Some people - the smart ones - think about tax-saving strategies throughout the year. Others wait until it's too late - April 15. The rest of us think about them in the last couple of months of the year.
So, with 53 days left in 2004, here's a timely tip to ease some of this year's tax burden before new laws go into effect:
If you have a clunker of a car that you're thinking of donating to charity, try to do it before the end of the year. Under a provision of the latest tax law, if you donate the car after Dec. 31, you can take a tax deduction only for what the charity sells that car for at auction.
But if you donate the car before the end of this year, you can deduct the "fair market value," which is often the price listed in guides such as the Kelley Blue Book.
Here's how it works. Suppose the Blue Book price of your car is $2,000. Donate it now and you can deduct the full amount. If you wait until next year and the charity can sell it for only $800, you can deduct only $800.
Another change has taken away what some have called the "Hummer loophole." For the past few years, business owners who bought large SUVs for company use could immediately write off almost all the cost of their vehicles in the first year. The law allowed an immediate deduction of up to $100,000 for vehicles weighing more than 6,000 pounds, which took in the largest SUVs, including the Hummer.
"Anyone who could do so was going out and buying big SUVs and deducting them," says Geordie Crossan, a certified financial planner in Westlake Village, Calif.
Facing mounting criticism from environmentalists and many tax specialists who saw the deduction as unfair, Congress last month cut the write-off to $25,000 and boosted the weight limit so it applies only to vehicles weighing 14,000 pounds or more, such as large refrigerated trucks. Even with the new rules now in effect, a substantial amount of a new SUV's costs can be written off over longer periods through expensing and depreciation - as long as the vehicle is used for business, tax experts point out.
Other tax changes have come about more gradually, most notably the spread of the alternative minimum tax, or AMT. This tax was created in 1970 when the top tax rate was 70 percent. It was designed to make sure that even the wealthiest people paid at least some tax. Back then, the AMT rate was 10 percent, Mr. Crossan says. Now the top federal income-tax rate is 35 percent. But because of inflation and other factors, the AMT rate has risen to 28 percent, he notes.
"There's been a lot of compression between the AMT and the regular tax," notes Albert Cappelloni, tax director at Vitale, Caturano & Co., a Boston accounting firm. "You can very quickly find yourself subject to the AMT."
With the AMT, you have to calculate your taxes twice: once under the regular system and again under AMT rules. You pay whichever tax is higher. The AMT does not allow deductions for things like dependents or state and local taxes.
"It really affects people who live in high-tax states and have two or more children," he says. He estimates that over 60 percent of married couples with children and incomes of $75,000 or more will be subject to the AMT next year.
"Right now," Crossan says, "people need to be sitting down with their tax professional, doing a tax projection to see what impact, if any, AMT has on their situation and see what planning opportunities are available to them."
For example, he suggests that people who may be subject to the AMT this year, but not next year, consider delaying as much as possible their state income and local property tax payments. That way, any payments made in 2005 would be deductible.
With the stock market mostly going sideways this year, many investors are apt to own a mix of stocks that have either lost or gained value. So, now is a good time to check your portfolio and see if there are any losers that you don't expect to rebound any time soon. You can use those losses to offset gains from other sales.
Some people may try too hard to avoid taxes, Mr. Cappelloni says. For example, "a lot of people invest in tax-exempt obligations to avoid paying taxes on their investments."
But since last year, the tax on profits from investments held at least a year is just 15 percent, the same as the tax on stock dividends. For investors in the 10 percent and 15 percent tax brackets, the tax on dividends is just 5 percent. Dividends earned before 2003 had been taxed at the investor's ordinary rate.
"When dividends are taxed at 15 percent, it might make more sense to invest in taxable investments like dividend- paying stocks," Cappelloni says.
Finally, Crossan notes, people should try to put as much as they can in their tax-deferred retirement accounts. Next year, the contribution limits for IRAs goes up to $4,000 from $3,000, while those over 50 can contribute $4,500, up from $3,500 this year. At the same time, contribution limits for 401(k) plans increase from $13,000 in 2004 to $14,000 next year. People over 50 can contribute as much as $18,000 next year, a $4,000 increase over this year's limit.