For the smart consumer, tax planning is a year-round event, and there is no better time than now to start work on your 2003 tax strategy, advises the Nevada Society for CPAs.
Advanced planning helps to ensure that you take maximum advantage of opportunities to reduce your taxes, particularly those strategies that may take a few months to implement.
Starting this year, the dependent care tax credit is expanded.
You qualify for the dependent care credit if, in order for you to work, you pay someone to care for a child under age 13 or for an incapacitated adult.
For 2003, the amount of expenses eligible for the credit increases to $3,000 for one qualifying dependent and to $6,000 for two or more, up from $2,400 and $4,800 respectively.
Under the new law, the maximum credit is increased to 35 percent of expenses for taxpayers with an adjusted gross income of $15,000 or less, and phases down to a minimum credit of 20 percent for taxpayers with an adjusted gross income over $43,000.
Pre-tax contributions to an employersponsored retirement savings plan, meanwhile, reduce the amount of taxable wages you report on your return, making qualified retirement plans an excellent way to cut your tax bill.
If you have a 401(k) plan at work, the top annual contribution for 2003 is $12,000, up from $11,000 last year.
If you're 50 or older, you're eligible for the "catch-up" provision, which means you can contribute up to $14,000 this year.
For traditional and Roth IRAs, the maximum annual contribution remains the same as last year, $3,000 or $3,500 if you're age 50 or older.
It's smart, too, to improve your recordkeeping this year.
Many people miss out on valuable deductions because they don't keep records of deductible expenses.
Start the year off by setting up a system for tracking deductible expenses and storing receipts.
Another tactic is to plan your investment gains.
While you should never make investment decisions based solely on tax considerations, proper planning can reduce your tax bill significantly.
For example, if it makes sense from an investment standpoint, wait to sell appreciated assets until you have met the one-year holding period to qualify for long-term capital gains treatment.
Timing losses to offset your gains is another tax-reducing strategy.
Capital losses can be used to offset any capital gains you have, plus up to $3,000 of other income, such as salary.
Any excess loss can be carried over to a future year.
Plan to give away some assets.
If you're thinking about liquidating appreciated assets to pay your child's college tuition, consider this: Gift the stocks or mutual fund shares to your child and have the child make the sale and pay the tuition bill.
If your child is in the 15 percent tax bracket, the 10 percent long-term capital gains rate would apply, compared to the 20 percent tax you would likely face.
For assets held for five years or more, a capital gains tax of 8 percent applies to those in the 15 percent tax bracket.
Plan to use your vacation home wisely.
If you own a second or vacation home, check with a CPA to determine whether you get a better tax break by treating the property as a second residence or as a rental property.
You will need to carefully work out a plan, since the number of days you personally use the home is critical to its tax treatment.
Another possibility? Plan to turn your hobby into a business.
You also may be able to turn your hobby into a business and write off business expenses.To qualify, you must be able to demonstrate that you engaged in the activity for a profit.
This means conducting the activity as a business, with good records and a separate bank account.
The IRS will expect your sideline business to show a profit in three out of five years, or you will have to prove your profit motive in order to deduct losses.
And most important, plan to get advice early.
Rather than waiting until the end of the year or just before your return is due, contact a CPA now for advice.
This will help you to take charge of your tax situation in 2003.
