With the holidays approaching, visions of sugar plums may already be dancing in your head. But if you hope to save a few bucks, envisioning a tax form may serve you better.
After all, tax experts say, now is the time to act if you hope to minimize the tax bill that comes due next April.
The good news is that even those who don't take action may pay less, simply because tax rates have dropped, just as certain credits and deductions have increased.
As part of the tax-reform bill signed into law last spring, rates for the 28, 31, 36, and 39.6 percent brackets have been cut by one-half percentage point. So someone previously in the 28 percent category, for example, will now pay 27.5 percent.
These rates fall another half point in 2002, so taxpayers who can push their paychecks or bonuses into next year will likely benefit even more.
Meanwhile, the 15 percent bracket remains the same. But a new 10 percent rate has been created and applies to the first $6,000 of taxable income for all single taxpayers, and $12,000 for married couples who file jointly.
Another boost for taxpayers, at least those with minor children, is a rise in the per-child tax credit. It now is $600, $100 more than last year. Credits are always more advantageous than a deduction, since a credit cuts your tax bill dollar for dollar while a deduction merely reduces the amount that is used to calculate taxes.
Taxpayers with college loans also are in for a break. You now can deduct as much as $2,500 yearly in interest paid on those loans, up from $2,000 in 2000.
But if you want to cut your taxes further, some action before year end is necessary. You can increase charitable contributions, accelerate property- or estimated-income tax payments, and even pump extra dollars into a workplace 401(k) plan if your employer allows it.
A common tax-saving point to consider: postponing income into next year and accelerating tax deductions into this one. Bernie Kent, a financial-services expert at the Detroit office of PriceWaterhouseCoopers LLP, warns, however, that pushing around income and expenses needs to be done carefully lest the taxpayer finds himself in AMT territory. This is the pesky Alternative Minimum Tax, which is meant to make sure that taxpayers can't use too many deductions and credits to wipe out any dues to Uncle Sam.
Although it is aimed primarily at the wealthy, the AMT is calculated in such a manner that it now ensnares millions of middle-income people, as well.
And if you have some losing investments in an era when stocks and mutual funds have stumbled and then stumbled some more, you can sell them and use those losses to shield profits earned from any winners that may have come your way.
"If you have unrealized losses, you may want to take them," says Mr. Kent, who also co-authored the book "PriceWaterhouseCoopers Guide to the New Tax Law."
Active investors have to watch out for what are called "wash sale" rules. This means that you cannot sell shares in a company at a loss, and then immediately repurchase that company. You have to wait 31 days before buying back into that company, or the loss for the first sale is disallowed.
Some other year-end tax and money moves:
Use up any money in flexible savings accounts. FSAs, funded with pretax payroll deductions, help pay for healthcare costs and dependent care. These funds must be spent by Dec. 31 or, you'll lose any remaining balance.
Make sure you have withheld enough money this year. Underpay taxes by more than $1,000, and you could face a 7 percent penalty.
Self-employed individuals should start a Keogh plan by Dec. 31. These tax-deferred savings plans allow annual contributions of up to $35,000, which can be deducted from personal income. You don't have to fund a Keogh until you file, but you must set it up before the end of the year.
Wealthy individuals can pare down their estates by giving gifts of up to $10,000 ($20,000 for married couples) without impacting their estates or paying gift taxes. Plus, the recipient of the money does not have any tax liability.
People buying a home should postpone the closing until January. Those who close this month may not have enough deductions to itemize their returns and would lose the opportunity to write off the loan fees. By closing on a home next year, the loan fees, along with the accumulated interest on the mortgage, make a write-off most likely.
If you have paid off the home mortgage or otherwise find yourself unable to itemize deductions every year, PricewaterhouseCoopers suggests considering "deduction bunching." This clusters deductions into alternative years to enable a taxpayer to take advantage of itemizing - which generally does better than standard deductions at lowering taxes - every other year.
Not all of these deductions and credits are available to every taxpayer. Most have income limits, meaning they start to phase out, once your taxable income rises to a certain level. Every deduction seems to have its own peculiar phase-out rule, so you'll need to check each to make sure it applies.
While lawmakers made a lot of noise this past summer about the tax breaks they had given America, most of the fireworks start in 2002 and beyond.
IRS tax expert David Torrison calculates that some 440 separate new provisions were contained in the law, and "most of them are coming into effect years down the road, in unprecedented phase-ins."
While some breaks don't kick in until 2009, most start in some fashion in 2002. Retirement- and education-savings plans came in for the biggest changes, all of which work to the advantage of the taxpayer. Here are some highlights:
529 college-savings plans. Starting in 2002, qualified withdrawals from these programs, sponsored by many states, are tax-free. Bernie Kent, a tax expert at PriceWaterhouseCoopers cautions 529 participants to hold off on making withdrawals until January.
Prepaid tuition plans. The new tax law allows private colleges to start their own plans. Before, they were limited to state-sponsored schools. These plans carry many of the same benefits of 529 plans, and let parents lock in the tuition costs now for their children attending college down the road.
Education IRAs. Now known as Coverdell Education Savings Accounts, these will permit a yearly contribution of $2,000, quadruple the level allowed in past years. And withdrawals can now be used for K-12 expenses, not just college. Plus, parents can use it to pay for a tutor or even buy a computer or Internet access meant for education purposes.
Roth and traditional IRAs. The new maximum annual contribution will be $3,000, 50 percent more than this year. And anyone over 49 can kick in an extra $500 yearly.
401(k) and 403(b) plans. Here, the maximum annual contribution rises to $11,000, compared with $10,500 now.
Faster vesting. Maybe not a true break as far as your Form 1040 is concerned, but a better deal, nonetheless. Starting in January, employers who offer matching contributions to defined contribution plans such as a 401(k) must allow vesting of their portion faster than in years past. This could benefit women who leave the workforce early to raise children.
Adoption credit. This break doubles in size to $10,000. next year.
Mileage deductions. Even though gasoline has suddenly become cheaper, the IRS will allow you to deduct 36.5 cents per mile on business use of an auto, up two cents. Sorry, but the 14-cent-per-mile deduction for auto usage in charitable works remains the same.