Originally created 12/08/96

Yearlong planning can ease tax burden

With just over three weeks left in 1996, there's still time to try to reduce your federal income taxes.

Almost everyone can cut his 1996 tax bill between now and the end of the year by carefully timing any major financial moves, says Rick Walter, a certified public accountant at Bashey & Co. in Bellevue. But it's important to make the right moves.

"I had a client who sold a large block of appreciated stock one December in order to make a down payment on a house which he bought on Dec. 29," Mr. Walter said.

Wrong move, on two counts, Mr. Walter said. "Had he consulted me in advance, we would have delayed both of these transactions until January." That would have given the man more than a year to pay tax on the gain from his stock sale.

In addition, he lost his ability to deduct the prepaid interest (called points) he paid on a mortgage for his house because he didn't have enough deductions that year to itemize.

Had he bought the house in January, he could have added those points to his other interest and property taxes, and they would have saved him about $600.

Mr. Walter says most taxpayers, even if they don't have major transactions in the works, can trim their taxes.

"I am constantly amazed that taxpayers do not list any noncash contributions when submitting their data to me," Mr. Walter said. "If you're like me, you have a ton of old clothes and household goods that are just waiting to be a tax deduction. I never turn down the call that says there will be a truck in my area next week to pick up items."

Internal Revenue Service guidelines indicate used items can be deducted and valued at 15 percent to 25 percent of their original cost. Often a deduction can be more than that.

The IRS says the deduction can equal the fair market value of the items you give away. You can determine fair market value by looking for comparable items at thrift shops or see what they sell for at auctions.

Often, taxpayers simply make a low guess in order to avoid trouble with the IRS.

If you don't want to compromise a legitimate deduction but don't have time to shop garage sales or thrift shops, consider spending $27 for a book that lists values for more than 750 commonly donated items using methods the author says are approved by the IRS.

The book, Cash for Your Used Clothing by William Lewis, is available by mail from Client Valuation Services, P.O. Box 22031, Lincoln, Neb. 68542 or by calling (800) 875-5927. The company says it will refund the price of the book to any taxpayer who doesn't save at least $200 by using it.

And if you haven't contributed $2,000 to an individual retirement account or a Keogh retirement plan, try to do so before the deadline. You have until April 15, 1997, to make an IRA contribution and deduct it on your 1996 tax return. But for Keogh plans, your contribution must be made by Dec. 31.

Starting in 1997, a spousal IRA contribution can be as high as $2,000 (up from $250 now), as long as the working spouse's income is at least as much as the IRA contributions of both.

Though many of the tax-savings strategies of the past have been eliminated by Congress, you'll still have more money in your pocket - or at least delay the tax bite - if you can postpone income from 1996 to 1997.

Deferring income isn't always easy, especially if you work for somebody else. Your employer probably wants to maximize deductions in 1996, and that includes paying salaries and wages. And even if you could persuade your boss to postpone your December paycheck until January, tax rules say that pay is taxable when you are entitled to receive it, even if you get it later.

However, if you bill clients for services, you can legitimately delay mailing your invoices until Dec. 30 or 31, ensuring that you won't be paid until 1997.

If you are thinking of selling securities or other assets, you might save taxes by timing their sale so that capital gains and losses are bunched together for maximum benefit.

If you have a capital loss of more than $3,000 this year, it will be more valuable if you have an equal amount of capital gains. Under federal tax rules, capital losses can offset capital gains without limit; but once your gains have been eliminated, any remaining loss can wipe out only $3,000 of other income in any one year. The rest will have to be carried forward to future years, deferring your tax advantage.

If you have high medical expenses and a choice of when to incur them, consider bunching them into 1996 or 1997. Medical expenses aren't deductible except to the extent they exceed 7.5 percent of your total income in the year they are paid. That wipes them out for most people.

Many homeowners have refinanced their mortgages in recent years, and many of them might have overlooked a tax deduction for points they paid on a previous loan.

When you pay off a loan in a refinance, any points you didn't deduct while the loan was in force can be fully deducted in the year you paid off the loan.

The timing of a refinance can make a difference, too. "A client of mine refinanced his mortgage on Jan.3," Mr. Walter said. "Had it closed by Dec.31, the old refinancing costs, which were being written off over 30 years, would have been fully deductible in 1994 and would have saved him $580."

Instead, the client had to wait a year for that $580 benefit.

If you refinanced a mortgage in 1993, 1994 or 1995 and didn't take this deduction, you still have time to file an amended return for that year with the deduction. This could get you a refund of several hundred dollars.

If you own your own business, a good general strategy is to pay all your deductible bills and buy any deductible supplies you can afford so you end the year with no accounts payable.

If you own rental property, pay for maintenance and repairs in December and consider allowing your tenants to defer until January part of the rent they would otherwise pay in December. If you have a mortgage payment due Jan. 1, paying it the last week in December will increase your 1996 interest deduction.

Several changes in the tax law take effect Jan. 1. Businesses will have a higher limit for "Section 179" deductions for buying equipment. And self-employed taxpayers will get to deduct 40 percent (instead of the current 30 percent) of their health insurance premiums.

Tips on saving

  • List noncash contributions, such as clothes, household goods or other items that you have donated to a charity, as a deduction.
  • If you haven't contributed $2,000 to an individual retirement account or a Keogh retirement plan, try to do so before the deadline.
  • If you own a business, and you bill clients for services, you can legitimately delay mailing your invoices until Dec. 30 or 31, ensuring that you won't be paid until 1997.
  • If you own rental property, pay for maintenance and repairs in December.

  • AllAccess

    Trending this week:


    © 2018. All Rights Reserved.    | Contact Us