At year-end, you should go over all your itemized deductions.
Medical expenses are deductible only to the extent they exceed 7.5 percent of your adjusted gross income (AGI). If you’re over the threshold for 2002, you can pay for checkups, eyeglasses, etc., with deductible dollars before year-end. If you’re not close to the threshold, defer such medical outlays into 2003.
The same strategy holds for miscellaneous itemized deductions (investment expenses, tax preparation, unreimbursed employee business expenses) but the threshold is 2 percent of AGI. Spend now if you’re over or wait if you’re under the 2 percent mark.
Ordinarily, you should prepay state and local income and property taxes, in order to get 2002 deductions for outlays you’ll have to incur anyway, early in 2003. There’s a catch, though: such outlays may not be deductible if you wind up triggering the alternative minimum tax (AMT) this year.
Thus, you should check in with your tax pro before writing these checks. Give your pro a status report (how will your tax picture this year differ from last year?) and ask for some direction to a “cross-over point.” That is, your pro should be able to tell you how much you can prepay this year, in state and local tax payments, bringing you up to but not over the line where you’ll incur the AMT.