Taxes are probably the last thing on consumers’ minds right now.
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But you should be thinking about year-end tax planning now so you won’t be shocked by bad news from your accountant.
The good news is that Congress didn’t pass any major tax legislation this year.
The bad news is that the window to make your year-end tax-saving moves is “getting smaller and smaller,” said Richard Joyner, head of personal finance planning for the southwest region at accounting firm Ernst & Young in Dallas.
Most tax-saving steps would have to be done by Dec. 31, he said. “If you’re doing any capital gains balancing against losses, you would need time to do that over the last couple of weeks.”
With Y2K jitters looming, giving yourself extra time now to make investment moves takes on added importance.
“There are still many things that a person with an average income can do that can affect this year’s taxes,” said Mark Luscombe, principal federal tax analyst at CCH Inc. in Riverwoods, Ill., which publishes tax materials. “In addition, this is a time to make strategic moves for next year, such as signing up for tax-advantaged employee benefit plans.”
Here are some things you can do in year-end tax planning to lessen the tax bite.
Shifting income from one year to another is one way to reduce your taxes. If you expect to be in the same or a higher tax bracket this year than in 2000, defer income until 2000 and shift expenses to 1999 so you can accelerate deductions to reduce taxes this year.
If you usually get a year-end bonus, ask if your employer can pay you the bonus next year. If you run your own small business and bill your clients, see if you can defer income by not billing until next year.
In contrast, if you expect to be in a lower tax bracket this year than in 2000, accelerate income into this year and defer payment of expenses to 2000. Be careful not to shift so much income into this year that you push yourself into a higher tax bracket.
This means that if your employer pays bonuses after the end of the year, ask if you can receive your bonus before the end of this year.
Keep in mind that if you do this, you’d be tinkering with your adjusted gross income, which is a key benchmark for deductions involving traditional IRA contributions, Roth IRA contributions, medical expenses and itemized deductions. So be aware of how changes in your AGI will affect other items on your tax return.
If you’re planning a marriage and you and your future spouse have substantial, similar incomes, put off the wedding until 2000 to avoid the marriage tax penalty. This tax oddity causes many two-income married couples who file jointly to pay more in taxes than they would if each had remained single.
This strategy doesn’t work with all couples. If one of you has much less income than the other, consider getting hitched this year rather than next year. You will generally be taxed less on the same income if you file a joint return than you would be if each of you filed single returns.
Bunch expenses such as miscellaneous deductions and medical bills so that the amount paid in a tax year is above the limit on deducting those expenses.
Have a property tax bill due in January? Pay it in December to clinch a deduction on your 1999 return. Consider scheduling elective medical procedures or making a charitable contribution before the end of the year. If you contribute stock to your favorite charity, you can get a deduction for the fair market value of the stock.
“If you give appreciated securities, you don’t use cash, and you avoid paying capital gains tax on that stock forever,” Joyner said.
On the other hand, if you sold the stock and contributed the sale proceeds to a charity, you’d pay the tax on the gain, leaving you less to contribute.
Accelerating deductions into the current year isn’t always the best strategy.
“If your itemized deductions are close to the amount of your standard deduction, you’re often better off bunching deductions in alternate years,” Luscombe said. “That can give you a significant amount of itemized deductions in, for example, odd years while you take advantage of the standard deduction in even years.”
Employees who work for a company as well as run their own business should check if they’ve paid sufficient estimated taxes for this year. If not, they should have more money withheld for taxes the rest of this year to avoid the penalty for underpayment of estimated taxes.
You can let your generosity cut your tax bill by making gifts of up to $10,000 for each recipient before the end of the year to take advantage of the annual gift tax exclusion. If your spouse joins in making the gift, you may give $20,000 to each person annually without paying any tax.
Contribute to your retirement plans because it can still reduce your tax bill. A tax-deductible IRA can reduce your adjusted gross income.
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“When you lower adjusted gross income, there’s not only a direct flow-through to a lower taxable income, but the size of your allowable itemized deductions may increase as well,” Luscombe said.
You can put up to $2,000 into an IRA if you have that much earned income and aren’t covered by an employer’s retirement plan. Even if you’re covered by a retirement plan, you can contribute to a tax-deductible IRA if your adjusted gross income is less than $51,000 and you file jointly.
The contribution phases out completely for joint filers at $61,000, while for single filers, the phaseout range is from $31,000 to $41,000 in adjusted gross income.
Review your investments. The stock market’s volatility this year presents taxpayers with opportunities for reducing their taxes.
You can save on investment-related taxes by putting off the sale of any profitable investments until next year because that postpones the tax on the profit until next year’s taxes are due.
But first ask yourself if you think a stock will drop in value. As always, don’t let tax issues alone drive your investment decisions.
If you’ve owned a stock for less than a year, consider holding on to it for more than a year because profits on the stock sale will considered long-term capital gains and be taxed at a top rate of 20 percent. Investments held 12 months or less are taxed as short-term capital gains, whose rate is the same as the income tax rate and can be as much as 39.6 percent.
Investors who have made fat profits on some investments can cut their tax bill by selling their dog stocks to offset the gains. If the losses exceed the gains, you can use the losses to reduce your taxable income by up to $3,000. Any additional capital losses can be carried forward to offset capital gains or income in the future.