Taxpayers have three weeks to pick up some sure-fire last-minute tax deductions that will save them money when April 15 rolls around.
In some cases, deductions that ordinarily wouldn’t occur until next year can be accelerated into the current tax year, and in other cases, taxpayers can save a bundle by simply waiting a few weeks to sell appreciated property or to buy a luxury car.
This year offers some unusual tax-saving opportunities because of new tax breaks pushed through Congress in the months after the Sept. 11, 2001, terrorist attacks and because the continuing bear market has left millions of investors with capital losses that can mitigate the April 15 pain.
Some of the experts say the tax burden could lighten for many Americans when the Republican-controlled Congress starts looking at things like capital-gains, dividends, tax brackets, and estate taxes.
Often, taxpayers benefit by making deductible payments ahead of schedule and deferring some income until after the end of the year, noted John Lewis, a partner in the Toledo office of Clifton Gunderson LLP, a certified public accounting firm.
“For example, if you’re due a year-end bonus and you can get your employer to agree, receive the bonus in January, 2003, rather than 2002,” he said. “On the deduction side, move charitable donations you would normally make in early 2003 to the end of 2002. Do the same with real-estate taxes or state income taxes.”
Charles Mira, a partner in the Toledo CPA firm of Mira+Kolena, pointed out that it often pays to bunch deductions of a certain type — particularly medical costs and miscellaneous deductions for those who itemize on Schedule A. Both of those deductions are available only to taxpayers whose costs exceed a certain percentage of income. “If you have significant medical expenses, say for braces, buy your glasses, etc., to allow you to lock in that [medical] deduction for this year,” he suggested.
However, David Baymiller, tax partner in the Maumee CPA firm of William Vaughan Co., cautioned that taxpayers should estimate next year’s income and expenses, too, before deciding to accelerate deductions and/or defer income — to make sure they don’t fall into the alternative minimum tax trap.
The alternative minimum tax — originally designed to ensure that even the wealthiest Americans pay at least some income tax — has gradually ensnared more and more taxpayers in its complex rules that can be triggered by such things as interest deductions for second homes, large capital gains, large number of dependents, exercising stock options, and certain itemized deductions. About 800,000 more taxpayers will have to pay the AMT in tax year 2002, bringing the total to about 2.6 million, according to the Tax Policy Center in Washington, D.C.
This may be the time to sell your stock-market losers — especially if you don’t think they’ll rebound anytime soon.
Investors can use their capital losses to balance out capital gains, and if the losses exceed the gains, that creates a deduction, noted Clifton Gunderson’s Mr. Lewis. Taxpayers filing as singles can deduct up to $1,500 in capital losses, and those married filing jointly can claim up to $3,000.
“It is not a problem if your net loss for the year exceeds $3,000, because the excess carries over indefinitely to future tax years,” he said. “Be mindful, however, of the ‘wash-sale’ rule when you jettison losers. Under this rule, your loss is deferred if you purchase substantially identical stock or securities within . . . 30 days before [or] 30 days after the date of sale.”
Taxpayers selling stock or real estate for a gain “may want to wait to close the sale until early 2003,” advised Mr. Baymiller. There’s a chance capital-gains tax rates will be lowered in 2003, he explained. And for real estate, gain from a sale late this year could be postponed by an installment sale, he added.
Here are some of the other year-end tax tips from the experts:
The local tax experts believe the new Congress may make the $1.35 trillion tax cuts permanent, and it may raise deduction limits for capital losses, trim taxes on corporate dividends (either through company tax credits or lower tax rates for individualss), and it may liberalize charitable-giving rules so that even taxpayers who don’t itemize can claim a deduction.
However, some, like Mr. Mira, believe that whatever Congress does is likely to be diluted by higher state taxes such as Ohio’s new “temporary” tax on income for trusts.
“There will be a lot of talk about a flat tax or national sales tax,” said John Hills, a partner in the Toledo firm of Spilman Hills & Heidebrink. “But [realistically] the only thing this Congress will do is make permanent the tax breaks that are scheduled to disappear after 2010.”