Frequently Asked Tax Questions -- December 23, 1996

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, Monday December 23, 1996

 

Income Tax Planning Before the Clock Strikes Midnight

ROBERT L. SOMMERS

Note: This exercise is for educational purposes only and is not intended to be legal or tax advice. Your particular facts and circumstances must be considered when applying the U.S. tax law. You should always consult with a competent tax professional with respect to your particular situation.

This World Wide Web Server is the creation and property of Robert L. Sommers , attorney-at-law. Copyright 1995-7 Robert L. Sommers, all rights reserved.


Monday, December 23, 1996 (part 2 of 2)

INCOME TAX PLANNING BEFORE THE CLOCK STRIKES MIDNIGHT

Go to Part 1 of this article
Sidebar from Chronicle article

Time is short! Although several options can lessen your tax bite in 1996, you'd better hurry!

Delay Receiving Income

Delay bonus payments or other payments to 1997. Remember, if you receive or have legitimate access to a check in 1996, but physically are unable to deposit it, you still have "constructively" received the income in 1996. Therefore, delaying this deposit or other amounts in 1996 will not postpone recognition of 1996 income.


Recognizing Capital Losses

If you have capital gains, consider selling those stocks which will generate a capital loss, prior to the end of 1996. Capital gains are netted against capital losses. Capital losses that exceed capital gains may offset ordinary income up to $3,000 per year and can be carried forward indefinitely until used in full.


Repurchasing the Same Stock

Suppose you own a stock that has lost value, but you want to keep it. Can you sell it, recognize the loss, then repurchase it? Yes, if you wait at least 31 days before repurchasing it. This is called a "wash transaction" and the rules state that you cannot acquire "substantially identical securities" within a 61 day period which begins 30 days before the sale and ends 30 days after it.

Suppose two years ago you purchased 1,000 shares at $90/share which is now worth $50/share. You might: (a) sell the shares and recognize a $40/share capital loss, then repurchase the stock 31 days later; (b) buy another 1,000 shares of the same stock at $50/share, then sell the original lot 31 days later; or (c) sell the stock and immediately buy stock in a similar company, hold the new stock for 31 days then sell it, and then repurchase shares in the original company. While each strategy has its risks, all circumvent the wash sale rules, permit you to deduct the loss on the original stock and still own shares of the stock.


Payments by Check or Cash

Payments by check and credit card made in 1996 count as 1996 deductions, even though the credit card credit card charges are paid off after 1996. If you have several large amounts outstanding, obtain a less-expensive home-equity line of credit (or use the one you already have) to pay the expenses in 1996. Pay other outstanding liabilities in 1996. Pay employees their bonuses in 1996.


Prepayments of Expenses by Cash-Basis Taxpayers

Period costs, such as insurance, taxes and rent can generally be prepaid for a maximum of one year. Interest deductions, however, can be prepaid for only one month.


Purchase Equipment in 1996

Purchase business computer equipment this year. The maximum amount of equipment eligible for a full deduction is $17,500 per year. Buy that color printer you've been eyeing, or that laptop computer. If you borrow money for these purchases, you'll receive a 1996 deduction although the pay back occurs later.


Gifts of Appreciated Property to Charity

Make a gift of appreciated property to charity. You'll obtain a current deduction for the fair market value of the property. There are strict substantiation rules for gifts of property valued over $250 in value. Note: For those taxpayers affected by the alternative minimum tax, charitable gifts of appreciated property are no longer considered tax preferences. Also, don't overlook clothing or books which may be donated to charity for a year-end tax deduction.


Write-off Worthless Debts This Year

Make an earnest attempt to collect outstanding debts this year and then declare them as bad debts. You must be able to show the debt became worthless in 1996. Remember, cash basis companies (most small service businesses) cannot deduct an uncollected receivable as a bad debt. Rather, it must involve money owed to you or an investment made by you that became worthless.


Maximize Contributions to Retirement and 401K Plans

Determine the maximize you can contribute to your retirement or 401 K plans and make the contribution. Those with self-employment income should form a Keogh retirement plan before the end of the year. Contributions to a Keogh plan may be made until April 15, 1997 (or later if you apply for a tax return extension). Note: The recent change allowing a $2,000 IRA deduction for a non-working spouse is effective in 1997, so this break will not help you in 1996. IRA contributions must be made by the due date of your return.



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All contents copyright 1995-2003 Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.