Whittle Away Your Tax Bill
Midnight, Dec. 31, signals the end to most of your opportunities to lower your 2002 tax bill. In addition to the tried-and-true strategy of postponing income until the next year and the obvious deductions you can take before the midnight bell tolls, here are other steps that might help you this year:
-- Dig into your pocket to increase your 401(k) contribution for 2002 to the new limit of $11,000 or, if you're 50 or older, to $12,000. If your original salary deductions don't add up to the max, immediately contact your plan administrator to ensure that you can make the extra contributions before the Dec. 31 deadline.
-- Budget so you can afford to save $12,000 in your 401(k)--or $14,000 if you qualify for the catch-up for people 50 and older--for 2003.
-- Open a spousal individual retirement account and contribute up to $3,000 ($3,500, for a husband or wife 50 or older) for a nonworking spouse, as long as your modified adjusted gross income is $160,000 or less.
-- If you're self-employed, try to postpone paying health insurance premiums until 2003. The deduction increases to 100% then, from 70% in 2002.
-- Fatten your kids' college accounts by contributing $2,000 per child to Coverdell Education Savings Accounts, up from the $500-per-child limit last year. Deadline for contributions is when you file your return (not including extensions).
-- See IRS Publication 970, Tax Benefits for Higher Education (www.irs.gov), for new, more liberal Coverdell ESA rules if you're contributing for a special-needs student.
-- Give holiday cheer to your kids, grandkids, or anyone else you love by taking advantage of the higher gift-tax exclusion of $11,000 per person for 2002, up $1,000 from last year.
-- Encourage your young adult children to start saving for retirement now. A child who's over 18, not a full-time student, with an adjusted gross income of less than $25,000 can take the new "Saver" tax credit of up to $1,000 for putting money into an IRA, 401(k), and certain other retirement accounts. If the child is married, the couple may have an adjusted gross income of as high as $50,000 and still qualify for a credit.
-- Spring for a new car. If you use it at least 50% for business, you can deduct up to $7,660 under a new first-year depreciation deduction. For an electric car, the deduction may go as high as $23,080.
By Ellen Hoffman