YEAR-END TAX PLANNING FOR INDIVIDUALS
By Lawrence E. Swartwood
Labor Day has come and gone, and although some of us are currently filing our 1997 income tax returns, for most of us, 1997 income taxes are merely an unpleasant memory. It is hard to imagine that we are already into the last three months of 1998, the last chance to plan for 1998 income taxes. We have traditionally used this time for tax planning to save or defer taxes.
Prepay and Bunch Itemized Deductions
One of the first things to consider is your mortgage deduction. It is due January 1st. By paying it in December, you will get thirteen months of deductible mortgage interest on your 1998 return. Of course, if you have already been prepaying your January mortgage payment, you will need to continue or you will only have eleven months worth of interest on this year’s return.
Consider prepaying state and local income taxes and property taxes that would otherwise be due early next year. As with mortgage interest, once you start this policy, you need to continue or lose the advantage. You must be careful of alternative minimum tax (AMT). If you are in AMT, prepaying taxes won’t help because the deduction is disallowed for AMT.
For 1998, the standard deduction is $7,100 for married taxpayers filing joint returns and $4,250 for single taxpayers. If your total itemized deductions are close to these amounts, there is little or no benefit in your itemized deductions. Instead, try bunching your itemized deductions into alternating years. If you can, you may be able to exceed the standard deduction by a sizeable margin in one year and use the standard deduction in the alternate year. Deductible items that can be bunched include your January mortgage payment, state and local income taxes, property taxes and charitable deductions.
A number of deductions are subject to adjusted gross income (AGI) limits. For example, miscellaneous itemized deductions must exceed 2% of AGI, and medical expenses must exceed 7.5% of AGI. If you can bunch these types of expenses, the AGI hurdle is easier to clear.
Tax Planning at Work
If you participate in a 401(K) plan, it is time to think about 1999 contribution levels, maximizing your deductions for 1998 and taking advantage of your employer’s matching contributions.
If you participate in a cafeteria benefit plan, such as a medical and dental plan or childcare plan, you need to plan for your 1999 contributions. If you are currently in a plan and have not expended the balance, this is the time to drain the plan. Otherwise, you will forfeit the balance. This is the time to get new glasses or contacts or the dental work you’ve been putting off.
Year-End Roth Conversion
Everybody is talking about converting regular IRA’s into permanently tax-free Roth IRA’s. 1998 is the only year that you can spread the resulting income over four years. So if converting is a good investment decision, 1998 is probably the time to do it. Remember, to convert to a Roth IRA, your modified adjusted gross income has to be $100,000 or less.
With the focus on conversion to Roth IRA’s, don’t forget the opportunity to make an annual Roth IRA contribution. While 1998 contributions can be made as late as April 15, 1999, the earlier the contribution, the earlier the contribution starts working for you.
Capital Gains
The holding period for long-term capital gain treatment has been shortened back to one year. The change was retroactive to the first of the year. So for 1998 sales, you’ll generally pay no more than 20% on gains on investment assets held over one year. Gains from investments held for one year or less are taxed at ordinary rates, as always.
Charitable Contributions
You may want to use appreciated stock that you have held for more than one year to make a donation to your favorite public charity. You get a charitable contribution deduction equal to the fair market value of the stock and you don’t have to report the long-term capital gain.
Lawrence E. Swartwood, CPA, is a Principal in the Tax Department with Alder, Green & Hasson LLP, a full service accounting and business consulting firm. Larry specializes in international taxation issues.
