Part 2 of 2

In any event, be sure to calculate your tax liability and adjust your withholdings accordingly. Consider using the extra tax savings to fund a retirement account and take a deduction, thereby reducing your taxes even further.

To Marry or Not to Marry?  

Couples who "tie-the-knot" on or before December 31, 2003 are considered married throughout the entire year, and this may significantly impact your taxes.

Roth Limitation: An individual with AGI of $100,000 or less may engage in a Roth rollover, but the same AGI limitation applies to the combined incomes of a married couple. Postpone marriage until next year if you and your fiancé's combined AGI will exceed $100,000. Although it is patently unfair to limit a married couple's AGI to the same amount ($100,000) that applies to single filers for the Roth rollover, there is little movement in Congress to change this rule.

Sale of a Principal Residence: Individuals who have owned and lived in their home for two of the past five years prior to sale ("residence"), may exclude up to $250,000 in profits ($500,000 for joint filers). Assume a single woman, who has lived in her residence with her fiancé for at least two years, sells her residence during the year for a $500,000 profit. If the couple marries before year's end and files a joint return, the full $500,000 will be excludable, even though the residence was sold prior to their marriage.

Compare the Limitations for Tax Breaks: Many tax breaks favor two high-earning individuals over a married couple. Passive activity losses; capital loss carry-forwards applied against ordinary income, contributions to retirement plans, IRAs, Educational accounts and other tax-favored programs could be adversely affected if individual taxpayers become married. Also, there could be an AMT impact. Prepare two individual returns and compare the combined federal and state taxes with a joint return.

Non-U.S. Taxpayer Spouse: If you marry a non-U.S. taxpayer and plan to file a joint return, your spouse's worldwide income needs to be reported on the joint return. Otherwise, you are required to file as married filing separately, a status that is less desirable than filing as single. So if your non-resident alien spouse has significant income, consider getting married next year.

Last Minute Deductions:  

Charitable Deductions: Empty your house of old clothes, furniture, computer and sports equipment and other "garage sale" items, estimate their fair market value (make an inventory and take pictures for your records), then donate them to Goodwill or your favorite charity to claim a charitable deduction. Items over $250, require a receipt. Also, if you have a used car, consider donating it to charity for a full blue book deduction. Note: IRS is investigating abuses involving charitable donations of automobiles so be prepared to substantiate the value of your automobile at the time of donation.

Contribute appreciated property to public charities and receive a deduction for the full fair market value on the date of the donation. Congress restored the provision allowing a full charitable deduction for gifts of publicly traded stock (held more than 12 months) to a private foundation for the full fair market value of the stock. Remember, donations of appreciated property, such as stock, include the appreciation as part of the charitable donation, but you do not have to pay capital gains tax on the transaction.

Example: If you donate stock having a $1,000 basis and worth $11,000, you receive a charitable deduction for $11,000. When the charity sells the stock, it pays no tax on appreciation. In contrast, if you sold the stock and gave the proceeds to the charity, you'd pay tax on the $10,000 gain. Assuming a combined federal and state tax rate of 20%, your cash donation would be $10,000, less $2,000 ( 20% of $10,000 = $8,000).

Mortgage Interest: It may be advantageous to pay your January mortgage several weeks in advance so that your mortgage company will properly record the payment as made in 2003 when it issues you a Form 1096, a tally of your principal and interest payments.

Note: Although an inaccurate Form 1096 does not prevent you from deducting the January payment, it could require that you prove to IRS that you actually made the January payment in December, if you should be audited. Remember, if you prepaid your January, 2004 mortgage payment in December, 2003, then you must prepay your January, 2005 payment in December, 2004 to obtain a full 12 months' deduction.

Remember, payment of interest on a home-equity loan is not a deduction under the AMT.

Taxes: Pay your fourth-quarter state income tax estimate this year. Pay your second property tax installment due in 2004, by the end of 2003. The same holds true for deductible alimony payments and deductible student loan interest. State taxes are not a deduction under the AMT.

Medical Expenses: Schedule medical and dental work prior to the end of this year and pay all medical expenses before December 31; these expenses are deductible to the extent they exceed 7.5% of your AGI.

Itemized Miscellaneous Deductions: Itemized miscellaneous deductions must exceed 2% of AGI. Employee expenses not part of an employer's accountable plan are considered itemized miscellaneous deductions. These include uniforms, travel expenses, automobile expenses, job-related moving expenses, meals and entertainment expenses (these have strict requirements), certain education expenses for maintaining skills, union and professional dues and expenditures for equipment (up to $100,000) placed in service in 2003, supplies and publications

Note: Special rules might apply to computers, automobiles and other mixed-use equipment. Itemized miscellaneous deductions are not a deduction under the AMT.

Credit Card Use