Tax strategies

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	Tax Strategies Personal Finance Advisor by Deloitte & Touche OnLine March 10, 1997

A few simple approaches can help you save on your taxes.

Even though tax planning should be a year-round activity, many individuals do not focus on ways to reduce their taxes until shortly before the April 15 filing deadline. Following is a list of tax tips and strategies to consider.

Accuracy of Tax Statements: Verify the accuracy of W-2, 1099, 1098, and other tax information statements. If you discover an error, contact the issuer and request a corrected copy. Reporting an amount on your tax return (even if it is the correct amount) that differs from the amount on the tax statement could cause the IRS to issue a notice or examine the return.

Dependent Taxpayer Identification Number: (TIN) The social security number is generally an individual’s TIN. The IRS can deny a personal exemption and the dependent care credit if a tax return is filed without a TIN for a claimed dependent. Failure to provide a TIN for a dependent born before December 1, 1996 will be treated as a mathematical/clerical error, which means the IRS can immediately assess tax without conducting an audit.

Funding an IRA: Individuals have until April 15, 1997, to make IRA contributions for the 1996 tax year. The deductibility of an IRA contribution depends on whether the taxpayer (or spouse) is covered by a qualified retirement plan those not covered may deduct IRA contributions, those covered may deduct contributions if their income is below a certain level. Deductible IRAs are the most advantageous; however, taxes on income generated in the IRA is deferred in both deductible and nondeductible IRAs.

Consider making 1997 IRA contributions early in 1997 this will maximize the benefit of the tax deferral. The Small Business Job Protection Act of 1996 increased the amount that joint filers may deduct for IRA contributions in one year. For 1997 and later tax years, contributions of $2,000 for each spouse are allowable, regardless of whether each spouse has earned income, provided the couple has earned income of at least $4,000.

Keogh Plan Contributions: If you are self-employed or a director of a corporation, consider making a contribution to a Keogh retirement plan for the 1996 tax year. The Keogh must have been established by December 31, 1996; however, contributions need not be funded until the due date of the individual’s tax return.

Section 179 Expenses: Purchases of qualifying business property that was placed in service during 1996 can be expensed (up to $17,500 in one year), rather than capitalized and depreciated over a longer time period. Several limitations apply to this deduction.

Health Insurance Premium Deduction: A taxpayer who in 1996 was self-employed, a partner, or a shareholder/employee owning at least 2% of an S corporation, can deduct 30% of individual and family medical insurance premiums from gross income. The deductible amount will be 40% in 1997. The deduction does not reduce net earnings subject to self-employment taxes, and it cannot exceed the earned income of the business that established the insurance plan. Additionally, a deduction is not permitted for premiums paid during a month in which the taxpayer (or spouse) was eligible for employer-paid health benefits.

Filing Requirements for Household Employees: Federal employment taxes for household employees are now reported on the employer’s individual income tax return. Tax penalties for underpayment of estimated tax will not apply to household employment taxes before 1998. Although the federal filing is required annually, many states still have quarterly filing requirements.

Separate or Joint Tax Return: For some couples, filing separate tax returns may be more advantageous than filing a joint return. If you and your spouse have comparable incomes, or if one of you has large itemized deductions, filing separately may lower the phase-out of itemized deductions and personal exemptions (phase-out thresholds are based on adjusted gross income). Consider the state tax implications of a decision to change filing status.

Estimated Tax Payments: Several tax rules allow individuals to reduce the amount of quarterly estimated tax payments or withholdings. Reducing estimated payments is similar to receiving an interest free loan from the government.

Home Improvements: If properly documented, improvements to a residence increase the tax basis of the property. Keep documentation (e.g., invoices, canceled checks) in one file, because they will not be needed until the property is sold.

Commonly Overlooked Deductions: Consider the deductions and tax credits in the following checklist when reviewing your 1996 tax return.

Fourth-quarter state or local estimated tax payments for 1995 (which were paid in January 1996).
Any balance due on 1995 state or local income tax returns paid during 1996.
Non-cash charitable contributions, including travel expenses at 12 cents per mile.
Deductible items reported on a closing statement from the sale or purchase of a home.
Seller-paid points on the purchase of a home.
Tax planning and tax preparation fees.
Margin interest expense paid on a brokerage account.
Personal property taxes paid on autos and other personal property.
Tax credit for foreign taxes paid on income from non-U.S. sources.
Tax credit for fuel taxes related to off-highway business use.

These are general strategies for reducing individual income taxes. Your tax advisor can provide additional information and should be consulted before any action is taken.