Timely Planning Can Lower Taxes. Some Thought and a Little Planning Goes a Long Way

(RIVERWOODS, ILL., November 12, 1999) "Christmas in July" may just be a another sales ploy to get you to spend some extra money, but Tax Time in November can mean real savings next April, and in years to come, according to CCH INCORPORATED (CCH), a leading provider of tax and business law information and software. CCH suggests that you take some time now, turn a few pages on your calendar and take a quick run through your 1999 tax information.

Getting a rough idea of your tax situation now can be key to adopting strategies that will lower your tax bill next April and beyond, according to Mark Luscombe, an attorney, CPA and principal federal tax analyst with CCH’s federal and state tax group.

"Time is running out, but there are still many things that a person with an average income can do that can affect this year’s taxes. In addition, this is a time to make strategic moves for next year, such as signing up for tax-advantaged employee benefit plans," Luscombe said.

Manage Income to Lessen Taxes

Shifting income from one year to another is one obvious way to affect your income tax burden. If you’re an employee and are usually paid a year-end bonus, you can often make arrangements with your employer to have the bonus paid in 2000 rather than 1999. If you run your own small business and bill your clients, you might be able to defer income simply by not billing until next year.

Luscombe pointed out that retirees often have an opportunity to lessen their taxes by carefully planning how and when they take large distributions from IRAs – for example, a distribution to buy a retirement home or part-time business.

"Taking part of a large distribution in December and part in January can be a recommended course. You may be able to avoid moving to a high tax bracket, and keep more of your Social Security benefits from being taxed, as well."

Qualify for Tax Perks

Another reason to control your 1999 income is to make sure you can take maximum advantage of various tax breaks on your return.

For example, joint filers begin to lose the full value of the Hope scholarship and lifetime learning credits when their adjusted gross incomes hit $80,000, and the credits are completely phased out for them at $100,000. The corresponding figures for those filing single are $40,000 and $50,000.

Similarly, the $500 child credit begins to phase out at $110,000 for joint filers, $75,000 for single filers and $55,000 for married people filing separately, declining by $50 for each $1,000 of income above those thresholds.

The ability to contribute to a Roth IRA, which promises significant tax benefits in the future even if it does not diminish current taxes, is lessened when adjusted gross income exceeds the $150,000 mark and disappears at $160,000. The corresponding levels for single filers are $95,000 and $110,000.

"Knowing that you might lose the ability to take advantage of one of these opportunities might affect your decision to sell stock or some valuable collectibles," Luscombe noted.

If your adjusted gross income is less than $100,000 for 1999, you are eligible to convert a conventional IRA into the new Roth IRA. The Roth IRA has several advantages down the line, including tax-free withdrawals in a wide range of circumstances, but you will have to count your conventional IRA as income and pay tax on it if you make the conversion.

Don't worry if you find out later that your adjusted gross income for the year exceeds the $100,000 cut-off point; you can "recharacterize" the money you converted back into a conventional IRA next year and avoid any penalty.

Conversion was more attractive last year, when owners of conventional IRAs could make the conversion but, for tax purposes, add only one-fourth of the amount involved to their other taxable income in each of four years. Those who took advantage of that opportunity, but whose 1998 income was too high to qualify for the conversion have until December 31 of this year to "recharacterize" back to a conventional IRA, and until April 17, 2000 to file an amended 1998 return.

Make the Most of Deductions

Individuals can exercise control over the timing of their deductions, as well as their income. If you have a property tax bill due in January, you can pay it in December to clinch a deduction on your 1999 return. Similar opportunities may exist with scheduling elective medical procedures or making a charitable contribution.

The question is whether accelerating deductions into the current year is always the best strategy. Sometimes it isn’t, cautions Luscombe.

"If your itemized deductions are close to the amount of your standard deduction, you’re often better off ‘bunching’ deductions in alternate years. 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."

Another case in which it’s best to be careful with deductions is for people who may be subject to the alternative minimum tax, or AMT. In the topsy-turvy world of the AMT, items that are deducted in figuring your regular tax are added back in to figure a tentative "alternative" tax. If the alternative tax is larger than your regular tax, you pay it instead.

