It's the most dreaded time of the new year. Yes -- tax time. April 15 will be here sooner than you think.
To prepare, there are some things you should do before this year ends, even if it's just days away.
"While effective tax planning takes place year-round, it becomes especially important at year-end when taxpayers still have time to take steps that will result in savings on their annual tax bill,'' said Jeffrey Eischeid, national partner-in-charge of the Personal Financial Planning group of KPMG's tax practice.
Advice for savings
Here are some last-minute tax tips, according to KPMG and the Texas Society of Certified Public Accountants:
- Look for miscellaneous expenses you can pay before the end of the year such as tax preparation fees, job-hunting expenses and professional dues. To take these expenses as deductions, they have to add up to 2 percent of your adjusted gross income. Paying some of next year's expenses in December might give you just enough to meet that threshold.
- Look at your investment winners and losers for 2003. Then, determine whether it makes sense to take tax losses by selling the stocks you no longer want. You'll have to move fast to execute the sale by Dec. 31. 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.
- Contribute 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 older than 50. Keep in mind that since your contributions are made with pre-tax dollars, your current taxable income is lowered.
Focus on return
Now, if time slipped by and you didn't get to make as many tax-saving moves as you would have liked, don't beat yourself up. Just move on and begin to focus on things to consider once you begin the process of filling out your 2003 tax return. Eischeid explains:
- Don't forget there have been some reductions to the capital gains tax rate. The capital gains tax rates for individuals, estates and trusts have been reduced from 10 percent (for taxpayers whose highest marginal income tax rate is 15 percent or lower) and 20 percent (for taxpayers whose highest marginal income tax rate is higher than 15 percent). The new rates are 5 percent and 15 percent, respectively. Here is where it gets tricky.
For 2003, the lower capital gains tax rates apply to sales or exchanges that occurred after May 5. Sales or exchanges that occurred on or before May 5, 2003, are still subject to the old 10 percent and 20 percent capital gains tax rates. These reduced capital gains tax rates are effective until Dec. 31, 2008 (with the 5 percent rate being reduced to zero in 2008).
- Keep in mind we now have lower income tax rates. The 2003 Tax Act reduces the top four marginal income tax rates of 38.6 percent, 35 percent, 30 percent and 27 percent to 35 percent, 33 percent, 28 percent and 25 percent, respectively. These reduced marginal income tax rates are effective until Dec. 31, 2010.
- When you fill out your 2003 return, don't forget that check you got this summer from the IRS. In July, the IRS began issuing advance payment checks to about 25 million taxpayers who claimed the Child Tax Credit on their 2002 tax return. The payment is an advance refund of the expanded Child Tax Credit for the 2003 tax year. The credit was increased to $1,000 per eligible child from $600. The IRS used your 2002 return to figure out whether you were due an advance payment check. The credit is gradually phased out for married couples filing joint returns as their adjusted gross incomes begin to exceed $110,000. So, if you received the $400-per-child advance payment, you have to take it into account in determining the remaining amount of credit due you. "You obviously can't take the deduction twice,'' Eischeid said. Just remember to subtract the amount of your advance payment check from the $1,000 per-child total on your 2003 return.
- Maximize 401(k) contributions. The limit for 2004 goes up to $13,000. In fact there are annual increases in $1,000 increments until the limit reaches $15,000 in 2006. For taxpayers 50 years of age and over, an additional "catch-up'' contribution is allowed. The additional "catch-up'' contribution amount is $2,000 for 2003, $3,000 for 2004, $4,000 for 2005 and $5,000 for 2006.