Tax planning now can save you money next April 15

NEW YORK (AP) -- Many people think all the good tax breaks go to the rich. But there are steps even average wage earners can take to reduce their income tax burden.

The trick is to set up your deductions before Dec. 31 so you can reap the payoff next April 15.

''The first thing you need to do is figure out where you are financially this year compared with last year,'' said Kerry Kabza, a financial planner who works with American Express Financial Advisors in Naperville, Ill. ''Sit down and look at last year's tax return. Pull out this year's pay stubs, look at your stock sales, get a rough idea what your tax liability might look like.''

Then, tax experts say, there are a number of strategies you can consider. Here are several:

-- Maximize your tax-sheltered savings

Every dollar you put into a 401(k), 403(b) or other tax-deferred retirement plan reduces your taxable income by a dollar, so maximizing your contributions can reduce your taxes.

The limit this year is $11,000 for most workers, but those 50 and older can add an additional $1,000.

If your company doesn't have a plan, consider setting up your own Individual Retirement Account, Kabza said. The limit is $3,000, plus a $500 ''catch-up'' contribution for people 50 and older.

''If you're self-employed, you should seriously look at establishing some kind of program for yourself,'' Kabza said. Options include a traditional profit-sharing plan or an IRA-like Simplified Employee Pension, or SEP, he said.

-- Bunch your deductions

If you don't think you'll have quite enough deductions to itemize this year, consider paying some bills early so they qualify on your 2002 tax return.

For example, Kabza said, pay a real estate tax bill that's due in the first quarter before Dec. 31. And make an estimated tax payment in December to cover your 2003 state tax liability. In some cases, you can even prepay your mortgage so you can claim the interest charges.

-- Harvest stock and mutual fund losses

When it comes to investments, ''nothing has changed in the law, but things have changed in people's portfolios,'' said Joanne E. Johnson, managing director of the J.P. Morgan Private Bank in New York.

After more than two years of down markets, many investors are holding stocks or mutual funds that have lost a great deal of value, she pointed out. But they also many have shares that they purchased a while ago that have appreciated.

''If you're going to sell some winners, look to offset those gains with losses,'' Johnson said.

If your losses exceed your gains, you can use up to $3,000 to reduce your taxable income -- and you can carry losses forward for use in future years.

''If you have dogs and you're looking to generate a loss, now is the time to do it,'' she advised.

-- Increase your charitable contributions

Many Americans step up their contributions to religious institutions or charitable groups around the holidays, and most give cash.

But Johnson points out that donating appreciated stock can help you do good and do well at the same time.

Say you bought stock at $1,000 that has increased in value to $5,000. If you sell it, you would owe tax on the $4,000 capital gain. However, if you donate the shares to a charity, you wouldn't owe any taxes and you could claim the entire $5,000 as a charitable contribution. The charity wouldn't have any tax liability either.

Both Kabza and Johnson said it wouldn't be a bad idea for people to talk with their own tax preparers or financial advisers as they work out year-end tax strategies.

Taxpayers can also get information from the Internal Revenue Service, which runs a fact-filled Web site at www.irs.gov. Many of the forms and publications needed for filing are posted on the site. The key Publication 17, ''Your Federal Income Tax,'' is online. Or people can call 800-Tax-Form (800 829-3676) and request a printed copy.