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· Income Planning · Accelerating Income |
· Deduction Planning · Medical Expense |
· Child Tax Credit · Credits |
· Investment |
Section 1
Income Planning
A key aspect of tax planning is to
estimate both your 2006 and 2007 adjusted gross income (AGI). Time-honored
strategies of accelerating deductions and deferring income must be evaluated
carefully because they are tied to AGI.
Accelerating Income
Into 2006
If you are anticipate being in a higher
tax bracket in 2007, you may benefit from accelerating income into 2006. To
accomplish this:
- Accelerate Collection of Accounts Receivables: If you are
self-employed and report income and expenses on a cash basis, issue bills
and attempt collection before the end of 2006.
- Year-End Bonuses: If your employer generally pays such bonuses
after the end of the current year, negotiate to have your bonus paid to
you before the beginning of 2007.
- Retirement Plan Distributions: If you are over age 59 1/2 and you
participate in an employer's retirement plan or have an IRA, consider
making withdrawals before 2007.
Deferring Income
Into 2007
If you expect your AGI to be higher in
2006 than in 2007, or you anticipate being in a higher tax bracket in 2006, you
may benefit by deferring income into 2007. To accomplish this:
- Delay Collection: If you are self-employed, delay year-end
billing to clients so that payments will not be received until 2007.
- Interest and Dividends: Interest income earned on Treasury
securities and bank certificates of deposit with maturities of one year or
less is not includible in income until received. To defer interest income,
consider buying short-term bonds or certificates that won't mature until
next year. If you have control as to when dividends are paid, arrange to
have them paid to you after the end of the year.
- Investments: Many mutual funds attempt to "dress up"
performance by selling stocks and other holdings before the end of the
year, resulting in ordinary income and capital gains being recognized by
shareholders. Avoid having to recognize such income by deferring your
investment decision until the beginning of 2007.
Section 2
Deduction Planning
Deduction timing is also an important
element of year-end tax planning. Deduction planning may be complex, however,
due to factors such as adjusted gross income levels and filing status.
Deduction planning is impacted by the
limits on itemized deductions that are tied to adjusted gross income (AGI), For
2000 returns, overall itemized deductions are reduced by 3% of the AGI
exceeding $128,950 for married taxpayers filling jointly ($64,475 if married
filing separate). Similarly, certain deductions may be claimed only if they
exceed a certain percentage of AGI: 7.5% for medical expenses; 2% for
miscellaneous itemized deductions; and 10% for casualty losses.
Deduction planning is also impacted by the
standard deduction. For 2000 returns, the standard deduction is $7,350 for married
taxpayers filing jointly, $4,400 for single taxpayers, $6,450 for head of
household, and $3,675 for married taxpayers filing separately. In cases where
your itemized deductions are relatively constant and are close to the standard
deduction amount, you might consider adjusting the timing of your expenses so
that they are higher in one year and lower in the following year.
You may be eligible to deduct student loan
interest on any qualified education loan, applicable to interest paid after
December 31, 1998. The deduction is allowed only for interest paid during the
first 60 months in which interest payments are required. The maximum deduction
is $2,000 in 2000. The deduction is phased out at a modified adjusted gross
income level of between $60,000 and $81,100 for joint filers,
and between $40,000 and $55,000 for all other taxpayers.
Other Deduction
Strategies
If you are a cash-method taxpayer,
remember to keep the following in mind:
- Deduction In Year Paid: An expense is
only deductible in the year in which it is actually paid.
- Payment By Check: Date checks before the
end of the year and mail them before January 1, 2001.
- Promise To Pay: A promise to pay or
providing a note does not permit you to deduct the expense.
Highlighted below are
some of the more common itemized deductions and strategies for maximizing their
benefit:
- Medical Expenses: Medical expenses, including amounts paid as
health insurance premiums, are deductible only to the extent that they
exceed 7.5% of AGI. Consider bunching medical expenses into years when
your AGI is lower.
- State Taxes: If you anticipate a state income tax liability for
1999 and plan to make an estimated payment, consider making such payment
before the end of 1999.
- Charitable Contributions: Consider making your charitable
contributions at the end of the year. This will give you use of the money
during the year and simultaneously permit you to claim a deduction for
that year. You can use a credit card to charge donations in 2000 even
though you will not pay the bill until 2001. A mere pledge to make a
donation is not deductible, however, unless it is paid by the end of the
year.
Tax Credit Planning
Section 3
Child Tax Credit
A nonrefundable tax credit of $500 per qualifying
child under the age of 17 is available on this year's return. The credit is
phased out at a rate of $50 for each $1,000 (or fraction of $1,000) of modified
AGI exceeding the following amounts: $110,000 for married filing joint; $55,000
for married filing separate; and $75,000 for all other taxpayers.
HOPE Credit and
Lifetime Learning Credit
For 2000, two education credits are
available - the HOPE Scholarship credit and the Lifetime Learning credit. The
maximum HOPE credit is $1,500 (100% on the first $1,000, plus 50% of the next
$1,000) per student for qualified tuition and fees paid on behalf of a student ( i.e., the taxpayer, the taxpayer's spouse, or a dependent)
who is enrolled on at least a half-time basis. The credit is available for only
the first two years of the student's post-secondary education.
The Lifetime Learning credit maximum in
1999 is $1,000 (20% of qualified tuition and fees up to $5,000). A student need
not be enrolled on at least a half-time basis so long as he or she is taking
post-secondary classes to acquire or improve job skills. As with the HOPE
credit, eligible students include the taxpayer, the taxpayer's spouse, or a
dependent.
Both the HOPE credit and the Lifetime
Learning credit are phased out at modified AGI levels between $80,000 and
$100,000 for joint filers, and between $40,000 and
$50,000 for all other taxpayers.
Section 4
Investment Planning
Effective for sales after December 31,
1998, the following rules apply for most capital assets:
- Capital gains on property held 12 months or less are taxed at an
individual's ordinary income tax rate.
- Capital gains on property held for more than
12 months is taxed at a
maximum rate of 20% (10% if an individual is in the 15% marginal tax
bracket).
To avoid capital gains altogether,
you may want to consider giving shares of stock to children or grandchildren if
they are in a lower tax bracket than your own.
Capital losses also require special
attention. In general, when you take losses, you must first match your
long-term losses against your long-term gains, and short term losses against
short-term gains. If there are any remaining losses, you may use them to offset
any remaining long-term or short-term gains, or up to $3,000 of ordinary
income. When and whether to recognize such losses should be analyzed in light
of the changes in the capital gains rates applicable to your specific
investments.