NEW YEAR'S RESOLUTIONS TO IMPROVE YOUR FINANCES

Making New Year's resolutions is a piece of cake, especially after a few glasses of champagne.  Following through on your resolutions is much more challenging.  Last January 1^st, did you make any resolutions concerning your personal finances?  If so, how'd you do?  Did you attain your financial goals, or was 2002 a total financial washout?

The good news about New Year's resolutions is that you get to make new ones each year.  Below are some New Year's resolutions to improve your finances.

Pay Some Extra Principal With Your Mortgage Payment Each Month

Looking for a risk-free return on your money?  By paying extra toward your mortgage each month, you'll get a risk-free return on that money equal to your mortgage interest rate.  Plus, you'll cut down on the number of years it will take to pay off your mortgage.  As a rule of thumb, try to pay extra principal each month equal to at least 10% of your total mortgage payment.

If You Don't Own A Home, Try to Qualify For the Home Office Deduction

If you're a renter, the rent you pay generally isn't deductible on your federal tax return.  By claiming the home office deduction, you make a portion of your rent deductible.  To qualify, you need to use a portion of your home regularly and exclusively in connection with your trade or business.  Using your office for managerial and administrative tasks qualifies.  You'll claim the home office either directly against your self-employment income on the Schedule C or as a miscellaneous itemized deduction on the Schedule A.

Save A Set Amount Of Money Each Month

Did you know that if you deposit $81.50 into your savings account each month, the account would be worth $1,000 at the end of the year?  To help you reach your goal, make sure to transfer the money out of your checking account into a separate savings or investment account. By doing so, it's more difficult to spend the money that you have managed to save.  Download our (Microsoft Excel) debt/savings calculator to calculate how much you need to set aside each month to reach a certain savings goal.  

Pay Down Those Credit Cards

If you owe money on your credit cards, determine how much you can realistically afford to pay down during the year. For best results, try not to charge additional purchases on those cards while you're trying to pay down what you owe.  Download our (Microsoft Excel) debt/savings calculator to calculate how much you need to pay each month to pay off a debt.

Maximize Your 401(k) & 403(b) Plan Contributions

At work, you probably have the opportunity to save for your retirement through a 401(k) or 403(b) plan sponsored by your employer.  The maximum annual contribution for 2003 has increased to $12,000.  And anyone who will be 50 or older by December 31st can contribute an extra $2,000 this year.  Remember, amounts contributed to these plans reduce your taxable compensation and grow tax deferred. 

Unless you're already on track to contribute the maximum to your 401(k) or 403(b) plan this year, now's the time to instruct your employer's benefit department to increase the percentage of your salary going towards this tax-advantaged retirement savings account. 

And if you're self-employed, set up a solo 401(k) plan or a SEP IRA plan as soon as possible, if you haven't already done so, and try to contribute to these plans systematically over the year.

Contribute $3,000 to a Roth IRA

Roth IRAs are one of the few tax-free investments available to individuals.  This year, you can contribute up to $3,000 to your Roth IRA. You won't get a tax deduction, but amounts contributed grow tax-free, as long as certain conditions are met. Consider signing up with a mutual fund company to have $250.00 automatically transferred from your checking account into a Roth IRA each month. 

Don't forget, if you're single and your adjusted gross income (AGI) exceeds $110,000 or married and your AGI exceeds $160,000, you're not eligible to contribute to a Roth IRA that year.  If your income exceeds the applicable threshold, you're still eligible to contribute to a traditional IRA for that year.  The amount contributed isn't tax deductible if either you or your spouse is covered under a retirement plan at work, but grows tax-deferred.

Take Advantage of the New and Improved College Savings Opportunities

Money contributed to Education Savings Accounts (formerly Education IRAs) and 529 Plans grow tax-free, as long as any money withdrawn is used for tuition and certain other college expenses, or in the case of ESAs, for private elementary school or high school as well.  You can contribute up to $2,000 per year per child into an ESA, and up to $55,000 at one time into a 529 Plan, subject to certain restrictions.  Money can now be contributed into both types of accounts on behalf of the same child during the same year.

