THIS time of year, people are more likely thinking about the best beach book, rather than taxes.
But while thoughts of April's return are still alive, now is a good time for taxpayers to see where they stand and what tax-smart moves to make in the next six months. Otherwise, December may arrive and filers will be deciding during stress-filled holidays what loser stocks to sell or what other tax-saving strategies they still have time to make.
"That kind of approach is counterproductive because, to really be effective, tax planning has to be a year-round activity," said Lyle K. Benson, a Towson financial planner.
Experts suggest that the first step is to get estimates of this year's income and 2002's tax bill. Do this using the recent tax return along with online tax estimators, such as www.quicken. com/taxes/tools and www. hrblock.com/taxes/tools/index.html.
This helps filers figure what credits or deductions they may qualify for, but also can reveal if too much or too little tax is being withheld from paychecks, experts said.
Review withholding: One sign that too much money is being withheld, of course, is if this year and every year a filer receives a big refund from Uncle Sam. If that's the case, revise the W-4 form filed with an employer to reduce tax withholding, experts said.
"People like to get refunds, but basically what you have done is given the government an interest-free loan," said Mark Luscombe, a principal analyst with CCH Inc., an Illinois tax information company.
On the other hand, events this year may result in not enough being withheld, such as getting married, losing a job and not having taxes withheld from unemployment checks or refinancing a mortgage so the interest deduction is substantially less, said Bob Scharin, editor of Practical Tax Strategies in New York. If that's the case, taxpayers could be hit with an underpayment penalty unless they increase tax withholdings or pay quarterly estimated taxes, he said.
Readjust portfolio: A few years ago, in the raging bull market, investors were reluctant to make adjustments to their mutual fund portfolio because they didn't want to sell funds that had appreciated substantially and be hit with a huge capital gains tax bill, said Fran Kinniry, a principal at the Vanguard Group in Malvern, Pa.
That's not a problem today. "A bear market gives people an opportunity to put the right product in the right asset location," Kinniry said.
Kinniry suggests investors adjust their portfolio so that actively managed funds, which tend to throw off more short-term capital gains, are in the tax-deferred part of a portfolio, such as in a 401(k) or Individual Retirement Account. Index funds and tax-managed funds that pass on less capital gains each year should be held in the taxable portion, he said.
Also, when selling securities, investors can use their losses to offset any capital gains on tax returns, plus deduct up to an additional $3,000 in losses against ordinary income.
Boost retirement contributions: Beginning this year, the law permits workers to contribute up to $11,000 in 401(k)s, nonprofits' 403(b)s and government 457 plans. Money goes into these plans pre-tax, so that taxable income for the year is reduced. Ordinary income tax will be owed on the money when it's withdrawn.
The maximum annual contribution to IRAs also went up this year, to $3,000.
On top of these new limits, workers 50 and older can make additional "catch-up" contributions this year of $1,000 in 401(k)s and similar plans and $500 in an IRA.
Employers must amend their plans to permit "catch-ups" and some may have to make revisions to allow for the increased contributions, said David Wray, president of the ProfitSharing/401(k) Council of America in Chicago. Many employers, sidetracked by financial and other concerns following Sept. 11, delayed making these changes, although they are expected to have plans amended in the next month or two, he said.
Even if the plans are updated this summer, workers still have time to take full advantage of the new limits by the end of the year, Wray said.
Investors can make this year's IRA contribution up until April 15 of next year, but experts recommend making them as early as possible. "Most people probably do it April 15 of the following tax year, but they're losing a whole year's return out of it," Kinniry said.
Invest for a child: If a child has a summer job, consider contributing to a Roth IRA on the child's behalf, suggested Alan Friedland, a certified public accountant in Cockeysville. Contributions can't exceed income, so the child would have to make at least $3,000 for a parent to make the maximum contribution.
"If you own a small business, you can pay your child to come in to work for you," Friedland said.
Money goes into a Roth after taxes are paid, but the child will be able to enjoy tax-free withdrawals after age 59 1/2 .
Of course, the Roth won't reduce taxes now, but the contributions made when a child is young can substantially add up. A $3,000 contribution today can grow to $88,320 in 50 years, assuming a 7 percent annual return, Friedland said.
And the child won't have to wait that long to tap the account without triggering early-withdrawal penalties. The money can be used to pay college expenses, and up to $10,000 can be withdrawn to buy a first home.
Education breaks: The start of the school year is nearing, and there's a new tax break for college expenses, Friedland said. This year and next, taxpayers can deduct up to $3,000 spent on tuition, fees, books and supplies without having to itemize, he said. The deduction goes up to $4,000 in 2004 and 2005, and then expires.
The deduction is available to singles with adjusted gross income of up to $65,000 and married couples filing jointly with income not exceeding $130,000.
Elementary and high school teachers, too, may be eligible for a small tax break passed early this year. For this year and next, they can deduct up to $250 they spend on books and classroom supplies off their tax return without having to itemize, according to the IRS.
To suggest a column idea, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@baltsun.com.