By Julian Block, attorney and former IRS investigator
The easiest way for many individuals to lower their taxes for 2001 is to shift payments for itemized deductions from 2002 to this year. Here are some strategies that can help.
CHARITABLE CONTRIBUTIONS. They still provide the greatest flexibility for most people. Remember, though, that gifts to charitable organizations are deductible when paid; pledges don't count.
One strategy is to accelerate payments by taking care of pledges to religious groups, schools and other charities this year, instead of next, as well as by donating before year-end the entire amount that you expect to give to you favorite philanthropy next year. Keep in mind that a check mailed as late as Monday, Dec. 31, is deductible for 2001.
ALTERNATIVES TO WRITING CHECKS. A tax-savvy way to make donations is with appreciated properties -- stocks, real estate, or other investments that have gone up in value since their purchase and that you have owned for more than 12 months.
Here's the benefit: Besides getting a deduction for the property's full market value, you also escape paying taxes on the accumulated gain in value since you made your investment.
To illustrate this break, assume your long-term stock holdings include some shares acquired for $4,000 that are now worth $10,000. Donate the stock to charity this year and reap a double break: A charitable deduction of $10,000, without having to pay taxes on the appreciation of $6,000.
STATE AND LOCAL INCOME TAXES. One widely recommended tactic to build up this year's itemized deductions is to pay property taxes and the fourth-quarter installment of 2001 estimated state and local income taxes before 2001 comes to a close, instead of waiting until they become due in 2002. This maneuver saves taxes if you expect to be in a lower federal bracket next year; the deductions are worth more this year.
TIP. If it seems clear that the amount now being withheld will not be enough to take care of your 2001 state and local income taxes, you can ask your employer to withhold more for those levies from your final paychecks for the year or make an estimated payment to cover the shortfall, regardless of whether you usually make estimated payments.
Prepayment in 2001 also is advantageous if you expect to be subject in 2002 to the alternative minimum tax, which applies only when it produces a higher bill than the tax figured the regular way. For AMT purposes, state and local income taxes, along with property taxes, are among the write-offs that are not deductible.
A WORD TO THE WISE. Don't try to game the system with an overpayment. An IRS ruling warns that a payment of estimated state income taxes in Dec. of 2001 cannot be deducted for 2001 where a person did not reasonably expect to owe any additional state tax liability at the time he or she submitted the payment and received a refund for this overpayment in 2002.
Julian Block is an attorney and former IRS investigator who has been cited by the New York Times as "a leading tax professional" and by the Wall Street Journal as an "accomplished writer on taxes." His âYear-Round Tax Savingsâ shows how to save truly big money on taxes â legally â and explains the steps you should take to reduce taxes for this year and even gain a head start for future years. To order the publication, send $9.95 for a printed copy or $8.95 for an e-mail version to:
3 Washington Sq.,#1-G
Larchmont, NY 10538