Contact:
Christina Finzel, [email protected] or 601-974-1034.
Jackson, MISS. - No one likes to think about the dreaded "April 15," especially as we enter the holiday season. But as Millsaps Tax Accounting Instructor Sanford Warren advises, taking time to think about your taxes now can pay off four months from now and beyond.
"Tax planning really concerns the timing and method by which your income is reported and your deductions and credits are claimed," explains Warren. "The basic strategy for year-end tax planning is to schedule your income so it will be taxed at the lowest rate and schedule your deductible expenses so they may be claimed in years when you are in a higher tax bracket."
Warren recommends conversion to a Roth IRA as a long-term strategy for many of his clients. Until the end of this year, you can roll your traditional IRA to a Roth and spread the tax payments over four years.
"One of the big advantages of the Roth is that your investments grow tax-free," Warren notes. "If your retirement is more than ten years away, you should seriously examine the move. But you have to decide before December 31."
Warren, who brings a healthy dose of "real world tax tales" to his students at Millsaps College, has served as an accountant for over 30 years and has experienced both sides of the ledger. A former Internal Revenue Service Agent, Warren now advises clients on how to improve their tax standing and offers the following suggestions:
1. Year-end Bonus: You may wish to defer your bonus to 1999 if this arrangement is satisfactory to your boss. If you anticipate a lower tax bracket for 1999, this may be a good move.
2. Social Security: For ages 62-65: Earnings in excess of the $8,900 allowable amount are repaid $1 out of each $2. For ages 65-70: Earnings in excess of $14,500 are repaid $1 for each $3.
3. Casualty Loss: Hurricane victims take note: If you suffered property damage during the year 1998, you may have a casualty loss equal to the lesser of (1) the decrease in fair market value of the property resulting from the casualty, or (2) the adjusted basis of the property. Any insurance coverage will reduce the casualty. If you have insurance, you must file a claim with them in order to claim the casualty on your return.
4. Estimated Tax: There is one remaining estimated tax date (January 15, 1999). If you owe additional taxes of $1,000 or more, this is the time to make the remaining payment to avoid possible penalties.
5. Capital Gain Rates: The long term capital gain rate is 20% for 1998. The holding period is one year.
6. Business Owners: You may hire your kids to work for you and pay them the amount of the standard deduction. This is not subject to social security and will not cause a tax liability for them, but it will provide a deduction for you.
7. Shifting Income to Your Kids: The kiddie tax does not apply to children 14 and over. Thus, you may save money by putting investment property in your child's name to take advantage of their lower tax rates. You can transfer $10,000 each year ($20,000 if you are married). This allows you to transfer a sizable portion of your estate to your children without gift or estate tax liability and, at the same time, increase the amount of income that will be taxed at your children's rate once they reach age 14.
8. Child Credit: Remember that you have a child credit of $400 for the year 1998 for each dependent child 17 or under.
9. Dependency Exemptions for Divorced Parents: The general rule is that the parent having custody has the dependency exemption unless he/she relinquishes it to the other parent. If you are a divorced parent, your year-end tax planning should include a consideration of which parent would most benefit by the dependency exemption and the effect this may have on the amount of child support to be paid.
10. Educational IRA: It is not too late to buy a $500 educational IRA for your child. This is non-deductible, but it will provide tax free funds for college. You can buy a $500 educational IRA each year until the child reaches 17.
11. Sale of Personal Residence: Remember that if you have used the residence for two of the past five years you may exclude up to $500,000 on a joint return or $250,000 on a single return.
12. Sale of Securities: Be sure to meet the December 15 date in selling securities to allow time for the results to be included on the 1998 return.
13. Other Items That May Produce a Tax Savings: Employment-related expenses; investment expenses; investment interest expense; medical expense; charitable contributions; depreciation; bad debts; and expenses related to a vacation home. For the medical expense and charitable contributions, you may wish to consider the advantage of either paying and claiming these this tax year, or deferring until next year if you will be in a higher tax bracket then.
With the numerous options available this year, Warren urges taxpayers to start planning now and to be mindful of their tax moves. "Just when you think you have beaten the tax system by maximizing your itemized deductions and making the most of other tax breaks, you may find that the alternative minimum tax (AMT) has ruined your plans." The AMT system is in place to ensure that you pay a minimum level of tax. Thus, if your deductions are too high and you've taken advantage of too many other tax breaks, some or all of these "references" may be disqualified. Warren quipped, "The AMT reminds us that you want to be good - but not too good in the deductions and breaks you take!"
Millsaps College is a privately supported college founded in 1890 and is affiliated with the United Methodist Church. Millsaps is one of only four liberal arts colleges in the United States to hold both a Phi Beta Kappa chapter and accreditation by AACSB - The International Association for Management Education of the undergraduate (BBA) and graduate (MBA) programs in business. The only national liberal arts college in Mississippi, Millsaps ranks in the top half of all national liberal arts colleges in the U.S. and rates 6th in value among national liberal arts institutions according to U.S. News and World Report, Aug. 1998). The College also ranks 67th in the nation among national colleges and universities and 11th among traditional liberal arts colleges with enrollments of less than 1,600 students on Money Magazine's Best College Buy list (Sept. 1997).
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