On Cutting Taxes at Year End
Profit Ability Article Highlight

As the year winds down, you are likely being pulled in several directions. One thing you should not overlook is your 2003 tax bill. Before the clock strikes midnight and 2003 is gone, it is critical that you take measures to lower your taxes before it is too late. See the list below for some simple, quick ways to lower your taxes. If you have questions about any of these measures, please feel free to call our offices at 714.937.6337 or contact our firm via e-mail at info@talleynco.com.

• If you're self-employed, open a retirement account. Contributing to a QRP/Keogh, SEP-IRA, or Simple IRA is tax deductible and these accounts grow tax-deferred. As long as the account is opened before December 31st, you have until you file your income tax return next year to make the contribution and still claim it on your 2003 tax return.
• If you don't have cash and you still want to make a donation, charge it instead. Even if you don't pay the bill until 2004, you can deduct it in 2003.
• Donate your old possessions including clothes, computers, and furniture. You may deduct fair market value for these items, but be sure to get a receipt. No receipt means no deduction in the IRS's eyes.
• Unless you are subject to the Alternative Minimum Tax, accelerate other tax deductible expenses . Miscellaneous itemized expenses must exceed 2% of your adjusted gross income to be allowed. Examples are union dues and IRA fees.
• Prepay your kids' medical and dental expenses for 2004. Accelerate these expenses if they exceed 7.5% of your adjusted gross income.
• Have your boss pay your bonus a month late. Enter into an agreement to postpone your 2003 bonus until January 2004. As long as the agreement is entered into before the bonus is "constructively received," you've deferred taxation until 2005!
• If you're self employed, defer billing until late December. Because you're operating on a cash-basis with the IRS, if you don't get paid what you're owed this year, it's not taxable for this year.
• Make January's mortgage payment in December to increase this year's interest deduction.
• If you're losing on a stock but want to keep it, sell the shares and buy them back after 30 days. The wash sale rules disallow any losses from the sale of stock if substantially identical stock has been bought within 30 days of the sale.
• Watch out for the Alternative Minimum Tax (AMT). The AMT is a flat 26% to 28% tax on an "augmented income." Some deductions (such as state income taxes and real estate taxes paid) may actually increase your net tax under the AMT. If you're in a high-income tax bracket ($75,000 and over), it is important to consult your tax professional regarding the AMT.
• Harvest your investment losses in taxable accounts by December 31st to offset any capital gains and/or up to $3,000 of ordinary income. You can carry over any unused losses to future tax years without expiration.
• If you make quarterly estimated tax payments to your state (and you're AMT free), make your Q4 payment by December 31st. That way you can accelerate it all as an itemized deduction on this year's tax return.
• Prepay the second installment of your property tax by December 31st instead of February so you can take the deduction on this year's return.
• Open and fund a 529 college savings account. Many states offer a current income tax deduction for all or some of contributions made to this account, and you'll be saving for your child's or grandchild's education. You can also gain immediate tax benefits such as contributing up to $110,000 this year without incurring gift taxes, as long as you elect to treat the contribution as being made over five years.
• Donate appreciated securities you've held for more than one year to a qualified public charity. You'll receive a full fair-market-value deduction and pay no tax on capital gains. Alternately, you should sell depreciated securities to take the tax loss first, and then give the cash to charity.
• Reinvested dividends for stocks sold in 2003 will add to your stock basis, thus reducing taxable gain.
• Give gifts before year-end to utilize your tax-free $11,000 yearly gift allowance. You are allowed to give this amount to as many people as you like (including your favorite accountant).
• Give appreciated stock to children 14 and older. They can sell the stock and be taxed at a lower rate. They can also hold onto the stock and sell it to fund college expenses. Pay local/state taxes before December 31st to increase 2003 deductions. Have your employer withhold extra taxes from your last few paychecks if you think you might be hit with an underpayment penalty for 2003. The IRS views wage withholdings as being spread evenly over the year.
• Use or lose your FSA – your flexible spending account allows you to set aside pretax dollars for things like child care and medical expenses. If you leave funds in this account come year-end, you lose them. So drain your FSA on whatever expenses you can. Also, you can now use FSA funds to purchase over-the-counter medication.

If you have questions about any of these measures, please feel free to call our offices at 714.937.6337. Or you can reach our firm via e-mail at info@talleynco.com.