Published April 2002

Last-minute tax tips and ideas for next year

It’s almost here again: Tax Day. Of course, if you’re particularly industrious, or you knew you were going to get a refund, then you might have filed your taxes weeks ago.

But if you’re like a lot of people, then you’ll drop your return in the mailbox on April 15. Between now and then, is there anything you can do to brighten your 2001 tax picture?

There are a couple of things you might consider.

You can still add to your traditional IRA, if you haven’t already “maxed it out.” If you’re eligible to make tax-deductible contributions, then you can lower your tax bill. Or, if you’re self-employed, you still have time to put tax-deductible dollars in your SEP-IRA. Since SEP-IRA contribution limits are considerably higher than those of your traditional IRA, you may have room to put in a sizable amount of money.

What else can you do to help yourself? For one thing, review your tax return one final time. Make sure you’ve taken all the deductions that you’re legally allowed. Take advantage of all capital loss “carry forwards’’ from 2000 that exceeded the $3,000 write-off limit and that could now be applied against ordinary income. Finally, go over your calculations to ensure that you’ve avoided any mistakes.

Beyond these 11th-hour moves, start thinking about those areas that you can improve on for 2002. For example, if you incurred a lot of taxes from your investments in 2001, examine where all the income was coming from. Did you sell appreciated stocks? If so, which ones?

Keep in mind that if you sell a stock within 12 months of buying it, you’ll have to pay capital gains taxes at your ordinary income tax rate, which may be 27 percent, 30 percent, 35 percent or 38.6 percent. But if you hold the stock for 12 months before selling it, then you’ll only have to pay a capital gains rate of 20 percent. And if you bought the stock after Jan. 2, 2001, and you hold it for the five succeeding years, you’ll only have to pay an 18 percent capital gains tax when you sell (assuming you’re in at least the 27 percent tax bracket).

Apart from holding stocks for at least a year, you can also look for tax-deferred investments. Put in as much as you can to your traditional IRA and your 401(k). After that, consider investing in an annuity, which offers tax deferral and high contribution limits.

Deferring taxes can obviously work in your favor. When you fund a Roth IRA, your earnings grow totally tax free, provided you meet certain conditions. And if you’re in a higher tax bracket, you may benefit from investing in municipal bonds. The interest on these bonds is exempt from federal income taxes; if you live in the state or municipality where the bond is issued, the interest may also be exempt from state and local taxes. (However, the alternative minimum tax may apply.)

Contact your tax adviser to discuss these issues and to help you find other ways to lower your taxes. But don’t wait too long! The earlier you put your “tax smart’’ strategies to work, the better off you’ll be next April 15.

Eric Cumley is an Investment Representative with Edward Jones Investments at 1201-C SE Everett Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 7,000 locations nationwide.

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