this coming year you'll end up paying the IRS just what you owe, no more or no less.

5. Get your savings plan on track. Nobody is getting younger in the New Year. If you haven't done so, you can still make your 2003 IRA contributions and get an early start on your 2004 contributions in January. You also may be pleasantly surprised to learn that the contribution limits for 2003 are now $3,000, up from the historic $2,000. If you or your spouse are over age 50, the one over 50 can make up to $3,500 in IRA contributions. That means a married couple both in their 50s can contribute $7,000. If you're not in a pension plan at work you should consider a deductible IRA that can save you 30 percent or more in taxes of what you contribute. If you have a pension at work, you can contribute to a Roth IRA and take out the money later tax free. It's also the time to increase your 2004 elective contributions to your 401(k) plan. Elective deferrals will be allowed up to $13,000 in 2004. Check out Bankrate's IRA center for help in making your retirement savings decisions.

6. Do an insurance checkup. With all that we insure nobody wants to think about more insurance, but it's too late to add insurance when the need arises. Bankrate's Insurance Guide can help you sort through the various types of coverages available. One of the hottest selling products is long-term care insurance. Long-term care insurance provides for your care when you're old and unable to care for yourself. The insurance can provide for nursing home care but it can also give you a stipend for nursing care in your home. This provision may allow you to remain in the comfort of your home rather than having to go into an institution. Part of the cost of the premiums are tax deductible as medical expenses or, if self-employed, as an adjustment to gross income. Seniors also have to contend with the new Medicare drug benefit. For those with prescription costs over $800 a year, it may make sense to pay the $35 monthly premium.

7. Consolidate debt. Now that you've racked up more debt, it's time to consider consolidating outstanding debt on credit cards, car loans and other personal debts into a home equity loan. Interest paid on most borrowings is generally not deductible (unless business related), while interest on home equity loans is generally deductible.

8. Meet with your attorney. Your attorney should review your wills and other documents to determine that they are still in accordance with your wishes and that they also conform to the impending repeal of the estate tax. If you haven't done your wills and you have children or property, then your attorney should advise you of the risks that you are taking and should get working on these indispensable documents and other estate planning steps. If you're in business, your attorney should also update your corporate minute books to reflect the business activity and decisions for the year or years since the minutes were last done.

9. Meet with your accountant early. The closer to April 15 that we get, the busier your accountant gets. And just like anybody that has too much work, some of it doesn't get his full attention, especially when he starts working 12-14 hour days. If you visit your accountant and he looks like he's overwhelmed, consider taking an extension of time to file your income tax return so that you both have opportunity to adequately review your taxes. If you don't have an accountant or tax professional, evaluate your situation to determine if you could benefit from professional advice. These tips can help you choose a tax pro that best fits your needs.

10. Buy hardware. If you're in business, it certainly makes sense to accelerate the acquisition of machinery and equipment that you'll need in the next year. In 2003, business owners have the option to expense up to $100,000 in personal property acquisitions vs. real property that does not qualify. Even if you can't qualify for the full $100,000 deduction because of income limitations, you get an accelerated tax write off of 50 percent of cost without regard to income. Additionally, we have one of the hottest loopholes available in recent memory. If you're in business, you can write off a substantial amount of the cost of acquiring a sport utility vehicle. For more information, you can see a compilation of my prior articles on this topic.

You've got 10 sound New Year's tax resolutions to pick from. Best wishes for a prosperous new year.