Year-End Tax Planning (Part II)
11/24/2003
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Last time in Part I of this “Year-End Tax Planning” series we briefly discussed that new and complicated tax laws make the traditional year-end planning trickier. Under many circumstances, each taxpayer will have to evaluate his /her current and anticipated situation before making the traditional moves to defer income and accelerate deductions.
We now discuss some particular actions that you could consider concerning the year-end tax planning.
1. Unless you are in the position of potentially owing alternative minimum tax (AMT), you might want to consider making your 2003’s 4th quarter estimated state tax payment before the end of the year, rather than waiting until January 2004 (the official due date is Jan. 15, 2004). Ditto for your 2004’s January mortgage payment.
By doing this, a taxpayer generally can bring forward the allowable itemized deductions from 2004 into 2003, thus reducing the current year’s tax bill. Of course, if you anticipate that you will move up to a higher tax bracket in the new year, consider making the payment after the New Year to maximize your overall tax savings.
2. To maximize your itemized deductions for 2003, consider making charitable contributions before the year-end. If you intend to make a significant gift, consider gifting appreciated securities to make your donation even more tax-efficient. This is achieved by avoiding to pay income taxes for the appreciation (i.e. capital gains) while you will be entitled for tax deductions at the securities’ market price.
If you anticipate that you will move to a higher tax bracket next year, then consider holding off in making the donation until after the New Year. Whereas the charities will benefit virtually the same, you will save more taxes by delaying the gifting date.
3. Review your investment portfolios and take actions that would maximize your investment returns – after taxes. For example, take losses in stocks that no longer fit your investment strategy by moving out of these securities to reduce your capital gains and other income.
For taxpayers with pre-May 6, 2003 long-term capital gains, realizing long-term capital losses may be particularly tax effective this year as post-May 5, 2003 net long-term capital losses may offset pre-May 6, 2003 net long-term capital gains.
4. If you have not fully funded your maximum retirement savings deferrals, you may want to consider making year-end contributions to take advantage of the allowed deferrals to lower your taxable income for the year.
For 2003, the maximum elective deferral for a 401(k) plan is $12,000. Taxpayers who will reach their 50th birthdays on or before December 31, 2003 may defer an additional $2,000 of income to a 401(k) plan. (2004’s maximum elective amount will be $13,000 with the “catch-up” of $3,000 for those reaching age 50 by the end of 2004).
For taxpayers using SIMPLE plans, 2003’s maximum amount is $8,000 with $1,000 additional amount allowed for those who are 50 or older by the end of 2003. (2004’s number will be $9,000 with $1,500 “catch-up”).
For those who are eligible to make IRA or Roth IRA contributions, the deadline for 2003’s contribution is next April 15 instead of the end of the year. 2003’s maximum amount for either IRA or Roth or combined amount is $3,000. Those who are at least 50 years old by the end of 2003 may contribute an additional $500 to their IRA/Roth. (2004’s amount will be the same as 2003’s).
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