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On money

Plot strategy now to avoid a tax shock next April 15

By HELEN HUNTLEY
Published May 16, 2004

April 15 has come and gone, but tax questions never go out of style. In fact, the best time to ask tax questions is before taking actions that will have tax consequences when April 15 rolls around next year.

So before consigning your 2003 tax return to the darkest corner of your hall closet or storage unit, make sure you know the answer to these two important tax questions: What's your tax bracket? How much additional income would it take to bump you into the next bracket?

Your tax bracket is not the percentage of your income you pay in taxes. Rather, it's the tax rate that applies to each additional dollar of income you earn. It is an important consideration if you are thinking of making money moves that will increase your income, such as cashing in savings bonds or taking withdrawals from a retirement account. It also matters if you want to compare the merits of taxable and tax-free investments.

Your tax preparer, if you used one, should be able to answer the bracket question for you. If you are a do-it-yourselfer, grab your 2003 tax return and find your taxable income (line 40 of Form 1040). Then adjust it for anything you already know will be different for 2004. For example, add extra income if you got a raise or made a charitable donation last year you won't be repeating and deducting this year.

Next, find where your income puts you in the tax brackets. Although the brackets will be adjusted for 2004, you can use the 2003 numbers as a guide. For single people, the 10 percent bracket goes up to $7,000, 15 percent to $28,400, 25 percent to $68,800, 28 percent to $143,500 and 33 percent to $311,950. For married couples filing jointly, the corresponding amounts are $14,000, $56,800, $114,650, $174,700 and $311,950. The full schedules are available in IRS Publication 17, page 283.

If you are single and your taxable income last year was $21,000, looking at the brackets shows that you can add another $7,400 before your tax rate will bump up from 15 to 25 percent.

Your bracket also affects the tax rate you pay on capital gains. If you are in the 10 or 15 percent bracket, your capital gains tax rate is 5 percent. If you are in a higher bracket, it is 15 percent.

Your actual tax is not determined by your tax bracket alone. As your income increases, other factors come into play. Extra income may cause you to lose some deductions, exemptions and credits. If you collect Social Security benefits, it also is important to know whether extra income will make more of your benefits taxable.

To understand those issues, IRS Publication 17 and the IRS Web site (www.irs.gov) are helpful resources.

Q. I was very unhappy when my broker disposed of my Global Crossing stock even though I had said I wanted to keep it. I did not know it was gone until I received a list of my holdings. When I called him, I was advised they had no choice in the matter. Is this true? If not, what can I do? I had decided to keep it just to see whether it would ever come back. There was no money transaction; it just disappeared.

Unfortunately, your stock is never coming back. Global Crossing went through bankruptcy reorganization and canceled all its previously issued shares, effective Dec. 9, 2003. Your old shares became worthless. Global Crossing issued new shares that trade on Nasdaq under the ticker symbol GLBC. If you want to own any of those shares, you have to buy them.

Your only consolation is that you were entitled to take a capital loss on your 2003 tax return, writing off your entire investment in Global Crossing. If you failed to do that, you can file an amended return.

Q. Some retirees worry that if they don't file a return, even though they are not required to do so, that they will be audited. Would it help to pay a small estimated tax, then file a return to get back the money?

No. Paying taxes you don't owe just to get a refund is making an interest-free loan to the government. If your income is below the threshold for filing, you don't have to file unless you owe the government or the government owes you. One common scenario: You have $400 or more in self-employment income, so you must file and pay self-employment tax even though you don't earn enough to pay income tax.

- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified May 16, 2004, 01:00:38]


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