By Linda Stern
WASHINGTON (Reuters) - You've probably just filed away the forms and put the whole stressful mess of income taxes behind you, but now is the time to really think about next year's taxes. When the weather is hot, so are the tax breaks -- if you know how to manage them.
Here's a picnic basket full of ideas.
First, guesstimate your 2004 tax rate. If you have a rough idea of what your combined federal/state/local income rate is, then you can start counting the dollars you'll save with tax planning.
Ask your tax preparer for this number, or calculate your rate from last year's forms, or look on the Web. You can find a good explication of federal tax brackets at the Web site of Arkansas tax preparer Kerry M. Kerstetter, http://www.taxguru.org and find your state tax rate at the Web site of the Federation of Tax Administrators, http://www.taxadmin.org.
Remember to consider your marginal rate, which is the rate applied to the highest part of your income, because that's the rate likely to apply to taxable income taken off the table in midsummer moves.
For example: If you calculate your marginal federal, state and local income tax rate to be 30 percent (not atypical), then every $2,000 you save will net you $600 next April.
Ready? Okay then, save.
-- Pile money into retirement savings. If you're not already maxing out your 401(k) plan, arrange to lift your voluntary contributions to the maximum allowed. That's as much as $13,000, or $16,000 if you're 50 or older, depending on your employer's rules. Just putting $5,000 more in between now and the end of the year will save you an extra $1,500 in taxes.
If you're already maxing out your 401(k), or don't have access to one, consider adding an Individual Retirement Account. If you don't have a retirement plan at work, or your income is below certain levels, you can contribute to a deductible IRA.
If you don't qualify for a deductible IRA, a Roth IRA will save you taxes in years to come. Put $3,000 every year in a Roth IRA earning 9 percent for 30 years, and at the end of that time period you'll have saved $179,892 in income taxes, according to calculations by the Farmers Insurance Group.
-- Add a health savings account. If you're in a position to control your own health insurance, get a high-deductible policy and open a health-care savings account. This enables you to shelter a chunk of your health-care spending money from taxes, and the earlier in the year you do this, the more you may save.
Couples or families can put as much as $5,150 in these accounts; that's another $1,545 in tax savings that you'll never have to pay. These are tax-free plans, not tax-deferred plans.
-- Take losses, suggests Neil Becourtney, a Roseland, New Jersey, tax preparer.
The market has been up and down and up this year, so it's likely some of your investments are under water. Sell them now to lock in losses that can lower your taxes later. You can't buy the same security back for 30 days, but you can buy something similar or rebuy the same company in 31 days.
Lock in a $3,000 loss and that eliminates at least $450 you'd have to pay in taxes on a similar gain. If you don't have taxable gains by Dec. 31, (or if your losses exceed your gains by $3,000), you can use that $3,000 to offset regular income, saving about $900 in taxes.
-- Start giving away money, and shares. You know you're going to feel charitable by the end of the year anyway. Start now by donating appreciated stock to your favorite charity and you'll pay less next spring.
If you own stock worth $5,000 and paid $2,000 for it, the finances go like this: Give the shares to your favorite charity, avoid $900 in taxes on the gain and save $1,500 with the deduction.
-- Work on vacation. A suggestion from accounting firm BDO Seidman: ``By tacking on some vacation days to an industry convention or by scheduling a series of business meetings to coincide with a family trip, you can write off a portion of your travel, hotel, restaurant and other vacation bills.''
-- Pay your estimated taxes, but don't go overboard. If you don't pay enough estimated taxes (or have enough taxes withheld from your paycheck), the IRS will make you pay 5 percent interest on the amount you underpaid. On July 1, that rate drops to 4 percent. That's a lot better than the rate you'll get on most other loans, so if money is tight, put the tax agency off for a few more months.
``If the choice is between paying the taxes or paying the credit card, pay the credit card,'' says Becourtney.
(Linda Stern is a freelance writer who covers personal finance issues for Reuters. Any opinions in the column are solely those of Ms. Stern. You can e-mail her at lindastern(at)aol.com).
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