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10 ways to cut your 2001 taxes
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December 17, 2001: 11:24 a.m. ET
Job-hunting, laptops, dental work -- all are potential last-minute deductions.
By Jeanne Sahadi
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NEW YORK (CNN/Money) - Sure, there are only a few weeks left before you ring in the New Year, but that doesn't mean you can't do a few quick things to trim your 2001 tax bill.
If you need added incentive, consider this: Tax rates will be lower in 2002, so your deductions will be worth more to you this year. A deduction, remember, reduces the taxes you owe by a percent of every dollar you're allowed to deduct. That percentage is equal to your top tax rate. So if you're in the 27.5 percent tax bracket, a $100 deduction means you'll pay $27.50 less in taxes (0.275 x 100). (To learn more about your tax bracket, click here.)
Of course, there are some deductions you can't increase by year's end, such as alimony payments. But there are many that you can. Here are 10 suggestions from CPAs Barry Picker of Brooklyn, N.Y. and Mark Rothstein of Redondo Beach, Calif.
10 ways to trim taxes
Be generous: Now is your last opportunity for charitable giving to tax-exempt nonprofits in 2001. You might also donate clothes, coats, furniture or appliances you no longer use and deduct their fair-market value.
Prepay bills that are deductible. Pay your January mortgage and property taxes, as well as your next round of estimated state income taxes in December. You can postmark these bills Dec. 31, but as a practical matter it's better to get the payments in early enough for your bank to post them in December, Picker said. That way, the IRS won't question which year the payments should be deducted.
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 USING CREDIT CARDS TO MAX DEDUCTIONS
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If you charge a deductible item to your credit card by Dec. 31, it will count as a 2001 deduction, even if it doesn't show up on your credit card bill until January 2002. So if you don't want to part with cash now and will be able to pay off your balance early next year, you might use a credit card to help maximize a few of your deductions.
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Get healthy. If you're close to exceeding the 7.5 percent threshold on medical and dental expenses this year, get that dental work done that you've been putting off and pay the bill before year-end, even if the work won't be completed until 2002. If you're not close to the threshold, but anticipate having a lot of medical expenses next year, hold off on all doctor appointments until January so that you have a shot of racking up enough expenses to take medical deductions in 2002.
Open a medical savings account. An MSA is an IRA-type savings account that lets you invest money to pay for medical expenses that your insurance plan doesn't cover. Your contributions are tax-deductible and your withdrawals are tax-free. To qualify, however, you must be self-employed or work for a small company, and you must have a health plan with a very high deductible. For more on MSAs, see IRS Publication 969.
Enhance your work life. If you're not quite over the 2 percent threshold for miscellaneous expenses, now's the time to pay your annual membership dues to professional organizations and subscribe to publications pertinent to your work. If you want a new job in your field, begin the hunt now. You can deduct most of your search costs in the year you incur them. These include employment agency fees, resume costs, transportation and meals.
Get your financial life in order. Another way to get over the 2 percent threshold for miscellaneous expenses is to take your money seriously. You might meet with your accountant or financial adviser to set up your 2002 financial plan, subscribe to a financial publication or rent a safe-deposit box if you need one.
Bunch your business property expenses. If you need to outfit your home office with a laptop, a faster Internet connection or more ergonomically correct furniture, make your move now. To expense the full price of your purchases, however, just make sure your business property expenditures don't exceed $24,000 for the year. Anything above that and you can only deduct a percentage of your costs for an item, said Cindy Hockenberry of the National Association of Tax Practitioners.
Sell your losers. Now's the time to squeeze out the lemons in your portfolio and throw away the rinds. Sell those investments trading at a loss that either have poor prospects or no longer fit with your investment scheme, Rothstein said. When you take a capital loss, it offsets any capital gains you realized in the same year. If you don't have any gains -- or your losses exceed your gains -- you may deduct up to $3,000 in losses against your ordinary income. Any unused losses may be carried over to future tax years. (For more on capital losses, click here.)
Contribute to your IRA. With a traditional IRA, you have until April 15 to make deductible 2001 contributions. For a SEP-IRA or a Simple IRA, you have until your tax filing deadline, including an extension if you're granted one. But the sooner you contribute, the longer your money has to grow tax-deferred.
Open a Keogh. If you're self-employed and want to open a Keogh account, you must do so by Dec. 31 in order for your contributions to be deductible in 2001. You don't have to actually make those contributions, however, until your tax-filing deadline in 2002.
Pick your deductions strategically
In picking which deductions you should increase by year-end, keep in mind there are two classes of deductions, and certain thresholds some expenses must meet in order to qualify as a deduction.
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STANDARD DEDUCTIONS IN 2001
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Single: $4,550
Married, filing jointly: $7,600
Married, filing separately: $3,800
Head of household: $6,650
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The first type of deduction is that which automatically reduces your gross income. Included are capital losses, retirement plan contributions, student loan interest, medical savings account contributions, alimony payments, and the self-employment tax.
The second type of deduction includes those expenses that you can itemize only if, taken together, they exceed your standard deduction. These include your home, business, medical, job and investment expenses plus your charitable contributions.
But it's here where the IRS imposes thresholds on some of those categories. For instance, the only part of medical and dental expenses you can deduct is that in excess of 7.5 percent of your adjusted gross income (AGI). So if your AGI is $100,000, and you have $8,000 (8 percent) in out-of-pocket doctors' bills, you can only deduct $500 (0.5 percent). You may have more luck meeting the threshold for miscellaneous expenses (e.g., job- and investment-related costs): to be deductible, they must be in excess of 2 percent of your AGI. 
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