Time To Start Thinking About Your Taxes

Although it is only November, it is a perfect time to start thinking about your 2002 taxes. Congress has managed systematically to close many of the “big-dollar” tax planning ideas, however, there are still some ideas and techniques that you can take advantage of between now and December 31st that will help lower your tax bill.

  • Offset Capital Gains With Capital Losses: If you have sold investment property at a gain this year, you may want to look through your portfolio to see if you hold any investments that are currently trading at a loss. If so, you could sell some of the loss property and use the loss to offset the gains. The netting rules require you to first offset gains or losses with property that has the same holding period. For example, you are required to offset short-term gains or losses with other short-term gains or losses. If the result is a net loss, you can then apply the short-term loss against any net long term gains. If the overall result is a net loss, you can apply up to $3,000 of the loss against your other ordinary income. Whatever loss is not used this year can be carried over to subsequent years.
  • Pay Deductible Expenses By December 31st: Estimated state tax payments, real estate taxes, and mortgage interest are deductible expenses on Schedule A of your tax return. Your 2002 fourth quarter Pennsylvania and New Jersey state tax estimated payments are not due until January 15, 2003. However, if you wait until 2003 to make the payment you are not getting the value of the deduction until you file your 2003 return, which could be in April, 2004. You will need to wait 15 months to take the value of the deduction. It is better to pay your fourth quarter state estimated tax payment by December 31st and get the value of the deduction in your 2002 tax return. Similarly, it might be beneficial to prepay real estate taxes and mortgage interest that are due early in 2003.
  • Maximizing Medical Expenses Deductions: If you are paying for the nursing home care of an elderly parent who is your dependent, some or all of these payments can qualify as medical expense deductions. If you have siblings who contribute to the care of an elderly parent, it might be beneficial to rotate the dependency deduction from year to year among yourself and your siblings. If financially feasible, the person with whom the dependency exemption rests in the current year should pick up all of the medical and nursing home expenses. This way, more of the medical expenses are deductible in a given year than if it were split among different parties because of the 7.5% AGI floor that applies for medical expense deductions.

    If you have a long-term care policy for yourself or your spouse, a portion of the premium is deductible depending on your age.

  • Shift Income To Another Year: If you are a salaried employee, it might be difficult to shift your income into the next year. However, it might be possible to shift year-end bonuses to January, 2003 instead of December of this year. By deferring the bonus, the income is not taxable to you until 2003.

    If you are self-employed, you could delay December’s billings until later in the month so you receive payment in January, 2003. This way, you will not be taxed on income this year that you did not have access to until late December. If you receive the income in 2003, you will have use of the money before actually paying the tax, not paying the tax without real use of the money.

  • Tax Law Changes: The Economic Growth and Tax Relief Reconciliation Act of 2001 provided many changes to the tax laws of the United States. Many of the changes, however, did not take effect until 2002. Some of the changes to be aware of for the 2002 tax year are as follows:
    • Rate Schedule Changes
    • Increase in IRA, 401(k) and SIMPLE Contribution Amounts
    • “Catch-Up” Contributions to Retirement Plans
    • Increased Gifting and Estate Exemption Amounts

If you have any questions about year-end tax planning or would like us to prepare your income tax return for 2002, please do not hesitate to contact us.

— Walter Reed

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