FOCUS ON PERSONAL FINANCE
Make Smart Year-End Tax Moves
You can reduce your taxes for 2001 and future years.

Don't let this year come to an end without exploring several steps you can take in December to minimize your tax bite in 2001 and beyond. But you must take action now to reap the benefits. Here are a few recommendations:

Fund your retirement plan for 2001 now. Most qualified retirement plans must be set up prior to the end of the year, although the IRS doesn't require plan contributions for 2001 to be made until the extended due date of the return in 2002. However, it does makes sense to fund your contribution for 2001 prior to Dec. 31.

Because you're investing in your retirement plan with a long-term perspective, consider putting the dollars to work in the stock market now, while stock prices are depressed. For 2001, the maximum allowed annual additions to your defined contribution plan are 25% of eligible compensation up to $170,000, or $35,000, whichever amount is less.

Take advantage of new increased funding limits for retirement plans. Beginning in 2002, the maximum addition to a defined contribution plan will be 100% of eligible compensation up to $200,000, or $40,000, whichever amount is less. By funding your 2001 contribution prior to the end of this year, you can begin funding your 2002 contribution in January. You'll benefit from the new increased funding limits for retirement plans, so it makes sense to fund your plan systematically throughout the year. Also, in 2002, the maximum amount of salary deferral for an employee 401(k) plan will be increased from $10,500 to $11,000. This limit is scheduled to increase by $1,000 each year until 2006, when it peaks at $15,000.

There's a new benefit for older workers. In 2002, employees who are age 50 or older may defer an additional $1,000 in a 401(k) plan. This additional contribution limit will increase by $1,000 each year until 2006, when it will peak at $5,000. Therefore, in 2006, an age 50 or older employee will be able to defer $20,000 in his 401(k) plan. This is an increase of $9,500 per year from the 2001 limit of $10,500.

Take advantage of higher limits for defined benefit plans. The maximum annual benefit that may be funded for these plans in 2001 is $140,000. That limit will increase to $160,000 in 2002.

Use vacation pay as a tax-exempt charitable contribution. If an employee chooses to forgo some paid vacation time and instead uses that vacation pay to make contributions to a qualified organized charity, the value of the donated wages won't be included in taxable wages on his W-2.

Take advantage of the increased Section 179 deduction. You may expense up to $24,000 of tangible capital assets purchased in 2001, including equipment used in your practice, and another $24,000 in 2002.

This is a more favorable tax treatment than depreciating the assets over their useful lives. In 2000, the Section 179 expense deduction was limited to $20,000 in assets.

Use the new benefit for funding a student's higher education. There's no federal income tax deduction for funding Section 529 qualified higher education programs, but some states do allow a deduction from taxable income for contributions to the state's plan. Also, beginning in 2002, you can make an annual contribution to both an Education IRA and a Section 529 plan for the same beneficiary.

Maximize gifting by transferring wealth during your lifetime. You can gift up to $10,000 a year per recipient to minimize transfer taxes at your death. In addition to the $10,000 gift, you can pay for a student's tuition costs directly to an educational institution and receive a gift tax (not income tax) exclusion for the amount paid. There's no dollar limit on the amount of the tuition payments you can make, and the student isn't required to be your relative.

Be tax-wise this December and take the time now to maximize financial success while minimizing your tax bite for 2001 and beyond.

Richard J. Alphonso, JD, CPA/PFS, M.S.T., and Anita S. Frank, CPA, are president and tax manager, respectively, of The Financial Advisory Group, Inc., in Houston. The Financial Advisory Group provides personalized fee-only financial planning, investment management and business consulting services.