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Archive for Sunday, March 16, 2003

Here are some things to think about as tax deadline looms

March 16, 2003

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I felt quite pleased with myself when a note popped up on my computer screen the other day -- a reminder, from me to myself, that I'd paid estimated taxes to the federal government last April, so I'll owe less now. What an organized guy.

Of course, this also was an unwelcome reminder to get going on my 2002 tax return.

Here is my annual list of key things to remember in doing taxes.

First, how to avoid an audit or other unpleasant hassle with the IRS: Don't make dumb mistakes like messing up your math, giving the wrong Social Security number or forgetting to sign your return.

Second, steer clear of shady characters offering to save you a bundle, if only you'll pay a modest fee. Some say the Constitution doesn't require federal income tax payments, others offer refunds on Social Security payments you've made. One of the most persistent, according to the IRS, offers blacks reparations for slavery. There's no such thing.

Since the tax return you're doing now involves taxes owed last year, it's too late for tax-reducing maneuvers such as selling investment losers.

But you do have through April 15 to make 2002 contributions to traditional IRAs, and some taxpayers can get valuable deductions on these.

The rules are complicated, but generally you can deduct all your contribution from your taxable income if neither you nor your spouse has a retirement plan at work. If one or both of you has a plan, you may still be able to deduct all or part of your contribution, depending on your "modified adjusted gross income," a figure derived from the data in your return.

Full deductions are available to people with MAGIs below $34,000, $54,000 or even $150,000, depending on filing status and which of you has a retirement plan at work.

For 2002, the deduction can be more valuable than ever because the annual contribution limits went from $2,000 per person to $3,000. People who were 50 or older last year can contribute another $500 a year.

Those contribution limits, by the way, also apply to Roth IRAs. There's no tax deduction, for anyone, on a Roth contribution. But these are excellent retirement savings plans nonetheless because withdrawals made in retirement are tax-free. You have through April 15 to make last year's Roth contribution.

The same deadline applies to Coverdell Education Savings Accounts, formerly called Education IRAs. These are used for investments to pay for education at any level -- kindergarten through graduate school. They are very attractive because withdrawals are tax-free and the contribution limits went up in 2002 to $2,000 per beneficiary from $500. To make a full $2,000 contribution, one must have MAGI no higher than $110,000 (double that for a couple).

Since there is no deduction for Coverdell contributions, meeting the April 15 deadline won't affect your 2002 tax bill. If you contribute after the deadline, it will apply to 2003. By missing last year's contribution, you'll reduce by up to $2,000 the amount you can set aside for that child in this excellent plan.

One of the perennial tax-time quandaries involves whether to take itemized deductions for expenses such as mortgage interest. Generally, you should if the total value of the deductions is greater than the standard deduction, which you can claim if you don't itemize.

For 2002, the standard deduction is $4,700 for single people, $6,900 for those who file as heads of households and $7,850 for people filing joint returns, as well as some widows and widowers.

What's the best way to do your taxes?

I've been pretty happy with TurboTax, the well-known computer program. The deluxe version, $39.95, can be found at any computer store. I also rely on J.K. Lasser's "Your Income Tax," a $16.95, phonebook-sized guide sold at most bookstores.

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