Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, December 5, 1994 TAG: 9412060043
SECTION: MONEY PAGE: A-10 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
Many of those changes will show up on your 1994 tax return, so this is about your last opportunity to consider a few year-end tax strategies to help soften the blow. Consider these tips, from the Institute of Certified Financial Planners, for the final month of the year:
Contribute the maximum you can afford to your qualified retirement plan such as a 401(k) or plans designed for the self-employed, such as a Keogh or simplified employee pension plan (SEP).
These plans remain among the best tax shelters around. You must open a Keogh by Dec. 31, but you have until April 15, plus any extensions you may claim, to make contributions for the current tax year. SEPs can be opened and funded as late as April 15.
Fund an individual retirement account (IRA).
If you are married, file income taxes jointly, each of you work, at least one is covered by a retirement plan and your modified adjusted gross income is $40,000 or less, each of you can contribute up to $2,000 of earned income and take a tax deduction for it. The modified gross income figure is $25,000 for unmarried taxpayers.
If only one of you works, the employed spouse can put in $2,250 split between two accounts.
If you are single and your adjusted gross income falls between $25,000 and $35,000, you can take a partial deduction, as can married couples with adjusted gross income between $40,000 and $50,000.
If married and neither of you is covered by a qualified retirement plan, you can deduct 100 percent of your IRA contribution regardless of the amount of your earned income.
Regardless of whether you can deduct the contribution, taxes on earnings will be deferred until you withdraw the money.
You can open and fund an IRA as late as April 15 for this tax year.
Time your income.
If you expect your income to be the same or less next year, consider postponing into 1995 the receipt of flexible income such as bonuses, self-employment income or the sale of investments. But the planners warned that you should not delay the sale of an investment solely for tax purposes if market conditions don't warrant a wait.
Delaying income gives you use for another year of the money that would have gone to taxes, and it will save you taxes if your income tax rate next year is lower.
If, on the other hand, you anticipate being in a higher tax bracket next year, then you should reverse the strategy and consider shifting income to 1994.
Consider selling a losing investment before the end of the year - assuming, of course, that market conditions warrant the sale.
The loss must first be written off against any investment gains you have taken. If you don't have investment gains, or if your losses exceed your gains, you may be able to write off losses against ordinary income.
By writing off losses against gains, you reduce your taxable income. Consult your tax advisor about write-off limitations.
Rates for the alternative minimum tax, a tax intended to close loopholes on higher-income taxpayers, have risen to 26 percent on the first $175,000 of income and 28 percent for income above that.
However, under the new Tax Act, charitable gifts of appreciated property, such as stock or art, that has been owned for more than a year no longer will be included when calculating the alternative minimum tax.
If you're subject to the alternative minimum tax, or if you simply want to reduce your taxes, this may be a good move. With higher personal rates, these contributions are more valuable.
If you plan to marry before the year's out, and you both earn comparable incomes, consider postponing the ceremony until January. If you marry this year and file a joint return, you actually may owe more total tax than if remained single and filed separately. This is known as the "marriage penalty."
On the other hand, if one of you earns considerably more than the other mate and you're planning a January wedding, it may pay to hurry and tie the knot in December.
The Virginia Society of Certified Public Accountants recommends that taxpayers maximize deductions, the flip side of minimizing income. You also may want to try bunching expenses if there is a threshold to be met.
Medical expenses, for instance, are deductible to the extent that they exceed 7.5 percent of your adjusted gross income.
If you're getting close to this threshold, try to accelerate some deductible medical expenses into this year. For example, arrange for treatment before year-end and pay the bill by Dec. 31. If you won't be over the limit, on the other hand, consider deferring postponable treatment until next year, when you may qualify for a deduction.
The same logic holds for miscellaneous itemized deductions. Generally, miscellaneous expenses that exceed 2 percent of adjusted gross income are tax deductible. Numerous expenses qualify for the miscellaneous deduction, including tax preparation fees, union dues and job-hunting expenses. If it looks as if you might reach the threshold by year-end, it might make sense to speed up payments for qualified expenses.
Review your withholding and quarterly tax payments. You - not the IRS or your employer - are responsible for making sure your tax payments keep pace with your tax liability. Make sure your withholding and estimated tax installment payments will add up to at least 90 percent of your 1994 tax bill. Pay too little and you'll be hit with a penalty. Pay too much, and you're making an interest-free loan to the government.
by CNB