BY GARY KLOTT
Gannett News Service
Untitled Article
As you work on your 1997 income tax return, it will pay to give some thought to steps you might take in the weeks and months ahead to save on your 1998 tax return.
Early planning is always essential to achieve sizable tax savings. And it's especially important this year given the new tax-saving opportunities opened up by the Taxpayer Relief Act of 1997.
Trying to plot strategies for the 1998 tax changes while you're still struggling with the 1997 changes might seem like trying to whistle and talk at the same time.
But as you work through your return, you'll often find valuable clues as to how you can adjust your financial affairs to reduce the tax bite. And some of the anguish you'll likely experience when filling out your return, such as finding a large expense that can't be deducted, might provide the inspiration needed to take prompt action.
''What I tell a client is that as you're going through the pain of accumulating data for your '97 return, perhaps you can consider things that will make it less painful and less taxing for '98,'' said Thomas Beneventi, a tax partner at the national accounting firm McGladrey & Pullen.
For example, if you always seem to come up just short of enough expenses to qualify for itemizing deductions on your tax return, try ''bunching'' payment of deductible expenses in alternating years. For example, instead of making a $2,000 donation to your favorite charity each year, donate $4,000 every other year. That might help you qualify for itemizing at least every other year.
For upper-middle-income taxpayers, the key to reaping many of the new law's most valuable benefits will be to find ways to keep their ''adjusted gross incomes'' below certain levels. Income eligibility requirements apply to the new child tax credit, the various new college tax breaks and the new Individual Retirement Accounts.
For example, the new tax credits for college tuition start to phase out for married couples with adjusted gross incomes above $80,000 on a joint return; the deduction for student loan interest at joint incomes above $60,000 and the new child tax credits at incomes above $110,000.
A look at the adjusted gross income figure on your 1997 return might give you a rough idea as to how much of a concern the income thresholds are.
With hundreds or thousands of dollars in tax savings at stake, many taxpayers have plenty of incentive to try to keep their incomes below the eligibility limits. There are a variety of strategies that can help them do that.
Employees can often reduce their adjusted gross incomes by thousands of dollars by taking advantage of their employers' 401(k) plans and ''flexible spending arrangements.'' Careful timing of investment sales can also help.
Schedule D (Capital Gains and Losses) might give some investors a hint as to whether they're positioned to take advantage of the new law's lower capital gains rates.
To reap the benefit of the capital gains cut will not only require heeding the new longer 18-month holding period before selling, but also reassessing investments in light of the capital gains changes. For instance, mutual fund investors will receive little benefit from the capital gains cut if they invest all their money in fast-trading stock funds that primarily generate gains that don't qualify for the new low rates.
If you're not eligible to deduct contributions to an IRA this tax season, explore your options for tax-sheltered retirement savings for the future.
The 1997 tax law expanded the options for many workers. Starting with the 1998 tax year, the new law raises the income-eligibility limits for deductible IRAs. And the new law gives birth to a new type of non-deductible individual retirement account named the Roth IRA, which allows tax-free withdrawals and is available to all but the wealthiest of taxpayers.
Nevertheless, many employees are likely to find that an old alternative -- their employer's 401(k) retirement plan -- remains the best option for retirement savings. For one thing, 401(k)s provide a way to shelter far more salary than the old or new IRAs allow. What's more, most companies will contribute 50 cents or more for each dollar contributed by the employee to a 401(k).
But in contrast to IRAs, you can't wait until the tax season to contribute to a 401(k). Contributions can only be made during the calendar year through payroll deduction.
If the itemized medical deduction always seems out of reach -- expenses are deductible only to the extent that they exceed 7.5 percent of adjusted gross income -- find out if your employer offers a flexible spending arrangement, or FSA, for paying medical expenses. The tax benefits of FSAs can reduce your out-of-pocket costs for medical care by hundreds of dollars a year.
Another option for some taxpayers is the tax-sheltered Medical Savings Account, which made its debut last year. Eligible are self-employed individuals and employees of small businesses -- employing no more than 50 workers -- who are covered by high-deductible health insurance plans.
If you end up claiming charitable deductions for large cash contributions on your 1997 return, consider donating stock or other appreciated investments the next time you make a sizable contribution.
You'll get a double tax benefit. Besides getting a charitable deduction for the current market value of your investment, you'll escape capital gains tax on the appreciation.
One caution: Be sure the shares you donate have been held more than one year. Otherwise, your charitable deduction will be limited to what you originally paid for the shares -- not their appreciated value.
Retirees who wind up paying income tax on part of their Social Security benefits should check to see if they can reduce their exposure to the benefits tax in the future by carefully timing withdrawals from retirement accounts and the sale of investments.
In some cases, spreading out investment income over more than one year can minimize the tax bite. In some other cases, bunching the receipt of investment income in alternating years can help reduce exposure to the tax every other year.
Whether you're due a fat refund check or you expect to be clobbered with a fat penalty for having too little tax withheld from your paychecks last year, this might be the time to adjust your withholding.
It's wise to make sure enough tax is withheld from your paychecks during the year so you don't wind up getting hit with IRS penalties for underwithholding.
But most workers have far more tax withheld than necessary -- in excess of $1,200 a year based on the average size refund check sent out in recent years. For many parents, overwithholding this year will end up hundreds or even thousands of dollars higher unless they adjust their withholding to reflect the new child and tuition tax credits.
While many people like the idea of getting a large tax refund check each spring, there is a price you pay for overwithholding. By extending the government what amounts to an interest-free loan, you lose the opportunity to make more productive use of that money for many months -- like paying off 18 percent credit card debt.
Employees can adjust their withholding anytime. All you need to do is file a new Form W-4 (Employee's Withholding Allowance Certificate) with your employer. A worksheet attached to the form will help you figure how much of an adjustment, if any, needs to be made.