"If your regular tax and alternative tax are fairly close together, you’re probably best off not bunching deductions, but trying to smooth out the ones that can trigger AMT liability from year to year," Luscombe said.

Review Your Investments

Noting that 1999 had seen a great deal of volatility in the stock market, Luscombe suggested that investors with losses or potential losses should consider their tax opportunities.

From a tax point of view, net capital losses up to $3,000 can reduce your ordinary income for 1999. Those in excess of $3,000 won’t reduce this year’s income, although they can be "carried forward" to 2000 and succeeding years.

"If you have capital losses greater than $3,000 at this point, you might look around for other securities where you have a capital gain that you’d like to lock in," Luscombe noted. "But don’t become so fixated on a minor tax advantage that you pass up significant investment gains."

One thing you can’t do is to sell a stock (on December 15, for example) and then turn around and buy it again within 30 days (on January 10), or sell "short against the box" – techniques that would let you create a sale for tax purposes while substantially retaining the stock involved. Both practices are now outlawed by the tax code.

Making Tax-Wise Choices

Even if your income and deductions are pretty well set for 1999, contributions to certain retirement plans can still reduce the size of the check you write next April, or increase the size of the check you receive. And if you are an employee, your company may be offering you opportunities around this time of year to reduce your year 2000 taxes.

A tax-deductible IRA can have several effects on your 1999 tax bill by reducing your all-important adjustable gross income.

"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 observed.

You can put up to $2,000 into an IRA if you have that much earned income and are not covered by an employer’s qualified plan. Even if you are covered by a qualified plan, you can now make the maximum IRA contribution 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.

The IRA does not have to be established in this year. As long as it is in place and the money is contributed as of April 17, 2000 – the Monday filing deadline for 1999 taxes – you can take the deduction. You can enjoy several months of tax-free earnings if you fund the IRA now, however.

If you’re self-employed, you can probably defer much more in a Keogh account than in an IRA, with a correspondingly larger effect on your tax bill. Like an IRA, a Keogh can be funded as late as next April, but unlike an IRA, a Keogh must be established with your bank or other financial institution by December 31 to have an effect on your 1999 tax bill.

Luscombe observed that the closing months of the year are often "open enrollment" periods for employee benefit plans that can reduce your taxes for next year, if not this one.

"Paying for health or dependent care expenses on a pre-tax basis and contributing to a 401(k) will directly lower your taxable income for 2000."

Luscombe also advises that if you know your 2000 tax bill will be lower for any reason – including credits you may be newly eligible for next year – you should take steps to enjoy your lower taxes by increasing your take-home pay.

"By adjusting your withholding on Form W-4, you can start receiving your year 2000 refund in January instead of waiting until 2001."

An IRA for Kids?

The holiday season, with its ample opportunities for part-time or temporary jobs, is an excellent time to implement a truly long-range tax strategy – a Roth IRA for your teenage children, according to Luscombe.

"If kids are provided with a Roth IRA when they’re in high school or college, they can have decades of tax-free earnings build-up to enjoy later in life. With compounding working in their favor, they can build up an impressive fund for buying a home, or for providing income after they reach age 59 . That would let them devote more of their resources during their working years to current needs. All they need is the extra earned income now to cover the size of the Roth contribution," Luscombe said.

To make sure their kids have the earned income that is a prerequisite for an IRA, owners of small businesses might think of hiring them as seasonal help. This has an added advantage because, unlike other employees, no Social Security withholding is required, but the child may be subject to self-employment tax.

"High-income families should definitely consider a strategy along these lines, even if it means increasing a child’s allowance to compensate for the wages that are funneled into the Roth IRA, or giving the child the actual dollars for the Roth IRA contributions and let them spend the earned income," Luscombe observed.


CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of business professionals and their clients. The company produces more than 700 electronic and print products for the tax, legal, securities, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer U.S. The CCH web site can be accessed at www.cch.com.

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