There’s still time to lower your tax

WASHINGTON — Behold, the end is nigh — the end of the year, that is. So what can you do right now to improve your tax and financial situation?

"There’s a bunch of things," said Jeffrey Kelson, a partner in the New York office of accounting firm BDO Seidman LLP.

However, he and other experts caution that you should be sure you understand your situation, because, particularly with taxes, recent changes have made old rules of thumb — such as accelerate deductions and defer income — unreliable.

If you know where you stand, here are some possibilities:

Gifts. If you need a last-minute deduction, a gift to charity can provide it. If you get the check into the mail before the end of the year, that’s generally enough to cause the gift to be deductible this year. George Albright Jr. of J.P. Morgan Private Bank’s Washington, D.C., office noted that gifts generally must be "completed" by the end of the year — that is, the giver must have relinquished "dominion and control" over the money or other assets, and it must be in the hands of the recipient or the recipient’s agent.

However, donations of money to charities follow the "mailbox rule," meaning if the check is in the mail, the gift is treated as completed.

In addition, don’t forget that you can make noncharitable gifts of up to $11,000 a year ($22,000 for a married couple) to anyone, including a child, grandchild or other relative, without incurring a gift tax. This provision has lots of highly sophisticated uses, but there are some simpler ones that are plenty useful. For example, did any of the kids or grandkids work during the year? If so, you can use the gift to fund a Roth IRA up to the amount of the earnings or $3,000, whichever is less. Contributions to a Roth IRA aren’t deductible, but withdrawals later on are tax free. This is a rush item only if you are up against the annual giving limit. You actually have until April 15 to make a 2003 IRA contribution.

Another idea: Fund a Section 529 or a Coverdell Education Savings Account for a child or grandchild. Earnings from these accounts are tax free when used for higher-education expenses or, in the case of the Coverdell, for elementary and secondary education as well. Neither generates a federal tax deduction, but many 529 plans carry a modest state tax deduction.

IRAs. Most deadlines for individual retirement accounts are tied to the deadline for filing your tax return, but Ed Slott, a Rockville Centre, N.Y., accountant specializing in IRAs, notes that there is a special deadline Wednesday. It involves certain inherited IRAs.

Until last year, people who inherited an IRA from someone who died before starting mandatory withdrawals, and who inherited it by virtue of being the named beneficiary (not just because they inherited the estate), could opt to take the money out over their life expectancy or within five years. Many people opted for the latter, either out of confusion or because they liked the fact that the five-year rule did not require any set withdrawals, only that the account be emptied within five years.

But last year the IRS reopened the window, allowing the five-year folks to switch to the life-expectancy tables.

However, the right to switch expires at the end of this year. So if you’re making withdrawals under the five-year rule, check with your account trustee (mutual fund, bank or whatever) to see if it makes sense and if you can do it.

"Every IRA beneficiary who is taking distributions based on a shorter life expectancy than their own should look at these new rules and see if the distribution schedule can be lengthened, Slott said.

Some beneficiaries will increase the life of their inherited IRA by more than 10 times. Imagine being able to add more than 40 years to the life of your inherited IRA instead of having to withdraw it all" in the next two or three years.