Last-Minute Tax Planning Opportunities

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, December 12, 1999.

Copyright © 1999 Robert L. Sommers, all rights reserved.

Part 1 of a 2-part series

Last-Minute Tax Planning Opportunities

Although your 1999 tax bill is due on April 15, 2000, you have until this month’s end to reduce your tax liability.

Y2K Glitches: Retain all bank and brokerage statements, year-to-date wage and employment records, and canceled checks. Back up and print out critical financial data needed for your 1999 returns. Double-check all W2 and Form 1099 statements you receive, including mortgage payment statements. If you've stored your 1999 tax information electronically, print out a hard copy. The last thing you want is a Y2K crash that zaps your financial records. Whether IRS’ computers will survive the Y2K problem without serious glitches remains to be seen.

The following are suggestions for lowering your taxes if you take action before midnight, December 31st.


To Marry or Not to Marry?

Couples who "tie-the-knot" before January 1, 2000, are considered married throughout 1999. The impact of getting married on one's taxes cannot be under-estimated. Usually, but not always, marriage will have a negative impact if both parties are earning significant amounts of income. For instance, the initial exemption under the Alternative Minimum Tax is $45,000 for joint filers, but only $33,750 for single taxpayers.

Conversely, the 10% surcharge on high incomes (increasing the top marginal tax bracket from 36% to 39.3%) applies to taxable income greater than $283,350 for single and joint filers alike. Therefore, two individuals with a combined taxable income of more than $283,350 should consider postponing marriage until 2000.

Roth Limitation: An individual with an Adjusted Gross Income ("AGI") of $100,000 or less may engage in a Roth rollover, but the same AGI limitation applies to the combined income of a married couple. Postpone marriage until next year if are considering a Roth rollover and you and your new spouse’s combined AGI will exceed $100,000

Sale of a Principal Residence: Individuals who have owned and lived in their home for two of the past five years prior to sale ("residence") may exclude up to $250,000 in profits ($500,000 for joint filers). Assume a single woman, who has lived in her residence with her fiancée for at least two years, sells her residence during the year for a $500,000 profit. If the couple marries before year's end and files a joint return, the full $500,000 will be excludable, even if the residence was sold prior to their marriage.

Estimated Tax Payments: Taxpayers with multiple sources of income or significant investment gains should make estimated tax payments. In general, you need to make estimated tax payments totalling an amount at least equal to your actual tax liability for 1998.

Your are not required to pay estimated tax if your 1999 tax withholdings and credits: (1) equal at least 90% of your 1999 tax liability; (2) equal 100% of your 1998 tax liability (105% if your 1998 AGI was greater than $150,000); or (3) reduce your total tax to less than $1000.

Remember, your estimated tax must include any self-employment taxes owed on income from a sole proprietorship. Also, income from a partnership, limited liability company or S corporation is often subject to self-employment taxes.


Last Minute Deductions

For those who itemize their deductions consider the following standard techniques:

Charitable Deductions: Empty your house of old clothes, furniture, computer and sports equipment and other "garage sale" items, estimate their fair market value (make an inventory and take pictures as part of your records), then donate them to your favorite charity to claim a charitable deduction. Items over $250 require a receipt. Also, if you have a used car, consider donating it to charity for a full blue-book deduction. Note: IRS is investigating abuses involving charitable donations of automobiles so be prepared to substantiate the value of your donated automobile.

Contribute appreciated property to public charities and receive a deduction for the full fair market value on the date of the donation. Remember, donations of appreciated property, such as stock, include the appreciation as part of the charitable donation, but you will not have to pay any capital gains tax.

Taxes and Mortgage Interest: Pay your fourth-quarter state income tax estimate and prepay your January mortgage payment this year. Pay your second property tax installment due in 2000, by the end of 1999. The same holds true for deductible alimony payments and deductible student loan interest.

Medical Expenses: Schedule medical and dental work prior to the end of this year and pay all medical expenses before December 31. These expenses are deductible to the extent they exceed 7.5% of your AGI.

Itemized Miscellaneous Deductions: Itemized miscellaneous deductions must exceed 2% of AGI. Employee expenses not part of an employer’s accountable plan are considered itemized miscellaneous deductions. These include uniforms, travel expenses, automobile expenses, job-related moving expenses, meals and entertainment expenses (these have strict requirements), certain education expenses for maintaining skills, union and professional dues and expenditures for equipment (up to $19,000) placed in service in 1999, supplies and publications. Note: Special rules might apply to computers, automobiles and other mixed-use equipment.

Paying Deductible Expenses: Payments by check and credit card made in 1999 count as 1999 deductions, even though the credit card charges are actually paid in 2000.




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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**