- The Washington Times - Wednesday, November 24, 2004

Time flies even when you’re not having fun. It is understandable, considering this long year of high anxiety, if tax strategy hasn’t been on your mind’s front burner.

Just mellow out long enough to put together a year-end strategy for the 2004 tax year. Otherwise, you may be kicking yourself on April 15 because you wound up paying too much in taxes.

“When formulating your year-end strategies, realize the decisions you make affect two years, both the current year and next year,” said Ray Ferrara, certified finance planner (CFP) and president of ProVice Management Group LLC in Clearwater, Fla. “Know your own motivation, since the strategy that is appropriate varies with your tax situation.”

At work, examine your 401(k) retirement plan, which provides an upfront tax deduction. Employees often lose track of what they had committed to it.

“Make sure you’re maximizing your contributions to your company 401(k) retirement plan to the limit, especially important if you receive a company match,” advised Mark Balasa, CFP and co-president of Balasa Dinverno Foltz & Hoffman financial advisers in Schaumburg, Ill.

The dollar limit for pretax contributions for 401(k), 403(b) and 457 retirement plans is $13,000 for 2004. If you turn age 50 in 2004, you can contribute an additional $3,000, to total $16,000. If you’re not up to the limit, changing the contribution taken from the rest of this year’s pay raises your retirement savings and reduces reported income.

Take full advantage of company flexible-spending accounts for child care and medical expenses, also funded with pretax money. Money unused this year can’t be carried over into 2005.

In a new wrinkle for 2004, those who itemize can choose between claiming a deduction for either state sales tax or state income taxes on their returns. Taxpayers can deduct either their state and local sales taxes or their state and local income taxes, but not both. This especially benefits taxpayers in states with no income tax or states that have a low income tax and high sales tax.

There’s a “clean fuel” deduction of $2,000 for certified vehicles put into service in 2004, such as the electric motor and gasoline engine Toyota Prius, Honda Insight and Honda Civic Hybrid.

As always, delay late-year mutual fund purchases until after a fund declares its December dividend, usually around midmonth, so you aren’t hit with taxable income this year. It’s also sensible to use home equity lines of credit, whose interest is probably deductible, to pay off high-interest nondeductible credit card debt.

Investments play a crucial role.

“Most people wait until November or December to pay attention to their capital gains and loss situation, but they should be doing it throughout the year,” said Matt McGrath, CFP with Evensky Brown & Katz in Coral Gables, Fla. “Unless you have tremendous losses, it’s a good idea to capture tax losses throughout the year to take advantage of them.”

Still, better late than never. You have until year’s end to unload stocks that are losers. You can use capital losses in excess of capital gains to offset up to $3,000 of ordinary income each year. Any unused capital losses are carried forward for use in future tax years.

After you’ve determined your marginal tax bracket, decide whether you should defer income into 2005 and accelerate deductions in 2004, the most common course. You can bunch miscellaneous itemized deductions and medical expenses to increase deductible amounts. You may be able to arrange with your employer to defer any bonus until next year. You can prepay your Jan. 1 home mortgage payment and property taxes in December.

However, that won’t help if you find yourself subject to the alternative minimum tax, designed to kick in if you have hefty deductions. For example, you might be subject to the AMT if you earn $75,000, have several exemptions for children and deductions for high state taxes, Mr. McGrath noted. It’s also of concern if you have municipal bond interest or incentive stock options.

“If you find yourself subject to the AMT, as an increasing number of taxpayers are, traditional tax planning is turned upside down,” observed Mr. McGrath. “You might want to bunch your deductions during the years that you aren’t subject to it.”

The AMT is complicated. In 2004, the AMT exemption amount is $40,250 for single filers and $58,000 for joint filers. This provision expires in 2005, when exemption amounts revert to $45,000 for joint filers and $33,750 for single filers. AMT brackets are not adjusted for inflation.

This is also the time when most donations are made to charities.

“An appreciated asset, such as stock, is an ideal donation because it’s the same as a cash donation for the charity and you avoid paying the capital gains tax,” explained Marilyn Capelli Dimitroff, CFP and president of Capelli Financial Services Inc. in Bloomfield Hills, Mich. “When you donate shares, the documentation occurs automatically with the transfer of the stock.”

In the case of a cash donation, your canceled check is your documentation. If you wish to donate clothing or other items, Miss Capelli Dimitroff advises going to the Web site www.satruck.com/valueguide.asp to check the Salvation Army’s estimated values for various items. Be sure to get a receipt as documentation that the donations were made.


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