Mellody's Math: Last Minute Tax Tips For 2001
N E W Y O R K, Dec. 27 -- The Internal Revenue Service would not call them taxes if they weren't quite so taxing, but there are some smart moves you can make in the last few days of 2001 to make paying them easier.
The IRS expects more than 130 million individual tax returns to be filed for 2001. This year, Congress passed legislation to cut taxes by $1.35 trillion between now and 2011, the largest tax cut since 1981.
The new tax plan lowers the top tax rate, repeals the estate tax in 2010, doubles the child tax credit, provides tax relief for married couples and expands education and retirement saving tax incentives. While many of these tax relief measures kick in over the next several years, here is what you can do right now, before the end of 2001, to ease your tax burden:
1. Defer Income: Basically, you should work now, but get paid later. Next year, tax rates above the 15 percent tax bracket are scheduled to drop by one-half a percentage point. This means any income you can defer into the New Year will be taxed at a lower rate, leaving you with more money. If you can, defer any and all added income owed to you this year into 2002. For example, if you are scheduled to receive a holiday bonus before year-end or you are owed consulting fees for completed work, have the check dated after Dec. 31, 2001. That allows you to save on 2001 taxes, and it gives you more cash as a result of lower tax rates in 2002.
2. Max out your 401(k): Since company retirement plan contributions are made on a pre-tax basis, you might want to contribute more to your 401(k) plan to lower your taxable income by the same amount. (In 2001, the maximum 401(k) contribution allowed is $10,500.) As an extra incentive, if your company matches contributions, you will capture an additional benefit of putting more, tax-deferred income towards retirement. If you receive a bonus before year-end that cannot be deferred into 2002, you may want to apply as much as you can to your 401(k) to help decrease your taxable income and ultimately this year's tax bill.
3. Maximize Deductions: The key here is pre-pay, pre-pay, pre-pay, as much as possible. If you are one of many taxpayers who itemize your deductions, consider pre-paying deductible items now such as mortgage payments, state income taxes, medical bills, health insurance and property taxes due in January. Why now? These deductions are worth slightly more this year than they will be next year when tax rates fall. But be warned: this strategy does not work for taxpayers subject to the Alternative Minimum Tax (AMT). Such can be the case for individuals who live in a high tax state, have many dependents, or have exercised stock options in 2001.
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