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Year-end tax tips
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December 2, 1998: 10:20 a.m. ET
As you celebrate the holidays, don't forget the tax-cracker suite
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NEW YORK (CNNfn) - Two things in life are unavoidable -- holidays and taxes -- and while sugar plum fairies may be dancing through your head, so should sweet little deductions.
Most taxpayers would rather see "The Nutcracker Suite" than spoil their holidays thinking about cracking taxes, but December is exactly the time to be evaluate your tax position.
Many tax operations have to be carried out during 1998 and some of the best tax deals expire at the end of this year, so it's worth taking a look at where you stand.
It won't take too much time, you may save a few dollars and you can get back to your place under the mistletoe in no time.
Give the gift of Roth
If you're saving for retirement you'll definitely need to take time out this holiday season to look at your financial situation, according to Stephen Mitchell, senior vice president at Fidelity Investments.
This is particularly important because of changes in the Roth individual retirement accounts.
"It's big because it offers a potential benefit to so many people," said Mitchell, "but many people don't know about it."
Unbeknownst to many, the Internal Revenue Service is giving you a gift this year but you have to pick it up before December 31. The gift is for those investors who are planning to convert from a traditional IRA to a Roth IRA.
Basically, the provision allows you to have the option of spreading the income from a conversion evenly over four years, which can not only lower your taxes this year but also reduce the tax costs of converting overall.
The IRS' gift doesn't come without strings, of course. Your adjusted gross income has to be $100,000 or less.
Visions of sweet tax breaks should be dancing through your head this holiday season.
Converting to a Roth can be fit into your busy holiday schedule, said Mitchell. "It's a very easy process. It just involves establishing a Roth IRA and indicating that you want to convert."
In addition, Mitchell said some investors may cut their taxes even further if they are eligible for a deductible IRA contribution.
To do this you need to be younger than 70-1/2 with an adjusted gross income of less than $30,000 for single filers and less than $50,000 for joint filers. These taxpayers can make a deductible contribution to a traditional IRA of $2,000.
Spare no expense
If you're self-employed you can give yourself a little present that will help you cut your tax bite and help you plan for your retirement in the future.
Those individuals who are in business for themselves can save more for retirement and pick up deductions by setting up a Keogh retirement plan.
Keoghs are similar to employer-sponsored retirement plans in that contributions are tax deductible for the business owner and money in it grows tax-deffered.
According to Mitchell, you can contribute up to 25 percent of compensation each year to a Keogh, with an annual limit of $30,000.
However, to get tax deductions for contributions made in 1998, calendar-year Keogh plans have to be set up by December 31.
Businesses will also need to think about their ordinary expenses at this time of year, according to Gail Winawer, tax partner at Goldstein, Golub, Kessler & Co.
"If you have business expenses, they must be for 2 percent of your income if you want to deduct them," said Winawer. "You might want to pre-pay them."
For example, if office supplies, forms and other types of paperwork are crucial toward your business you may want to consider now as a good time to buy enough for next year, if that will boost your expenses up above the 2 percent mark.
If you spend 1 percent of your income on business expenses in 1998 and 1 percent in 1999, you won't get any benefit. By combining the two in one year, you get the deduction.
Winawer said investors should, in particular, look at their financial pictures. Based on how your individual stocks have done, you have a good opportunity to make even your losses turn into gains.
"See if you can plan your income to take advantage of capital losses," she said. "Sum up whatever trading you've done and see what capital gains you've lost or realized."
For example, if you've got a particular stock that has been performing poorly and you were thinking of selling it anyway, you can unload it now and the loss can be applied to minimize your taxes.
You can take up to $3,000 of such losses and deduct them, she said. Any other losses can be carried forward. Keep in mind, though, if you hold your shares for more than 18 months or more, you'll be paying 20 percent in capital gains taxes.
Since Christmas is the time for giving, you might want to consider making donations before the end of the year.
"If you have clothing or household items you no longer need, this is the time to take it to a charity," said Winawer.
Charitable contributions like clothes or money are only deductible if you itemize. You'll also need a receipt for such gifts so make sure you get one when you make your donations.
Once you've accomplished these things, you'll be able to gather all of your deductions around your Christmas tree, tell them how much they mean to you and bask in the holiday glow of knowing you've made smart tax choices.
-- by staff writer Randall J. Schultz
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