When To Plan

What part of the year, more than any other, is tax time? If April 15 leaps to your mind, you flunk this test, and the consequences can be painful. Mistaking the return-filing deadline for tax time probably means you're paying more income tax than you have to-year after year. The lifetime cost can be enormous.

Taxes are a year-round sport. The borrowing, spending and investment decisions you make from January 1 through December 31 shape the tax bill that's due April 15. Still, one part of the year is especially important: the days between Halloween and New Year's Eve.

Think of the final weeks of the year as a cornucopia overflowing with opportunities to trim your tax bill. Don't wait until after Christmas to begin. By that time, the doors to many money-saving moves will be closed.

The harvest of savings begins with a survey of where you stand in early November. Tote up your earnings for the year to date from salary, interest, dividends, investment profits, self-employment, rental income and any other sources. Estimate how much more income you expect in each category before the old year gives way to the new.

Now figure how much you can shrink that income before the IRS gets a crack at it. Draw up a list of your adjustments to income: write-offs for such expenditures as alimony and individual-retirement-account contributions that reduce taxable income whether or not you itemize deductions. Next, estimate your itemized deductions. The numbers don't have to be precise. Guesses based on your previous year's return and any significant differences you know will apply this year are okay.

With a fix on your taxable income, check the tax rates that apply. That tells you exactly how well you'll be paid for maneuvers that reduce taxable income. If you are in the 27% bracket, for example, every $1,000 you shave off that income figure cuts your tax bill by $270. This is true even if your adjusted gross income is over $137,300 in 2002 and you are hit by the squeeze on itemized deductions. The law now takes away a set dollar amount of your deductions based on your income. Since what you lose is set by your income, each additional dollar of deductions still has full tax-saving power. The crackdown starts at $139,450 in 2003.

Although it's usually best to do what you can to push income down and deductions up, in some circumstances that's a prescription for disaster. If you are likely to be subject to the alternative minimum tax (AMT), it may pay to accelerate the receipt of taxable income and delay paying deductible expenses. The same goes if you will be in a higher tax bracket the following year thanks to higher income.

Savvy year-end tax planning involves looking to the year ahead as well as the one that's winding down.