Nation/World

Opportunity, Fear Drive Tax Plan Like It Or Not, Your 1997 Tax Countdown Has Begun.

You have less than 10 weeks left to take action to cut your taxes before one of the most complicated tax-filing seasons in more than a decade - a headache created by the oxymoronic Taxpayer Relief Act of 1997.

If complexity isn’t a compelling enough reason to start plotting your year-end tax strategy earlier than usual, here are two more:

Opportunity and fear.

Do things wisely, and you stand to save hundreds, if not thousands, of dollars in taxes.

For example, this coming April, investors can slice the tax on capital gains, home sellers can pocket up to $500,000 in appreciation, business owners can write off larger expenses, and small businesses and their workers can count the money they saved in the new simple retirement accounts. There are even more breaks starting in 1998 - everything from new child and education credits to higher-education breaks to revitalized individual retirement accounts.

Despite all the tax law changes, a classic tax-planning strategy remains sound: “Bunch or defer” income and deductions into the year that will cut your tax more.

Indeed, the phasing out of credits, deductions and exemptions for upper-income taxpayers makes bunching and deferring more vital than ever.

The strategy is based on three time-tested rules of tax planning: Postpone tax whenever possible; Take the income tax bite when your tax bracket is lowest; Funnel deductible expenses into a year when your tax bracket is high.

To execute this strategy wisely, first sketch out your taxes for both 1997 and 1998.

It’s important to identify income, deductible expenses and investment gains and losses you could judiciously pour from one year to the other.

Bunching and deferring tends to be most effective if your income is irregular and you are straddling two tax brackets - giving small adjustments powerful leverage.

It also works if your income is steady but you can regulate certain deductible expenses, bunching them every other year so they exceed the standard deduction every taxpayer is entitled to take, resulting in larger write-offs every second year.

Among the items you might manipulate with significant effect:

Income: This includes bonuses, fees, investment profits and payouts from retirement plans. For instance, it might be wise to ask your boss to postpone paying your year-end bonus until January if you expect to fall into a lower tax bracket in 1998.

Timing investment sales can pay off even if you remain in the same tax bracket. If you sell this year, the tax is due next April. By waiting until January to sell, you would postpone the tax bill until April 15, 1999 - an extra year in which that money can work for you, not Uncle Sam.

Deductions: There are three classes of deductions you can move from one year to another: itemized deductions, miscellaneous deductions and medical deductions. No matter what, in 1997 you are entitled to claim at least the standard deduction of $4,150 if you file singly or $6,900 if you file jointly as a married couple.

For most taxpayers who itemize their deductions, the biggest writeoffs generally are mortgage interest, state and federal tax payments and charitable contributions. Itemizing is worthless until you can pile up more than the standard deduction, however.

The second tier of deductions are so-called miscellaneous deductions. These include a laundry list of expenses ranging from union dues and safe-deposit-box rentals, to subscriptions to investment publications and unreimbursed employee business expenses. The problem is you can’t write off all these deductions. You can write off only the total expenses that exceed 2 percent of your adjusted gross income, or AGI. Similar logic is applied to medical expenses, except you can write off only the amount that exceeds 7.5 percent of your AGI.

Your goal is to bunch deductions in whichever year gives you the bigger bang. If that’s 1997, that commonly means paying your January mortgage bill, April property tax or fourth-quarter estimated tax payments in December. If you’re buying a home as the year winds down, consider closing escrow in January if the mortgage points and interest wouldn’t help push you past the standard deduction.

If you want to give to charity but won’t have the cash until January, charge your contributions; your deduction is based on when you gave the money, not when you pay it.

xxxx PREPARE FOR NEXT TAX SEASON NOW Lower that refund: If you’re on course to file for big refunds next April 15, cut back your withhold ing immediately. If tax refunds are your illogical way of saving, then how about authorizing automatic withdrawals into, say, an individual retirement account instead? Account for those kids: Starting in 1998, you can claim a $400 credit for every qualifying dependent age 16 and under. (It will rise to $500 in 1999.) So reduce your withholding accordingly in January to avoid an oversized refund on April 15, 1999. Pay bills with pretax dollars: Many employers open enrollment in November and December for flexible-spending accounts you can use to pay certain expenses in 1998. You can defer $5,000 tax-free from your pay for child care and an unlimited amount for medical bills. Project your expenses conservatively because you’ll lose any money left over at year’s end. Brace for a fiscal hangover on New Year’s Day: You max out on Social Security tax once you earn $65,400. The problem is those FICA deductions will start chipping away at your paycheck again starting Jan. 1. “The Christmas bills hit, then guess what, you come up short because you’re back on the FICA trail,” said Greg Finley of Mohler, Nixon & Williams. So, don’t get too giddy during these FICA-free days.



Click here to comment on this story »





Blogs

Not an autograph but still pretty good

Got a note from Kathy Schafer. "I know I have mentioned before that I lived on Midway Island in the Pacific Ocean from 1954 to 1955. I was a fourth ...



Wild Card/Monday — 2.8.16

During the weekend, I took time to watch a debate on each side of the political divide -- one a re-run of the Democratic debate earlier last week. The Democratic ...


Labrador at forefront of gay marriage clash

When the U.S. Supreme Court last summer gave same-sex couples the right to marry, Republican Rep. Raul Labrador of Idaho said Congress should move quickly to protect the religious liberty ...





Sections


Profile

Contact the Spokesman

Main switchboard:
(509) 459-5000
Customer service:
(800) 338-8801
Newsroom:
(509) 459-5400
(800) 789-0029
Back to Spokesman Mobile