Protect your tax benefits
Did you know that there are over 20 tax breaks that disappear once your income reaches certain levels? Many deductions, credits, and other tax breaks are reduced or eliminated when your adjusted gross income (AGI) is too high. When that happens, you're effectively increasing your tax rate and you pay more taxes.
To determine whether you are approaching any of the many phase-outs for deductions or credits, prepare a preliminary estimate of your taxable income for 2002. If your projected AGI is too high, you can work on ways to reduce your AGI. For example:
Contribute the maximum amount allowed to IRAs and other retirement plans. Increasing tax-deductible retirement plan contributions will reduce your adjusted gross income, potentially easing the burden of income-related phase-outs of deductions and credits.
Review your investment portfolio. Consider taxes when deciding which investments to sell and when to sell them. Remember that selling both winners and losers in the same year lets you offset your capital gains with losses plus an additional $3,000 of other income.
If you plan to sell a piece of real estate and replace it with another investment property, look into a tax-deferred exchange. Done properly, an exchange lets you trade up in value without increasing your AGI.
