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Year-End Tax Planning Can Help Generate High Return On Investment

It is time to start thinking about year-end income tax planning strategies.  There are many strategies that taxpayers might be able to take advantage of, which could save tens of thousands of dollars with a little time and effort.  Taxpayers of course, should consult with their financial advisor regarding an overall tax strategy to determine if it makes sense.

Manipulating Income:

 A taxpayer who will be in a higher income tax bracket in 2003 than 2004 would be wise to defer income into the following year.  Employees should request their employers, if they agree to do so, to have their year-end bonuses paid in 2004.  A board member might also be able to defer receipt of their compensation.  Delaying the withdrawal from an IRA until January, 2004 may make sense as long as the taxpayer complies with the IRA minimum distributions rules.

Accelerating expenses into 2003 that qualify as itemized deductions can save thousands of dollars as well.   For example, by prepaying all state and local income taxes in December of 2003 rather than January of 2004 will generate large federal income tax savings.  The same strategy applies to real estate taxes and miscellaneous itemized deductions, such as investment advisory and income tax preparation fees.

Tax Loss Selling: 

It often makes sense to recognize capital losses that have built up in a taxpayer’s investment portfolio.  Taxpayers are able to offset capital gains with capital losses and deduct up to $3,000 of excess capital losses against any type of taxable income in any particular tax year.  The current tax code permits a carry forward of capital losses indefinitely.  This strategy is prudent from an investment standpoint as well.  All investors should rebalance their portfolios at least annually.  Income tax planning of this type allows such a rebalancing.

Timing Mutual Fund Purchases And Sells:

Mutual fund investors should contact investment companies prior to year-end to obtain an estimate of dividend, short-term and long-term capital gain distributions prior to their payout.  If a mutual fund is bought just before the ex-dividend date, a taxpayer could end up with a tax bill right away without actually participating in the fund's gains.  Also, if an investor doesn’t have any gains, they may want to consider selling the fund to avoid the distribution.

Maximize Retirement Plan Contributions: 

An individual taxpayer is eligible to contribute $12,000 of pre-tax contributions into 401(k), 403(b), or 457(b) plans in 2003.  Taxpayers over the age of 50 by year-end are eligible for a special $2,000 catch-up contribution.  The taxpayer can contact their employer to see if there is still time to change the amount of contributions being made into their retirement plan in order to maximize retirement plan savings in 2003.  In 2004, the pre-tax employee contribution limit is $13,000 and the catch-up contribution is $3,000.  A great deal of tax savings can be generated by maximizing contributions to these plans. 

For employers and self-employed individuals establishing or changing over to more lucrative retirement plans can substantially reduce income taxes.  There have been a number of changes over the past few years enabling much larger contributions to be made.  It is well worth an in-depth discussion with a financial advisor to ensure maximum contributions.

Any year-end tax planning technique that is chosen needs to consider the effect it will have on the Alternative Minimum Tax (AMT).  Many unsuspecting taxpayers are becoming subject to the AMT, which is essentially an additional income tax that is calculated over and above the regular income tax that prevents individuals from taking advantage of too many tax breaks.  State and local income taxes, miscellaneous deductions and personal exemptions are just some of the items that are non-deductible for purposes of calculating the AMT.  Fortunately, contributions to 401(k) and other retirement plans are still deductible.

Furthermore, any time that a decision is made, it will affect adjusted gross income (AGI). Therefore, consideration needs to be made about the outcome that AGI will have on all types of IRA contributions and Roth IRA conversions, medical expense deductions, miscellaneous itemized deductions, taxation of Social Security benefits, various tax credits, personal exemption phaseouts and the overall ability to deduct itemized deductions. 

The numerous tax law changes that have occurred over the past couple of years have complicated year-end tax planning.  A professional review is more important than ever. 

For further information, contact James J. Holtzman, CPA at (412) 635-9210 or e-mail him at

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