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"Start Now To Cut Next Year's Tax Bill"
by
Grace W. Weinstein

It's too late to do much about your 2003 tax bill - although a contribution can be made to an Individual Retirement Account for 2003 right up to the day you file your income tax return for the year - but it's none too early to start thinking about 2004. Planning early can produce big savings.

Here are a half dozen money-saving tips:

1. Adjust your withholding to reflect the tax you'll actually owe. The goal is to come out even, or close to even, at the end of the year. Don't under-withhold or underestimate, or you'll owe Uncle Sam a nondeductible penalty. But don't over-withhold either. Some folks deliberately have too much taken out of their pay so that they'll receive a refund, but over-withholding means that you lose the use of your money while giving an interest-free loan to Uncle Sam. If you use withholding to discipline yourself to save, sign up for automatic saving or investing and have money transferred directly to a bank or mutual fund.

2. If your deductions exceed the standard deduction - $9,500 for a married couple filing jointly in the 2003 tax year - itemize deductions by listing them on Schedule A with Form 1040. Be sure to do the arithmetic. The government points out that 500,000 taxpayers overpaid their taxes, by an average of $600 apiece, by claiming the standard deduction when they could have itemized. For many of these taxpayers, mortgage interest alone exceeded the standard deduction.

3. Close to the edge? If you usually take the standard deduction, consider "bunching" deductions in alternate years so that you can take advantage of itemized deductions. To bunch your deductions, make annual charitable contributions in January and December of one year, then skip the following calendar year. In the year you double up your charitable donations, prepay January mortgage interest and first-quarter property taxes in December. 

4. Consider consolidating personal debt into a home equity loan or line of credit to make the interest deductible and - very likely - lower your interest rate. Just don't put your home on the line unless you're confident that you can repay the loan on schedule.

5. Contribute as much as you can to tax-sheltered retirement plans. For 2004 the ceiling on IRA contributions is $3,000 plus $500 if you are age 50 or more. The ceiling on employer-sponsored 401(k) and 403(b) retirement plans is $13,000 plus catch-up contributions of $3,000. In all of these plans, earnings aren't taxed until you take the money out. In employer-sponsored plans, you may also benefit from employer matching contributions.

6. If you have children or grandchildren, take advantage of one or more of these education tax incentives:
a) The Coverdell Education Savings Account lets you put away up to $2,000 per child per year in a tax-deferred account. 
b) The interest on U.S. Savings Bonds is tax-free if the proceeds are used for tuition and fees and if your income is under specified limits in the year the bonds are redeemed.
c) Qualified Tuition Plans ("529 plans") provide tax-free savings when the money is used for college tuition, fees, books or room and board. Contributions are not tax-deductible on your federal tax return but some states offer tax breaks to residents. 
d) Meet income limitations and you can deduct tuition and fees of up to $4,000 in 2004. This deduction is available even if you don't itemize other deductions.
e) Up to $2,500 in interest on college loans may be deducted, whether or not you itemize deductions, if you meet income limitations.
f) Meet income ceilings and claim the Hope scholarship credit for $1,500 in tax credits, per student per year, for the first two years of college.
g) The Lifetime Learning Credit of up to $2,000 a year is per-family, not per-student.

Income ceilings are a moving target. And, since Congress made the rules regarding each tax break, those rules are complicated. For detailed up-to-date information, see: The Procrastinator's Guide to Taxes Made Easy    

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