By Janet Groene, F47166
You can’t outrun taxes when you go full-timing. But full-timing likely will change the way you manage your taxes. Suddenly you may have a different state of residence, different income and expenses, perhaps different dependents, and probably a new filing system that’s smaller than a shoe box.
Julian Block is a nationally recognized attorney and tax expert who is frequently quoted by the Wall Street Journal, Business Week, Money, and other publications. Recently he shared a few tax tips with me from his 50-page booklet, Year Round Savings, which I recommend as a guide to managing taxes month by month. Here’s a sample of the advice he offers.
- Year-round planning isn’t just for the wealthy. It’s important to get started now for this year and the next.
- Beware of generalizations, “including mine,” Mr. Block warned. The advice that moves your brother-in-law into a lower bracket could put you in a higher one, he said.
- Your marital status on December 31 usually determines your filing status for the entire year, so a single day can make a big difference in your tax tab for this year and the next. In the book, Mr. Block explains the full impact of the so-called “marriage penalty.” He suggests that it may be wise to advance or postpone marriage or divorce, depending on your situation.
- Each year is different, so stay up-to-date. Adjustments for inflation change, affecting the amount of itemized deductions you may have.
- Contributions to an existing IRA or Keogh plan can be made as late as April 15 of the following year. If you get an automatic four-month extension on filing, however, this does not extend the IRA deadline. If you’re self-employed and have a Keogh plan, different rules apply.
- Taking deductions for dependents isn’t always cut-and-dried. For instance, suppose you supply partial support for a parent, son, or daughter. You need to know what counts as “support,” what doesn’t, and what percent of it you contribute. If you share custody of a child with an ex-spouse, consider the potential tax savings if the person in the highest tax bracket claims the full exemption.
- As early in the year as possible, decide whether you’ll itemize your deductions or take the standard deduction. You can’t do both. If you use Schedule A of Form 1040, you need no receipts or proof. If you itemize, however, you must be prepared to substantiate every expense. To come out ahead, your total itemized deductions must exceed the standard deduction you would be entitled to claim anyway. Itemizing can be enormously complicated, but Mr. Block’s booklet explains how to navigate the forms. Don’t forget that deductions go up if you are elderly or blind.
- If you itemize, you can take a full deduction for some things (such as interest on your home mortgage) but only a partial deduction for medical expenses and losses for casualty or theft. Again, the booklet supplies tips and guidance about special cases such as gambling losses, margin interest, and interest on student loans. It’s a headache, but Mr. Block contends that most upper-middle-income and high-income taxpayers do better by itemizing.
- If you make a mistake on your tax form, it’s easy to submit a refund claim. Have the Amended U.S. Individual Income Tax Return (Form 1040X) sent to you by mail (call 800-TAX-FORM, 800-829-3676), or by fax (703-368-9694), or find it on the Web at www.irs.gov. A change to your Form 1040 might also mean that you need to amend your state return, so file your state’s version of the 1040X.
- Did you know that medical expenditures are deductible only to the extent that they exceed 7.5 percent of your income? If you have a health expense, pay as many bills as possible in one year to get above that threshold. You might, for example, pay by credit card and deduct the cost in the year payment is charged, even though you don’t pay the bill until the following year. Don’t forget dental cleanings, routine physical checkups, hearing aids, extra eyeglasses or contact lenses, and medically required home improvements, such as refitting your motorhome for wheelchair access.
- Charitable contributions provide great flexibility, because they can be timed. Only gifts count. Pledges don’t. Mr. Block’s booklet includes a chapter titled “Dating and Delivering Checks” that provides tips about charitable giving.
- In the tax year 2002, most homeowners (and this may include motorhome owners) can deduct mortgage interest. What about “points,” prepayment penalties, and refinancing costs? Mr. Block sorts it all out in this booklet.
- he booklet also explains how some income can be timed, thus affecting your Adjusted Gross Income (AGI). This, in turn can alter the deductions that are determined by AGI, such as casualty and theft losses, medical expenses, and miscellaneous expenses. Trimming your AGI also can lower your Social Security tax and increase the deductibility of your IRA contribution. Suppose that your income will drop before the end of the year, because you’re retiring to go full-timing. To minimize your income and maximize your deductions, you might delay mailing bills to clients or customers until after December 31, while paying business expenses before the end of 2002. Just make sure your withholding or estimated tax payments cover any additional tax, Mr. Block warned. Otherwise, you may pay penalties.
Mr. Block’s booklet explains how to handle investment income, U.S. Savings Bond interest, capital gains and losses, and shifting wealth to heirs. The book also explains, and this is extremely complicated, how to know what tax bracket you’re in. This will determine how much you put into a pension plan and whether you take your payout in installments or as a lump sum when you leave your company.
The tax bite at retirement can be horrendous unless you handle it correctly, Mr. Block said. In the book he gives several different payout and rollover scenarios, with suggestions on how to know which option is best for you. The answer depends on your tax bracket. You will also find out about the Alternative Minimum Tax, which once affected only the wealthy and is now snaring middle-income folks. It’s a special problem at a time of transition, such as the year you sell your house, cash in a retirement plan, and go full-timing.
According to Mr. Block, if you are in a 35 percent federal and state tax bracket, and can use legal strategies to trim taxes by $2,000, the savings provides the same purchasing power as almost $3,080 of additional pretax income.
These are just a few tidbits from the feast of information provided in this inexpensive booklet. Order Year Round Savings for $11.95 postage paid or $9.95 via e-mail from Julian Block, 3 Washington Square #1-G, Larchmont, NY 10538; [email protected]. Also available are his guides Dependency Exemptions; Marriage and Divorce; Home Sales; and Travel & Moving Expenses. For any two reports, send $21 ($17 for the e-mail version); for three reports, send $26 ($21 if e-mailed); for four reports send $29 ($24 if e-mailed). You must indicate which reports you’d like to receive. The reports are issued new each year to keep up with the fast-changing tax laws.
Books for travelers
The second edition of Frommer’s Exploring America By RV ($16.99, John Wiley & Sons) by Shirley Slater and Harry Basch is an excellent armchair read and a practical guide to trip planning. It tells where to eat in or get takeout; where to write for more information; where to splurge; and where to camp, raft, bicycle, and sightsee. The first part of the book is about general RVing issues. The second section describes RV adventures in Utah, Alaska, the Dakotas, the Rio Grande Valley, the Heartland, the Florida Keys, the Blue Ridge Mountains, and New England. It can be purchased in bookstores, from online booksellers, or from the publisher’s Web site, www.wiley.com.
The Rough Guide to Yosemite National Park ($9.95, Rough Guides) is compact enough to fit in a vest pocket, yet it describes dozens of hikes, sites, things to do, campgrounds, precautions, and routes in this park. Maps and elevations are a huge help, as they include information about the length of each hike and how high you’ll be going. Look for this guide in bookstores, or online booksellers, or go to www.roughguides.com.