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Getting ready for tax season

Christmas is coming, I am sure everyone wants to think about tax season right in the middle of the holiday cheer. However, there are advantages to thinking about tax planning before the year end. When April 15 approaches, many people will spend a lot of time organizing and preparing tax information, and a lot of time complaining about their tax bill. Here are some suggestions to help make filing your next year’s income taxes easier and less costly.

Deferring income and accelerating deduction. This is a traditional tax planning strategy but it is even more relevant in view of the declining income tax rates. Some methods of deferring income would include delaying receipt of a year end bonus or selling property on the installment method. Accelerated deductions might include paying state or local taxes in 2002 rather that 2003, making a charitable donation, or paying certain business related expenses in 2002.

Investment-related strategies. Before year end review your securities portfolio for any investments that have a loss. Consider selling some of these to offset capital gains you have already recognized this year or to deduct a $3,000 (may vary depending upon your filing status) net capital loss, which is deductible each year. If your net loss exceeds the $3,000, the excess can be carried over indefinitely to future tax years. Always consider the cost basis and acquisition date when selling securities. This will allow you better control over the amount of your gain or loss and whether it is a long-term or short-term. 

Another strategy is a mutual fund exchange or a bond exchange. This allows you to recognize a taxable loss and still hold a similar, but not substantially identical fund.

Make your IRA contributions early in the year instead of waiting until the last minute. The sooner you make your IRA investment, the sooner this money will begin growing for you tax-deferred (or tax-free in the case of Roth IRAs).  For 2002, you are generally allowed to contribute to a traditional or Roth IRA the lesser of $3,000 or your earned income, depending on your adjusted gross income.  These limits are increased by $500 for each eligible person who is over the age of 50 by the end of the year.

Increase your retirement plan contributions. If you have a company that offers a 401(k) or other type of retirement plan, contribute the most you can. This will not only save you money in taxes (the contributions will reduce your taxable income), but will also provide growth on a tax-deferred basis. This year you can put up to $11,000 into your employer’s 401(k) plan. In addition, your employer may match your contributions, giving you money toward retirement. Take Susie S. Aver for example. Susie earns $50,000 per year and saves 10% of her salary into her company 401(k) plan ($5,000 per year). Her company matches 100% of her contribution up to 3% (adding another $1,500). Susie’s $5,000 contribution would also save her about $1,550 in state and federal income taxes. Between the company match and tax savings, she is ahead even before her investments reflect any growth.

Keep your tax files and records organized. You needn’t dread tax preparation. A little organization during the year can save you loads of time. Your system can be as low-tech as a series of envelopes for the tax-related information (such as charitable contributions, medical bills etc.), or as automated as keeping your records on a computer bookkeeping program. As you start to receive tax information in January, take a minute to look at the papers to make sure they are accurate. The sooner you start getting mistakes corrected, the more likely you are to have the information you need by the filing deadline. If you have an accountant preparing your taxes, be prepared to pay a higher fee if the tax information you provide is unorganized.

Remember to keep good records for all stocks you purchase, including the date and price you pay. You will need this information when you sell these stocks to calculate your taxable gain or loss. You should also keep all year-end statements you receive, again to help calculate taxes upon their liquidation.

Don’t wait until April 1 to hire an accountant. If you are looking to hire or change accountants, do so when they have the time and patience to meet with you. Accountants will be better able to assist you when you give them some time to do effective planning.

Nancy Hadley is an Investment Representative with D.A. Davidson in Sandpoint. While D.A. Davidson & Co. provides investment advice related to taxes, you should always consult your tax/legal advisor.


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Nancy Hadley

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