Paying extra in December can save you come April
By Sandra Block
USA Today
This is the time of year when people make lots of lists. Shopping lists. Party lists. Lists of restaurants that are open on Dec. 25, in case Uncle Clifton's deep-fried Christmas turkey sets the house on fire.
Advertiser library photo • April 15, 2002
In the spirit of the list-making season, we offer one more — a list of things you can do between now and Dec. 31 to cut your taxes:
Paul Smith, right, arranges parking receipts he brought to the Ala Moana H&R Block office, while tax associate Grant Abo, left, enters Smith's tax information into a computer. Smith, a chef, said his move to Hawai'i mixed up his paperwork. "Normally I'm a January tax filer," he said.
• Bump up your deductions. If you itemize on your tax returns, paying some of your bills before the end of the year could reduce your 2002 taxes. For example, if your property taxes are due in January, pay them before Dec. 31.
Accelerating deductions is usually a smart strategy because it allows you to pocket the tax savings sooner rather than later. It's a particularly smart strategy now, says Mark Luscombe, tax analyst with CCH, which publishes tax guides. Under the 2001 Tax Relief Act, tax rates aren't scheduled to decline again until 2004. But several members of the Republican-controlled Congress have proposed speeding up the rate cuts. If taxes fall in 2003, your deductions will be worth more in 2002.
• Give your jalopy to charity. Around this time of year, lots of charities run ads seeking donations of used vehicles. The ads often hint that in exchange for your generosity, you'll get a big fat tax deduction.
In recent years, the IRS has warned that taxpayers who overstate the value of their used cars could face trouble down the road. Recently, the IRS followed up with a ruling that offers some guidance. According to the ruling, you can use a used car pricing guide — such as the Kelley Blue Book — if it lists a price for a car that's the same make, model, year, sold in the same area and is in the same condition as the donated car.
If that information isn't available, you can use other "reasonable" methods to estimate the car's fair market value, the IRS says. A local car dealer might be able to give you an estimate. Photos of the car and copies of local classified ads for similar vehicles will support your deduction if it's challenged by the IRS.
For a deduction of $5,000 or more, you'll need a professional appraisal. The Better Business Bureau offers tips on donating a car at www.give.org.
• Check your withholding. If you're not having enough withheld in taxes, you'll face a big tax bill next spring. Worse, you could get smacked with a penalty. In 2001, 6.3 million taxpayers were penalized an average $254 for failing to pay enough tax during the year.
Big life changes, such as marriage or divorce, can affect your tax liability. So can income that's not subject to withholding, such as rent, interest or capital gains from the sale of investments.
The IRS offers a withholding calculator on its Web site. You'll need current pay stubs and last year's tax return to estimate whether you're having enough withheld. If you come up short, there's still time to arrange for your employer to withhold more from your paycheck.
• Stuff money into your retirement plans. Contributions to a 401(k) plan are pretax, so money saved in a 401(k), or similar company retirement plan, will reduce your taxable income. By lowering your taxable income, you might be eligible for other tax breaks, such as the child tax credit, says Jeffrey Eischeid, a partner with KPMG's Personal Financial Planning practice in Atlanta.
In 2002, you can contribute up to $11,000 to a 401(k). If you're 50 or older, you can contribute up to $12,000, as long as your company allows catch-up contributions. If you earned more than $85,000 in 2001, you might not be able to contribute the maximum.
Workers with self-employed income can contribute up to $40,000 to a Keogh plan. Those contributions are directly deductible from your income. You have until April 15, 2003, or later if you file for an extension on your tax returns, to make your contributions, Eischeid says. But if you want to deduct the contributions on your 2002 tax returns, you must set up the Keogh by Dec. 31, 2002.
• Make sure the IRS doesn't owe you money. Have you moved in the last year? The IRS may have some money for you.
The IRS says it's looking for more than 96,000 taxpayers who are owed about $80 million in undelivered refunds. In most cases, the checks were returned because the recipients moved without notifying the IRS.
If you think you're eligible for some of that unclaimed cash, go to www.irs.gov and click on the link marked "Where's my refund?" You'll need to provide your Social Security number, filing status and the amount of the refund shown on your 2001 return. The feature won't be available long, because the IRS says it needs to start preparing for the 2003 filing season.
You can also search a free database provided by the National Taxpayers Union at www.ntu.org. You can search the database by plugging in your last name.
