Year-end tactics can cut your tax bill
You've done a great job at work this year, and the boss wants to reward you with a bonus. Say thanks and politely ask if the check can be mailed after Jan. 1, says tax expert Jim Seidel.
Stalling income is a tried-and-true way for people to try to knock down their income-tax bills. As this tax year winds to a close, it's important to consider it along with a useful counterpart - accelerating expenses.
This could be as simple as making an extra house payment that includes deductible interest, contributing to a charity before year-end, or even making an early property-tax payment.
As for timing such payments, now is good, but Mr. Seidel, a senior tax analyst at New York tax-advisory service RIA, says that you can wait until Dec. 31, because a check or credit-card payment is considered as made this year even if it does not clear until next year. Just make sure the check is good, he says. And you might want the Postal Service to provide you with an inexpensive proof of mailing.
These tax strategies are known as "bunching" - lumping expenses into a given year, or moving income around to the extent possible in order to bulk up deductions.
"Take a look at your expenses and see if you can shift them one way or another," suggests Seidel.
Bunching can come in especially handy for itemized deductions such as medical expenses or that grab bag of "miscellaneous" deductions - tax-preparation fees, unreimbursed employee expenses, job-hunting costs, or the use of your home for business, etc. Both of these require itemization and have floors.
For medical expenses, they have to exceed 7.5 percent of your adjusted gross income (AGI), and 2 percent for miscellaneous deductions. Sometimes this requires long-range planning, such as paying for orthodonture work, while at other times a single visit to the dentist, for example, will help push you over the limit.
The general rule is to bring expenses into 2002 and push income to 2003, but Seidel says there are exceptions. If you expect your income to rise enough to put you into a higher tax bracket next year, he says you'll want to push expenses into 2003.