Personal Finance
Reducing taxable income can pay dividends in April

By Eileen Alt Powell
Associated Press

NEW YORK — The April tax season might seem far away, but now is the time to try to lower your tax bill. Steps to minimize your taxable income and maximize your deductions generally must be taken before year's end to count.

	Links
•	RIA
•	LifePlan Financial Group, Inc.
•	Small College of Business Administration
•	National Association of Enrolled Agents

More than one-third of Americans with adjusted gross income of $30,000 to $50,000 itemized deductions last year, according to RIA, a New York provider of tax information and software to accounting professionals. The figure rose to more than two-thirds for those with income of $50,000 to $100,000, it said.

Here are suggestions from tax experts:

• Make the most of tax-sheltered accounts.

The dollars you put into 401(k) and other retirement accounts reduce your taxable income, "so it's a good idea to get as close as you can to maxing out on that," said Charles Enis, an associate professor of accounting with the Smeal College of Business Administration at Pennsylvania State University. The limit this year is $10,500.

If your company doesn't offer a retirement program, you can set up your own Individual Retirement Account, putting aside $2,000 a year tax deferred. The deadline for setting up IRAs is April 15.

"People should also look into flexible spending plans," Enis advised. "They're a great deal as long as you're conservative."

Flexible spending plans allow you to set aside pretax dollars — generally in amounts of $1,000 to $2,000 — to cover health care and child care expenses. The downside is that if you don't use the money, it reverts to the company fund.

• Convert credit card debt.

The interest you pay on credit cards is not tax deductible; the interest you pay on your mortgage is. So paying off credit card debt with a home equity loan or line of credit can get you a tax write-off.

"It boils down to: Would you rather pay 18 percent interest (on credit card balances) and not get a deduction or pay 9 percent on a line of credit and get a deduction," Enis said.

Still, he cautioned, consumers should weigh such decisions carefully: "The important point is the fundamental economics of what you're doing. The tax benefit is the icing on the cake."

• "Harvest" stock losses.

Korb, who heads the LifePlan Financial Group, notes that an increasing number of Americans own stocks and stock mutual funds, and that gives them the opportunity "to make lemonade out of the lemons in their portfolios."

By that he means "they should look at their holdings to see what has lost value that they can sell."

Those losses can be used to offset the capital gains on other investments, dollar for dollar. In addition, losses can be used to offset up to $3,000 of income — with the surplus carried over for future years.

• "Bundle" deductions.

Some people, especially retirees who have paid off their mortgages, often don't have quite enough to itemize deductions. This year, the standard deduction is $4,550 for singles and $7,600 for a couple filing jointly.

"These people can benefit from 'bundling' deductions into one year and taking the standard deduction the next," said Tony Bardi, a tax specialist in Gresham, Ore., who is a spokesman for the National Association of Enrolled Agents.

This could involve prepaying next year's property taxes, making your estimated fourth-quarter state tax payment in December rather than waiting until Jan. 15 and doubling up on charitable contributions, he said. "Those with mortgages might make their January payment in December to bring the interest into 2001," he added.

• Charity comes in a variety of forms.

A lot of people made extensive charitable contributions to aid the survivors of the Sept. 11 terrorist attacks, and they can write these and other donations off on their taxes.

It's also increasingly popular to make non-cash contributions, including used clothing and household goods to organizations such as the Salvation Army or Goodwill, Bardi said.

"I have an older gentleman who went through one room in his house every year for several years and donated things he no longer needed or wanted," Bardi said. "He came out with several thousand dollars in deductions."

He suggested keeping a detailed list of contributions to make it easier to calculate the value.

The Internal Revenue Service requires an appraisal on donated cars and other high-value items.