April 15 may be the best-known tax date of the year, but if you want to save on next year's taxes the Pennsylvania Institute of Certified Public Accountants recommends that you start planning in December. Here are 10 tasks to consider before year-end to minimize your 2003 tax bill.
Balance Gains and Losses
Tally up your investment winners and losers for 2003. Then, determine whether it makes sense to take tax losses by selling your unattractive stocks.
If your losses exceed your gains, you can deduct up to $3,000 in capital losses -- $1,500 for married couples filing separately -- against your other income, reducing the amount on which you must pay taxes. Losses in excess of $3,000 can be rolled over into subsequent years.
If you're self-employed or have sideline income, consider deferring income into 2004 by delaying billing. Employees don't have a choice of when they get paid, but if you're in line for a year-end bonus, you might ask your employer to hold off until January. Of course, it only makes sense to defer income if you expect to be in the same or lower tax bracket next year.
Maximize Miscellaneous Itemized Deductions
Items such as tax preparation fees, job-hunting expenses, certain unreimbursed employee business expenses, and some investment costs are deductible as miscellaneous itemized expenses. To qualify, they must exceed 2 percent of your adjusted gross income (AGI). For example, if your AGI is $50,000 and you've already incurred the minimum of $1,000 in miscellaneous deductions, you've met the 2 percent floor and should check into accelerating additional miscellaneous deductions into 2003.
Save on Mortgage Payments
If you itemize deductions, consider paying your January 2004 mortgage payment by Dec. 31, 2003, to deduct the interest this year. Be sure your check arrives at the bank or other financial institution by year-end to have the payment reflected on Form 1098.
Make Charitable Contributions
Giving money to a charity is a great way to save on taxes and help others. If you itemize, your contribution is tax-deductible. Just be sure to get your donation postmarked or in the hands of your favorite charity by Dec. 31, and to obtain a receipt for donations of $250 or more.
Contribute the Maximum to Your Retirement Accounts
If you haven't contributed the maximum to your tax-deferred 401(k) retirement savings account, some employers allow you to catch up for the current year. For 2003, you can contribute a maximum of $12,000 -- $14,000 if you're over 50 years of age by the end of the tax year. Since your contributions are made with pre-tax dollars, your current taxable income is lowered.
You may be able to open a traditional IRA and deduct the full $3,000 -- $3,500 if you are age 50 or older by the end of the tax year -- maximum IRA contribution if you are not age 70 or older during the tax year and if you have earned income of at least that amount. If you are married and file jointly, you may each contribute up to $3,000 -- $3,500 if age 50 or older -- to an IRA as long as your combined earned income covers the contributions.
If you are an active participate in an employer-sponsored plan for 2003, you still may be able to deduct the full $3,000 ($3,500 if age 50 or older) if you are a single filer and your modified AGI is $40,000 or less -- $60,000 or less for couples filing jointly. Deductibility of IRA contributions phases out as your AGI rises from $40,000 to $50,000 for single filers and $60,000 to $70,000 for couples filing jointly.
The maximum IRA contribution for an individual, who is not an active participant in an employer-sponsored plan, but whose spouse is an active participant, phases out at AGI between $150,000 and $160,000.
Update Flexible Spending Accounts
Many companies offer flexible spending accounts that enable you to set aside pretax dollars for qualified health care costs. If you have a health care flexible spending account, be aware that you forfeit any money left unspent in your account at the end of the year. As long as you expend money on eligible health care items by Dec. 31, you can be reimbursed from your account after year-end. Order extra contact lenses or schedule an extra dental cleaning.
In 2003, you and your spouse together can gift up to $22,000 of assets free of federal gift tax to each of your children. The benefit of shifting the income on those assets to children under 14 is limited since unearned income beyond $1,500 is taxed at the parents' marginal rate. But for children 14 and older, all income (earned and unearned) is taxed at the child's marginal rate.
Stock Up on Supplies if You're a Teacher
Eligible educators who work at least 900 hours during a chool year may deduct up to $250 of qualified expenses for purchases of books and classroom supplies. This is an "above the line" deduction, which means that you do not have to itemize in order to claim this tax break. Be sure to save the receipts to substantiate your expenses.
Organize Your Tax Records
Organizing your tax records and paperwork early gives you time to request copies of any missing documents and makes it less likely that you will miss valuable deductions when you file your 2003 tax return. If you are unsure of the documents you need to complete and support your tax return or to take advantage of other tax-savings opportunities, consult a CPA.
Founded in 1897, the Pennsylvania Institute of Certified Public Accountants is a professional association of more than 19,000 CPAs who work in public accounting, industry, government, and education. PICPA is the second-oldest and fifth-largest state CPA organization in the United States.