Tax Planning for 1999

\| DT Online Home \| Site Search \| Personal Finance Advisor \|
	Year-end tax strategies Personal Finance Advisor by Deloitte & Touche OnLine November 30, 1998

Check your situation today to save taxes in years to come.

A year-end review of your personal tax situation is one of the most effective ways to reduce your overall tax liability. "Start the end-of-the-year tax planning process early so that you will have time to gather necessary information and investigate tax-saving ideas," notes Laura Peebles, Deloitte & Touche. The following five steps are a good way to begin the year-end review:

Estimate income, deductions, credits, and exemptions for both 1998 and 1999.
Identify deductible items that could be shifted from 1998 to 1999 (or vice versa).
Determine your marginal tax rate for 1998 and 1999.
Estimate the total amount of taxes due and compare this amount to estimated payments and withholdings to date (if necessary, increase withholdings or estimated payments).
Determine whether the Alternative Minimum Tax (AMT) will apply.

The year-end planning process generally encompasses two basic principles -- taking advantage of permanent tax savings opportunities, and deferring taxes to some future year (by accelerating deductions or deferring taxable income).

Permanent Savings: Avoidance of underpayment penalties is a permanent saving strategy available to everyone. For 1998, an individual will not be assessed an underpayment penalty if the balance due on the tax return (total tax liability for the year, less tax withholdings and timely estimated payments) is less than $1,000. In prior years, this threshold was $500. If the balance due is $1,000 or more, the taxpayer will be subject to an underpayment penalty unless 1998 estimated payments and withholdings equal

90 percent of the current year’s tax liability;
100 percent of the prior year’s tax liability (regardless of the current year’s adjusted gross income -- AGI); or
90 percent of the tax liability based on quarterly annualization of current year-to-date income.

Taxpayers should also avoid overpayment situations. If a taxpayer expects a substantially lower total tax liability, but fails to reduce estimated tax payments or withholdings, the taxpayer will be providing the government with an interest-free loan in the amount of the overpayment.

Two other important permanent tax-savings strategies are (1) avoidance of the AMT, and (2) conversion of ordinary income into capital gains income. These strategies are dependent on the amount and type of income and deductions included in the taxpayer’s return. Consult your tax advisor.

Deferring Taxes: Income is generally taxable to individuals in the year of receipt. By accelerating or deferring the payment of certain deductible expenses, a taxpayer can influence the amount of taxable income for a particular year.

State and Local Tax Payments: If accelerating deductions will help attain tax savings, paying real estate taxes before Dec. 31, 1998, (even though payment is not due until early 1999) will secure the deduction for the 1998 tax return. Also, paying the balance of estimated state tax payments in December 1998, rather than waiting until the due date (usually Jan. 15, 1999, or April 15, 1999), will accelerate the deduction into 1998.
Miscellaneous Deductions: This defined group of expenses (for example, tax preparation fees, cost of investment advice, charges for safety deposit boxes) are deductible only to the extent they exceed two percent of AGI. Grouping or bunching miscellaneous deductible expenses in a single year may help the taxpayer meet the two percent floor.
Prepaid Interest: In most cases, cash-basis taxpayers can deduct expenses in the year paid. Prepayment of deductible interest during the year in which the interest relates is permissible. Mortgage payments are usually due around the first of each month; therefore, taxpayers can pay the January 1999 payment before the end of 1998, and increase the amount of deductible interest for the 1998 tax return.
Medical Expenses: Grouping medical expenses in a single year can help taxpayers qualify for the deduction. Medical expenses are only deductible to the extent they exceed 7.5 percent of AGI. Therefore, incurring certain flexible medical costs (for example, expenses for eyeglasses, contact lenses, dental work, routine physical examinations) all in one year may allow the taxpayer to meet the 7.5 percent floor.
AMT Caution: If AMT is likely to apply in 1998, taxpayers probably should not accelerate payments for state and local income taxes, property taxes, and other miscellaneous deductible expenses. These taxes and miscellaneous items are not deductible in computing AMT income, and therefore, a deduction yields no benefit to taxpayers subject to the AMT. Other AMT rules apply to investment interest expense and medical expense deductions.

Tax Planning Booklet: Year-end tax planning strategies, as well as significant tax law changes for 1998, are discussed in Personal Tax Planning 1998, a booklet published by Deloitte & Touche. For a copy, contact a tax professional in your local Deloitte & Touche office.

These are some thoughts to consider about personal tax returns for 1998. Your Deloitte & Touche financial and tax advisors can also provide information and should be consulted before any action is taken.