To reduce the amount of tax you owe when you file your 2000 return next
year, you may have some tax decisions to make between now and December
31.
The
secret to successful year-end tax planning is to consider your tax
situation two years at a time. The idea is to reduce the tax you will
pay over both years (’00 & ’01), not just one. You need to look at
the income and deductions which apply to ’00, which fall into ’01 and
which are available in either year.
It is usually better to
defer income and accelerate deductions. This way you will delay, for
the longest period of time, the tax you pay. This will be especially
true if there is an across the board tax decrease in ’01. (Possible,
but don’t hold your breath!). If you expect to be in a higher tax
bracket in ’01 the opposite strategy, delaying deductions and
accelerating income, would probably be more beneficial.
Your
investments offer a way to shift income at year-end. You can decide
when to take the gain or loss, this year or next. You shouldn’t let
taxes be the sole driving reason for making changes in your
investments. Whatever decisions you make should make overall economic
sense.
Retirees can juggle payouts from IRAs for the best tax result.
Tax planning using deductions may be the most successful. Three types of itemized deductions are easiest to shift:
Charitable
Contributions – Deducted in the year your check is mailed. Also
consider donating appreciated securities. You get to deduct the full
value of the asset (if held for more than one year) and avoid paying
income tax on the appreciation.
State and local taxes - This
works especially well with estimated state income taxes. You can pay
the estimate that is due in January ’01 in whichever year it produces
the best result. The second half of property taxes due in April can
also be considered for prepayment in December if needed. Care should be
taken to make sue that the alternative minimum tax does not come into
play.
Interest Expense – You may consider paying the January
mortgage payment in December. It is important to make sure the Mortgage
Company receives the payment before the end of the year. This way it
will be reflected on Form 1098 that shows the interest paid by you for
the year.
Other itemized deductions can also reduce you income tax bill:
Medical
– The deduction is limited to 7-½% of AGI. Shifting payments from one
year into the next may allow you to exceed this limitation and get a
deduction in at least one of the years.
Miscellaneous – The
deduction is limited to 2% of AGI. This deduction includes investment
and tax advice, job-hunting expenses, unreimbursed employee business
expenses, IRA fees and safety deposit box charges. Shifting these
expenses into one year or the other may enable you to exceed the limits.
Some individuals, by careful planning, are able to itemized in one year and use the standard deduction in the second year.
The
alternative minimum tax should always be carefully considered. If it
applies to your tax situation many of these strategies will just not
work!
Careful tax planning can make a difference in your income
tax liabilities. Please contact your tax advisor for more specific tax
saving ideas that may be used in your specific tax situation.
Diane K. Burch, CPA