Planning for 2003 taxes should start now
4/15/2003

Planning for 2003 taxes should start now
Source: Scripps Howard
Publication date: 2003-04-15


      Now that your 2002 taxes are done and gone, don't count on new tax cuts to reduce your 2003 tax bill. Bank instead on tax-saving strategies already on the books, experts say.

"I tell clients you have to use the law we know today and plan according to what's real," says Evan Snapper, senior manager with accounting firm Ernst & Young's personal financial counseling practice.

     Snapper adds that the best tax planning is good organization. Too many people, he says, "give up valuable deductions because they don't keep track through good records."

     So before filing your 2002 tax papers away, check them again to see how record-keeping can help tax planning year-round:

     — Keep good asset records starting with your No. 1 asset, your house. Additions and other major improvements add to the basis price when you sell, shielding you from capital gains taxes. You still have to pay taxes on any capital gains above $250,000 or $500,000 for a couple. Closing costs you couldn't write off upfront like attorney fees and transfer taxes also add to a home's basis, whether you still have your original mortgage or have refinanced.

     — Mutual fund statements over the years may show if you have capital losses to write off to lessen the pain of a bear market. People who automatically reinvest their mutual fund distributions grow accustomed to owing taxes on them. Double-check to see if you have a loss entitling you to a write-off up to $3,000 a year.

     Lisa Caputo, president of the Women and Company division of Citigroup, counsels women to do year-round tax planning to stretch the $1 trillion a year they earn.

     Start by working with an expert who can help design a financial plan that takes you through the next 10 years. Kick-start it this week before you file your 2002 tax papers away, Caputo says.

     Jeffrey Eischeid, national partner for personal financial planning with the accounting firm KPMG, tells clients to "take advantage of every opportunity that currently exists to put money into tax-favored savings programs — the earlier in the year, the better."

     — Start by contributing regularly to tax-deferred saving plans. A 401(k) retirement account or Individual Retirement Account on which taxes are deferred until withdrawal in retirement each has the double benefit of lowering pre-tax income now and building a nest egg for retirement, when your income — and your tax bracket — may be lower.

     Contribution limits for traditional tax-deferred IRAs and for Roth IRAs (on which money is taxed now for the promise of tax-free withdrawals) have been raised from $2,000 to $3,000, or $3,500 for people 50 and older.

     In 2003, federal tax law lets you put up to $12,000 tax-deferred into your 401(k) plan — $14,000 if you are 50 and older — but only if your employer approved the higher limits.

     — Tax-sheltered education savings accounts are another option that lets you put in after-tax dollars now for tax-free withdrawals for qualified educational purposes.

     Coverdell education savings accounts let you invest after-tax dollars of up to $2,000 a year for a child under 18 to cover the cost of pre-college schooling, including tuition, room, board, books, computer equipment, uniforms and the like. Earnings and withdrawals for qualified expenses are tax-free.

     State 529 plans, named after their tax-code section, let you save college tuition, room and board and the like. You pay taxes on the money you put in, but there are no taxes on the principal or interest as the fund grows and you withdraw the funds tax-free.

     Parents or grandparents looking to fund a 529 account can use the annual gift tax exclusion — $11,000 in 2003 — to fund an account. Or you can combine five years' worth of gift-tax exclusions into a single year's gift to a 529 account if you want to get it out of your estate, on which the first $1 million is free of federal estate tax in 2003. One caveat: If the contributor dies within the next five years the money is subject to gift tax.

     Eischeid counsels clients to keep an eye on their investment timeline in today's volatile stock market: The closer you are to needing the cash for education, the less aggressively you should invest, he says.

     IRS taxpayer advocate Nina Olson adds: Make sure you won't need to withdraw money from tax-favored accounts sooner than tax law allows for reasons other than education or retirement: If you do, you'll face 10 percent early-withdrawal penalties atop an income tax bill.

     Finally, if you get a hefty refund on your 2002 taxes (the average so far is $2,010), you gave Uncle Sam a free loan of your money instead of putting it to work for you. If your refund was for more than $500, consider lowering your withholding on the W-4 form on file with your employer, advises attorney-accountant Mark Luscombe of tax publisher CCH Inc.

     Alternately, if your tax bill was at least 10 percent more than the amount withheld from your paycheck, Luscombe suggests adjusting W-4 withholding upward to avoid paying quarterly estimated taxes plus penalties and interest on any balance due.

© 2000 Scripps Howard News Service.

All Rights Reserved.

Publication date: 2003-04-15


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