Tax Guide: More Tips Anyone Can Use

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Chapter 3
7 More Tips For Everyone
Tax Strategies for 1998

Nondeductible
IRAs and Roth
IRAs can save
you taxes in years
to come.

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.

Don't double up your first minimum distributions and pay unnecessary income and excise taxes. Minimum distributions are generally required at age 70½, but you are allowed to delay the first distribution until April 1 of the year following the year you reach age 70½. In subsequent years, the required distribution must be made by the end of the calendar year. This creates the potential to double up in distributions in the year after you reach age 70½. This double up may push you into higher tax rates than normal. In many cases, this pitfall can be avoided by simply taking the first distribution in the year in which you reach age 70½. Retirement distributions are discussed in Chapter 6.

Important!

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Don't forget filing requirements for household employees. Employers of household employees must withhold and pay social security taxes annually if they paid a domestic employee more than $1,000 a year. Fed-eral employment taxes for household employees are now reported on your individual income tax return (Form 1040, Schedule H). For 1997, household employment taxes are due April 15, 1998, when your own return is filed. Starting in 1998, in order to avoid underpayment of estimated tax penalties, employers will be required to pay these taxes for domestic employees by increasing their own wage withholding or quarterly estimated tax payments. Although the federal filing is now required annually, many states still have quarterly filing requirements.

Consider funding a nondeductible regular or Roth IRA. Although nondeductible IRAs are not as advantageous as deductible IRAs, you still receive the benefits of tax deferred income. (IRAs, including Roth IRAs, are discussed in Chapter 6.)

Calculate your tax liability as if filing jointly and separately. In certain situations, filing separately may save money for a married couple. If you or your spouse is in a lower tax bracket or if one of you has large itemized deductions, filing separately may lower your total taxes. Fil-ing separately may also lower the phaseout of itemized deductions and personal exemptions, which are based on adjusted gross income. When choosing your filing status, you should also factor in the state tax implications.

Avoid the hobby loss rules. If you choose self-employment over a second job to earn additional income, avoid the hobby loss rules if you incur a loss. The IRS looks at a number of tests, not just the elements of personal pleasure or recreation involved in the activity.

Review post-death planning opportunities. A number of tax planning strategies can be implemented soon after death. Some of these, such as disclaimers, must be implemented within a certain period of time after death. A number of special elections are also available on a decedent's final individual income tax return.

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