Avoid Resolution Pollution

Did you set so many financial goals that you'll end up attaining none of them?  If so, take this opportunity to restate your financial resolutions for 2003.

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PLAN AHEAD AND CUT YOUR TAXES

The tax laws continue to get more complicated.  Only by planning ahead can you take advantage of the tax saving opportunities that apply to you.  Thanks to the recent tax law changes, you can:

• Pay Less Taxes.  That's because the tax rates are due to decrease in 2004.  The top four brackets are scheduled to decline by 1% each, from 27%, 30%, 35%, and 38.6% to 26%, 29%, 34%, and 37.6%.   For that reason, it might make sense to defer some income into 2004 or accelerate some deductions into 2003.

• Let the Government Subsidize Your Education. Starting this year, the Lifetime Learning Tax Credit has doubled.  You can now cut your tax bill by $2,000 by claiming a tax credit equal to 20% of the first $10,000 in tuition, books, and required fees paid during the year on behalf of you, your spouse, or your dependents.  Make sure to time your tuition payments to take full advantage of this annual $10,000 threshold.  Keep in mind, however, that single individuals whose AGI exceed $50,000 and married couples whose AGI exceed $100,000 aren't eligible for this tax credit.

You should also be aware of a temporary deduction allowed if you're paying qualified higher education expenses.  In 2002 and 2003, you can deduct up to $3,000 per year, even if you don't "itemize your deductions".  And then for 2004 and 2005, the deduction increases to a maximum $4,000. Unfortunately, you can only claim this deduction if your AGI is less than $65,000 (increased to $80,000 in 2004) if you're single or $130,000 (increased to $160,000 in 2004) if you're married. After 2005, the deduction for higher education expenses is scheduled to end.  Once again, timing your tuition payments will help you take full advantage of this tax break.

• Save Taxes When You Buy Equipment or Business Automobiles.  For 2003, the amount of property and equipment that you can purchase and write off has increased to $25,000, up from $24,000 allowed in 2002.  So if you'll be purchasing more than $25,000 of equipment, try to spread those purchases over two years if possible. 

There is also a second tax break available to you through September 11, 2004.  If you purchase equipment in excess of the $25,000 threshold, you're allowed to claim "bonus depreciation" of 30% on the excess.  Plus, if you purchase an automobile that is used in connection with your business, the depreciation allowed in the first year has more than doubled.  Consider purchasing business equipment or automobiles prior to September 11, 2004 to take advantage of this tax break.

• Hold Onto Your Money Longer.  If you're a high-income taxpayers (those with adjusted gross income greater than $150,000), the "safe harbor" requirement for your withholding and estimated tax payments has been reduced to 110% of your prior year's tax liability, down from 112% as required in 2002.  This means that if your income will be substantially higher in 2003 than it was in 2002, you can hold onto more of your money longer by planning ahead. 

For example, let's say that your total tax liability on your 2002 tax return was $40,000, and your income will jump considerably during 2003.  If that's the case, you only need to pay in $44,000 to the IRS during the year through withholding and estimated tax payments (paid in evenly over the year.)  By paying in 110% of last year's tax, you generally won't be subject to an underpayment penalty by the IRS, no matter how much you owe.  You might as well hold onto the additional taxes that will be due next April in a savings account and earn some interest on that money. 

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TAX AND FINANCIAL PLANNING CALENDAR FOR JANUARY, 2003

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2002 & 2003 TAX FACTS

• For 2002, the standard deduction for a single individual is $4,700 and for a married couple is $7,850. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes, real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
• For 2002, the personal exemption is $3,000. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  
• The maximum earnings subject to social security taxes has increased to $87,000 in 2003 from $84,900 in 2002.
  
• The standard mileage rate is $.365 per mile in 2002, and has decreased to $.36 per mile for 2003.
  
• The maximum annual contribution to a 401(k) plan or a 403(b) plan has increased to $12,000 for 2003 from $11,000 in 2002.  And if you'll be 50 or older by December 31, 2002, you can contribute an extra $2,000 into your 401(k) or 403(b) account this year.
• The maximum annual contribution to your IRA is $3,000 for 2003 and 2002.  And once you turn 50, you can contribute an extra $500 into your IRA this year.

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