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TAXES
Last Chance to Trim Your Taxes
by Mary Beth Franklin
Here's a new twist on the old "What would happen if a tree fell in the forest" riddle: What would happen if Congress passed a big tax cut and nobody noticed? We might just find out this year. Although the fourth tax cut in as many years is being touted as saving taxpayers nearly $150 billion over the next decade, its real impact will be muted. The primary goodies restore tax benefits that expired at the end of 2003 (the loss of which you wouldn't have noticed until you did your 2004 return next spring) or prevent other breaks from disappearing at the end of this month, which would have resulted in tax hikes in 2005. Bottom line: The 2004 tax cuts (see the highlights below) are more political than pocketbook.
But just because Congress did little to cut your taxes this year doesn't mean you're out of luck. Actions you take over the next few weeks can pay off handsomely.
Save now and later
The best way for most of us to reduce the IRS's take is to save for the future by contributing to tax-deferred retirement plans. The more money you funnel into an employer-sponsored 401(k) -- or a similar 403(b) or 457 plan if you work for a school, hospital, or state or local government -- the less the IRS gets to tax. If your company offers a plan, you can contribute up to $13,000 this year -- or $16,000 if you'll be age 50 or older by the end of this year and qualify for a $3,000 "catch-up" contribution.
Self-employed people, like hairdresser Dona Baker of Aurora, Ill., can save really big with a solo 401(k) plan. Designed for business owners with no employees (other than a spouse), this relatively new plan allows Baker to contribute up to $13,000 this year as an employee. Baker's business, which is incorporated, can contribute as much as 25% of her compensation -- up to a combined maximum limit of $41,000 this year. If you own your business and it is not incorporated, your company may contribute an additional 20% of net self-employment income. You can compare potential tax-deferred contribution limits for a solo 401(k) and a variety of other retirement plans at www.401khelpcenter.com (click on "Small Business Channel").
"I try to sock away as much as I can," says Baker, 37, who opened a salon in a commercial office suite last year after working for other people for 16 years. "The bottom line," she says, "is I make about 50% more by working for myself, even though I have to pay taxes as both employer and employee." Her 401(k) contributions will save her almost $13,000 in federal and state taxes when she files her return next spring. Baker's goal is to retire from full-time work at age 50. At her current savings rate, she's on track to reach that goal, says Therese Meike, her A.G. Edwards financial planner.
Unlike an IRA, which can be opened as late as next April 15 for 2004 contributions, a solo 401(k) must be opened by December 31, and employee contributions must be made by that date. The employer pay-in can be made anytime before your 2004 return is filed.
If you have a company 401(k) and haven't yet contributed the maximum, consider bumping up your December contribution, or ask if you can put part of a year-end bonus into the plan. Remember: A bonus goes further in a 401(k) than in your paycheck because the IRS doesn't get a shot at it first.
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