1998 Tax Guide: Year-End Tax Moves

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Chapter 2
Year-End Tax Moves

1998 Tax Guide

he year-end tax planning process begins with estimating your 1998 income, deductions, exemptions, and credits. Starting early will give you extra time to

Important!

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obtain additional information on items that concern you or to investigate additional ideas for tax savings or deferral. The tax rate tables and worksheet (1998 Individual Income Tax Rates and Tax Forecasting Worksheet) can help you compute your expected taxable income and tax liability. The worksheet will help you view the current year and next year together and will provide a starting point for evaluating the tax effects of the various strategies set forth in this book.

Six Steps for Determining Where You Are

Estimate your income, deductions, credits, and exemptions for 1998 and 1999 using the Tax Forecasting Worksheet.
Identify items that you can shift from 1998 to 1999 or vice versa by reviewing Personal Tax Planning 1998.
Determine your marginal tax rate -- the rate at which your next dollar of income will be taxed -- for 1998 and 1999.
Determine how much tax you owe and when you must pay it to avoid underpayment penalties.
Determine whether you are subject to the alternative minimum tax (AMT).
Take the actions needed to make the best of your tax situation.

Minimizing Your 1998 Tax

Your goal in working through the year-end tax planning process is to reduce the amount of tax-to-be as much as you can. There are two ways to do this: through permanent savings of taxes or by deferring taxes to some future year. Examples of permanent savings are the reduction or elimination of liability for the alternative minimum tax or the reduction of your current tax liability by converting ordinary income into capital gain income that is subject to a lower marginal tax rate. Table 2-1 shows that your marginal tax rate can actually be higher than the "advertised" tax rates of 31 percent, 36 percent, and 39.6 percent.

Table 2-1 1997 Effective Marginal Tax Rates on Income
	"Advertised" Rate
	31%	36%	39.6%
Effect of 3-percent reduction in itemized deductions	0.9%	1.1%	1.2%
Phaseout of each exemption	0.6%	0.7%	0%
Totals for:
Individual	32.5%	37.8%	40.8%
Family with two children	34.3%	39.8%	40.8%
Family with four children	35.4%	41.1%	40.8%
Typically, married taxpayers with taxable incomes of $271,050 or more, who are therefore in the 39.6% bracket, will have adjusted gross income above the $304,300 level at which personal exemptions are fully phased out.

It is extremely important that, after you determine your 1998 tax liability, you also determine when those taxes must be paid to avoid underpayment penalties. The following section discusses the rules that govern the requirements for the payment of taxes.

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