Tax Guide: General Strategies, Part 1

16 tips anyone can use

See our newest planning guide, with tips and strategies for 1998!

Saving on taxes
is a year-long
activity.

Make your estimated payments and withholding penalty-proof when possible. The key to success in this area is careful monitoring of your tax situation throughout the year. Look at the rules as set out in Chapter 2, and take time to review your tax payment situation now!

Be sure to provide dependents' Taxpayer Identification Numbers (TINs) where required on your tax return. The IRS is now authorized to deny a personal exemption and the dependent care credit if you file a return without a TIN for your dependent. (Generally, for an individual, the TIN is a Social Security number.) Failure to provide a required TIN is now treated as a mathematical or clerical error, which means that the IRS can immediately assess tax, without conducting an audit.

Consider a $2,000 individual retirement account (IRA) contribution on behalf of a spouse whose earnings are less than $2,000. 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 years, the deductible amount can be as much as $2,000 for each spouse, as long as the combined compensation of both spouses is at least equal to the contributed amount.

Consider donating appreciated stock to a private foundation before June 1, 1997. Before that date, you can deduct the full fair market value of such a gift (up to the regular percentage-of-income limitations). This tax break is scheduled to expire after June 1, 1997.

When planning distributions from pension and 401(k) plans, bear in mind that the excise tax on excess distributions has been temporarily repealed. It may be advisable to withdraw larger amounts in 1997 than seemed appropriate before.

Maximize the amount of interest you can deduct. There are significant restrictions on the types of interest expense that are tax deductible. Some examples of deductible interest expense are most home mortgage interest (subject to limitations), investment interest (also subject to limitations), and interest related to a trade or business. Personal interest, including interest on credit cards, car loans, and tax deficiencies, is not deductible. Analyze your borrowings and restructure debt where possible to gain a tax deduction on favorable borrowing rates. (See Chapter 13.)

Don't sell appreciated assets to fund charitable gifts. Both you and a charity can benefit if you give appreciated assets to the charity instead of selling the assets and donating the after-tax proceeds. The amount of the savings (which can be significant) will depend on how much capital gains tax you would have paid on the sale. This strategy is discussed in Chapter 11.

Avoid the potentially costly combination of capital gains, AMT, and state and local taxes. The alternative minimum tax rates now reach to a maximum of 28% for alternative minimum taxable income in excess of $175,000. Because the capital gains rate and the AMT rate are the same (28%), if you have large capital gains, your risk of paying AMT will increase substantially and should be anticipated. The AMT will have a profound effect on your tax planning and particularly on the payment of expenses that are not deductible for AMT purposes, such as state income taxes. Careful multiple-year planning will help you determine when to pay state income taxes, particularly in high income tax states, in the event that you have large capital gains. The AMT is discussed in Chapter 10.

Look for the double shelter opportunity in some passive gains. The Tax Reform Act of 1986 created a complicated set of rules to deal with passive losses. The rules essentially provide that you cannot use real estate and other tax shelter losses to offset wages, interest, dividends, and gains from stock market investments. Passive losses can only be used to offset passive income in most situations. The result is that many taxpayers have suspended passive losses that they carry forward from year to year. These passive losses can be valuable if you have passive income or dispose of a passive activity, and their use should be maximized. Passive losses are discussed in Chapter 12.

Don't overlook minimum distributions at age 70½ and rack up a 50% penalty. Minimum distributions from qualified retirement plans and IRAs must begin by April 1 of the year after you reach age 70½. The amount of the minimum distribution is calculated based on your life expectancy or the joint and last survivor life expectancy of you and your designated beneficiary. If the amount distributed is less than the minimum required amount, an excise tax equal to 50% of the amount of the shortfall is imposed. Retirement distributions are discussed in Chapter 6.

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