Archive for Sunday, December 28, 2003

Experts: Adjust taxes before new year

There’s time to make most of money

December 28, 2003


When it comes to taxes, the April 15 filing deadline is circled on almost everyone's calendar.

But area accountants and financial planning professionals say people who are looking to reduce their tax bills should make a special mark for Dec. 31 as well.

The April 15 deadline is when taxpayers have to get their returns in the mail to avoid penalties from the Internal Revenue Service. But Dec. 31 is the deadline for taxpayers to make certain contributions, sales or adjustments to their financial portfolios and still claim them on their 2003 tax returns.

And unlike the April 15 deadline, there are no forms taxpayers can fill out to get an extension. Once the clock strikes midnight, certain tax opportunities become as worthless as a 2003 calendar.

But procrastinators shouldn't fret just yet. Area tax professionals say there's still time.

"Last minute still works as long as we can get it done before the stroke of midnight," said Harold Pearce, a financial planner with Lawrence-based David M. King and Associates. "And trust me, we have certainly made some transactions right before midnight for our clients."

And most tax planners are prepared for residents' last-minute adjustments.

"We're definitely in the office at this time of year," said Jim Long, an accountant with Lawrence-based Bogner & Long. "We've been fielding a lot of calls the last two weeks and will right up until the new year."

Find a charity

The basic end-of-the-year tax strategy is the same as it has been for decades -- accelerate deductions and defer income when possible. In other words, taxpayers usually should look for ways to take a tax deduction in 2003 rather than 2004. And if they're due to be paid some money, they may want to look at ways to get paid in January rather than December.

"Any tax dollar we send away is gone forever, so we're always looking for ways to keep those dollars longer and keep them working for us," Pearce said.

The one exception to that rule is for taxpayers who believe their financial situations will change dramatically in 2004. For instance, people who are expecting a big raise in 2004 that may push them into a higher tax bracket, may want to save their deductions to use in 2004 to offset the higher taxes.

But for those who aren't expecting to ride the gravy train next year, advisers suggest that they start looking for deductions now. Pearce said one of the most popular tax reducing strategies continued to be charitable donations, which are tax deductible.

"If you are planning on making any gifts to charities, now would be the time to do it," Pearce said. "That would be the No. 1 thing to do to reduce their taxes this year."

Jo Bryant, executive director of the United Way of Douglas County, said many area residents take advantage of the strategy. The United Way has its fund-raising drive in the fall, but many people wait until the end of the year to give, she said.

"We have a lot of people tell us during the campaign that they're going to give, but they don't know how much yet but that they'll know in late December," Bryant said.

Long said people also may want to consider donating stock to a charity. For example, if a person bought $1,000 worth of stock and it now was worth $5,000, the taxpayer could transfer the stock to a charity and get a $5,000 deduction, even though they only paid $1,000 for it.

"It is one way to reduce your tax liability without paying anything out of pocket," Long said.

Stock search

Speaking of stocks, taxpayers should sell their bad stocks in December rather than waiting for the new year. Tax professionals call the strategy balancing gains and losses.

The principle behind it is that gains on stocks that taxpayers sell in a year are taxed, but losses on stocks that they sell in a year count as tax deductions.

For example, an investor may have stock that could be sold for a $1,000 profit in 2003, but he also may have a stock that could be sold for a $1,000 loss. If he sells both, the $1,000 loss will cancel out the tax that he owes on the $1,000 profit. Also, if investors have more stock losses than gains in a year, they can accumulate those losses and use them as deductions in future years.

But like most tax strategies, there's one big caveat. Advisers don't recommend making decisions on which stocks to sell based on tax implications alone.

"That's kind of like letting the tail wag the dog," Pearce said. "But if you were going to make a move on a stock in the next couple of months anyway, you should look at doing it now rather than later."

Fund deadlines

Taxpayers also should take a close look at a variety of funds that allow people to invest and receive tax benefits in return.

One of the newer types of funds is a 529 plan, which allows parents, grandparents and other family members to invest money into a special state-run account to save for a child's college education.

"A 529 plan is a great way for you to benefit your loved ones' future educational goals while rewarding yourself with a 2003 tax break," said Lynn Jenkins, Kansas treasurer, who oversees the state's 529 plan.

A married couple living in Kansas can deduct up to $4,000 off of their taxable state income by investing in the plan. Single residents can deduct up to $2,000 from their state taxes. But the catch is that contributions must be made by Dec. 31 to be used as a deduction in 2003.

Jenkins also recommends that taxpayers look at their 401(k) retirement account to see if they have invested the maximum amount in their retirement plans. Jenkins said some employers, although not required by law, will allow employees to make a last-minute contribution. Under federal law, each person under 50 years can contribute $12,000 to a 401(k), while people 50 or above can contribute $14,000.

All investments in a 401(k) plan are made with pre-tax dollars, which reduce the amount of a person's taxable income.

Individual Retirement Accounts, or IRA's, work in a similar way but they do not have the tight deadline. Pearce said individuals generally can still take a 2003 deduction as long as they deposit money in their IRA before the April 15 filing deadline.

Other tips

Tax professionals said there were several smaller issues taxpayers should think about.

  • Self-employed people who make estimated tax payments each quarter should make their fourth quarter state tax payment by Dec. 31, even though they have until mid-January before the payment is considered late. Long said by filing before the new year, taxpayers could use the state payment as a deduction on their 2003 federal tax return.
  • Teachers who work at least 900 hours during a school year may want to stock up on classroom supplies, Jenkins said. He said teachers may deduct up to $250 a year in qualified expenses.
  • Paying January's mortgage payment in December is another way to get an extra deduction for 2003, Jenkins said. Homeowners get a deduction for home interest payments they make during the year.

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