Your Money : SPOTLIGHT ON TAXES : Six Things You Can Do to Trim Your Taxes
When it comes to tax planning, timing is everything.
If you can push deductible expenses forward and taxable income back, you can delay paying taxes on part of your earnings and save yourself hundreds of dollars in 1994 income taxes.
Of course, eventually, income deferrals will catch up to you and you’ll have to pay the tax. But meanwhile you can earn interest on it and, if you can believe the rhetoric coming out of Washington these days, you may pay tax at lower rates in the future.
In any event, now as the holidays approach, ‘tis the season to accelerate deductions, defer income and sidestep those year-end pitfalls that can cost you at tax time. What can you do? Give, bundle up and save--among other things.
* Pay taxes and mortgage early. Property and state taxes that aren’t due until March or April can be paid in December for a 1994 deduction. You can also make your January mortgage payment in December and get an extra month of mortgage interest deductions.
* Give: Knock the dust off the ‘60s relics you have in the garage or attic and call a local charity. Organizations ranging from the California Council for the Blind to the Vietnam Veterans of America and St. Vincent De Paul seek usable clothing, furniture and appliances. Many local libraries would love your old books, too. You get a deduction for the fair market value of any old items you give to a qualified nonprofit, but be sure to get a receipt.
If you’re giving away items worth more than $500, you’ll need to fill out a form stating what you gave and how you estimated the value. If you’re giving items worth $5,000 or more, you’ll need an appraisal, too.
Meanwhile, if you’ve been considering making cash donations, do it before year-end. But, if you’ve got stock that’s appreciated in value, you may want to consider giving the stock instead. The benefit: The shares may have only cost you a few bucks when you bought them years ago, but you get a deduction equivalent to today’s fair market value. Better still, by giving the stock directly, you don’t have to pay capital gains taxes on the appreciation. Be quick. The charity has to receive the stock--or be registered as the share owner of record--by Dec. 31 if you want the deduction this year.
* Bundle up: You can get tax deductions for unreimbursed business expenses and medical costs, but only if these expenditures amount to more than set percentages of your income. “Miscellaneous” deductions, such as business expenses, professional dues and subscription costs for newspapers and magazines needed for work, are only deductible after they exceed 2% of your adjusted gross income. Medical costs can be written off once they exceed 7.5% of your AGI. As a result, most taxpayers should try to “bundle” these expenses by pushing them into just one year.
For example, if this has been a big year for medical bills and you’re approaching the 7.5% threshold, schedule any additional necessary appointments--eye exams, physicals, check-ups--before year-end. That way, you have a chance at the medical expense deductions.
* Save: If your employer offers a 401(k) plan, you should be contributing to it at the maximum levels possible. That’s because 401(k) contributions are taken out of your pay before tax. As far as Uncle Sam is concerned, you never earned the money.
The contributions reduce your taxable income, tax obligations and make it easier to reach deduction thresholds for casualty losses, medical expenses and miscellaneous itemized deductions.
Economically speaking, 401(k) plans are a good deal too. If your employer matches contributions, your retirement savings will grow at a rapid clip, even in the sorriest investment environments. And some plans allow you to borrow up to half of your account value without tax penalty, so you may not even lose access to your cash.
In 1994, the maximum allowable 401(k) contribution is $9,240. That contribution will save a tidy $2,864 in tax for somebody in the 31% bracket.
If your employer doesn’t offer a company pension or 401(k), you can contribute up to $2,000 per year to a tax-deductible Individual Retirement Account. And, if you’re self-employed, you can put up to $30,000 of your self-employment income into a Keogh plan.
* Avoid mutual funds. Mutual funds are a great way to invest, but not in November and December. This is the time of year that fund companies distribute capital gains and dividends to shareholders. If you’re a new investor, these distributions are a return of your principal, not investment earnings. But federal tax rules require you to pay tax on them as if they were investment earnings. If you’re planning to pump some money into a mutual fund, wait until January to start.
* Mine for losses. If you’re like most people, you’ve got some losses in your investment portfolio this year. Examine your portfolio and determine whether it’s time to sell and trigger deductible capital losses, or whether it’s better to hold on and wait for an impending recovery.
