NEWS ARTICLE

For: Release week of December 17, 2001

To: Rotating News Article

By: Linda K. Bowman, Ext. Agt. IV - Family & Consumer Sciences

Santa Rosa County Extension Service

Telephone: 850/623-3868 or 939-1259, ext. 1360

Tax Planning Series: End of Year Tax Planning Tips

If you want to save money on your 2001 income tax bill, now is the time to make changes that can be implemented prior to December 31, 2001 according to Jeff Schnepper in "End-of-year tax-saving tips" in MSN Money. He contends that basically there are three methods one can use to decrease the tax bite: defer income, accelerate expenses and take advantage of credits.

Authorities recommend that you begin your tax planning by preparing an estimated 2001 income tax return in late November or early December. Determine if you have enough deductions to itemize. If you have enough deductions to itemize, examine health and miscellaneous expenses to determine if they are close to the 7.5 percent and 2 percent "floors" respectively? If they are you will want to take advantage of these deductions this tax year. The following tips can help you maximize your income tax savings.

Defer Income:

One of the first strategies to consider is increasing pension contributions. Every time you put money in your 401k or 403b (if you work for a non-profit) you reduce your taxes. You get a tax deferral as well as increased compounding return on your investment. For example, if you are in the 27.5 percent tax bracket in 2001 and you put $1000 in a 401k or 403b you will immediately reduce your taxes by $275.

Qualifying IRA contributions can reduce taxes as well as deferring taxes on earnings until a later date. Contributions to a Roth IRA will not decrease taxes this year but earnings will compound tax-free forever.

If you have a choice to receive income in December 2001 or January 2002, defer receipt until January. The 27.5 percent tax bracket for 2001 is reduced to 27 percent in 2002. This means you not only get the benefit of tax deferral but also a lower tax rate.

Accelerate Expenses:

Prepay expenses such as property taxes before December 31, so that they can be deducted from 2001 income taxes. Make your January mortgage payment in December 2001. By doing this you can deduct the interest paid on your 2001 income tax return. Contribute cash as well as goods to charitable organizations now. If you don't have cash you may want to charge your contribution. The deduction is allowed in the year of the charge.

Schedule medical checkups for family members, dental, eyes, and general health in order to bunch expenses at the end of the year or the beginning of the next year depending upon your total deductible expenses and whether you have met the 7.5 percent "floor" for medical expenses.

Also consider prepaying miscellaneous expenses if you are close to the 2 percent "floor" for deducting them. The strategy with all "floors" on expenses is to accelerate if

your expenses are above the floor or defer paying expenses until next year if your expenses are below the "floor."

Credits:

Credits are always better than deductions. Credits are a dollar-for-dollar reduction in your tax, but deductions are only a percentage decrease in taxes. The Economic Growth and Tax Relief Act of 2001 introduced several new credits that will affect hundreds of Floridians. For example, every family with an annual income of less than $110,000 qualifies for a $600 credit for each child in the family under the age of 17. This credit will increase each year until it tops out at $1,000 in 2010. In addition new educational tax credits are available. The Hope Scholarship provides a tax credit for college tuition for the first two years that a student is in college; up to $1,500 in tax credit is available. In addition the Lifetime Learning Credit kicks in after the student in the household no longer qualifies for the Hope. This is 20 percent up to $5,000 in tuition for graduate and undergraduate expenses.

With the 2001 tax law changes it is more important than ever to keep good records. Tax law limits are being phased in over a 10-year period. For example the amount of money you can contribute to an IRA will rise from $2000 in 2000 to $5,000 in 2008. Similarly your company's retirement plan 401k or 403b will rise from $10,500 to $15,000 in 2006. This rising contribution may or may not trigger a matching contribution from your employer. Check it out!

In 2001 interest on student loans is fully deductible if you file as a single taxpayer and your income is less than $65,000 or $135,000 if you are married and filing a joint return. Some payments for college tuition are deductible over the next four

years then, under current law, the deduction goes away in 2006. Now is the time to go to school.

If you have a question, call Linda Bowman, Family and Consumer Sciences Extension Agent, The University of Florida--Santa Rosa County Cooperative Extension Service--IFAS, at (850)623-3868 or (850)939-1259, Ext. 1360 for south county residents, between the hours of 8:00 a.m. and 4:30 p.m. weekdays. Hearing impaired individuals may call Santa Rosa County Emergency Management Service at 983-5373 (TDD).

Extension Service programs are open to all people without regard to race, color, sex, age, handicap or national origin. The use of trade names in this article is solely for the purpose of providing specific information. It is not a guarantee, warranty, or endorsement of the product name(s) and does not signify that they are approved to the exclusion of others.