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.

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