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Do your tax prep now
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October 8, 1999: 10:05 a.m. ET
Look ahead to April 2000 by culling documents, adjusting expenditures
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - As the death of winter creeps into the air, it feels like it's time to cuddle up and hibernate. But stick your head out from under the comforter and give your finances a once-over, if you want to ease the pain when tax time blooms in the spring -- some fourth-quarter preparation can ease first-quarter fright.
"You don't put your head under the sheet. Now is the time to get busy," said Carolyn Kaufman, a certified financial planner who runs Kaufman & Co. Financial Planning in Beachwood, Ohio. "Most people say 'I'll think about it tomorrow and don't want to do it.' Many come in Jan. 1 and say 'What should I have done?' That's too late."
What's the best way to prepare for tax time? "That's such a big topic," said Stan Hargrave, a certified financial planner with IMS\CPAs in Riverside, Calif. Though some tax-management ideas are more suited for small businesses, there are several ways for individuals to prepare so they don't get an Internal Revenue Service-charged shock.
Find out where you stand
The first step is to calculate your likely income and what tax bracket that means you'll fall in, Hargrave said. The options for how "normal" people can position themselves have shrunk with tightened tax laws, but knowing where you stand now helps.
For instance, the 28 percent tax bracket covers a range of taxable income from $25,750 through $62,450 for a single person -- so if your income is already at $30,000, there's not that much you can do. For joint-filing couples, the range is $43,050 to $104,050.
"But if you're at the upper extremes of the bracket, watch out," he said, or you'll end up moving into a bracket where you're taxed at 31 percent. "You need to be aware of that. That simple knowing where you're at can save you 3 percent."
Take some time to review your tax situation before the end of the year. That also helps in another way.
"What we're telling clients, of course, is to go back and organize their documents so they can see where they are," Kaufman said. That exercise reminds people to keep receipts for donations and to track possible deductions. "That's the biggest problem. People don't keep records, and they have deductions they can't take because they can't prove it."
Manage your income if you can
A few people in middle- to senior-management positions may be able to channel their income stream between one year and another. Ask yourself whether you're better off accelerating earnings into this year or trying to stave them off. Some employers may accommodate deferring a bonus, for instance, or you could ask for an advance.
"If you think you're earning less next year than this, ask 'Can I receive my bonus next year,'" suggested Greg Zandlo, a financial planner with North East Asset Management in Coon Rapids, Minn.
If you've done any contract consulting work, think about when you want to bill for it. Consultants, like small business owners, are in perhaps the best position to control when they take their income.
Deferring income is attractive for people approaching the cutoff for Roth IRAs. For the full $2,000 allowance, the cutoff is $95,000 for single people and $150,000 for couples filing together. That's adjusted gross income, including regular income as well as interest, dividends, alimony and the like.
Similarly, there's a $100,000 cutoff for turning a conventional IRA into a conversion Roth IRA. With a conversion IRA, you'll pay tax on the full amount the year of the conversion, but the money then grows tax free until you're 59-1/2.
"If you're trying to qualify for the Roth conversion IRA, you might ask your employer to defer paying you in December if you're on the cusp," said Marc Freedman, president of Freedman Financial Associates in Peabody, Mass. "At a reasonable company they can work that in."
Think about maximizing your deductions
But salaried employees have no real options on manipulating their income once they've had the check cut. If you plan to itemize, though, you can make the most of that, tax advisers point out.
If you don't always itemize, you might want to try to consolidate your deductions in a particular year, shooting to itemize one year and then take the standard deduction the next. That's sometimes called "swelling" or "bunching" your deductions.
For instance, to qualify to itemize medical bills, they have to amount to 7.5 percent or more of your adjusted income. But if you're very close to or past that point, go ahead and get any optional medical procedures you were thinking about but might have put off.
"If you've had a really bad year, with glasses and dental work and some medical procedures," Kaufman suggested, "get that tooth handled, a cap, crown, any of those things that are expensive." And if you normally get optional care such as a physical after January, you might want to move it up into this year.
Make earlier payments
Some other fourth-quarter tax strategies involve moving up payments so they fall in 1999 rather than 2000. Zandlo recommends prepaying on your mortgage, making your January mortgage payment in December. "Take those payments and lump it into this year," he said.
Generally you can only prepay one month on your mortgage, the January payment. It's a gray area, but the IRS typically views moving more payments up as too aggressive. But there are other ways to make your property work for you. Some states allow you to pay some property taxes for next year in this year. Even though most people pay them monthly, they're billed twice a year and you can move them up, Hargrave said, "and it's all directly deductible if you itemize your expenses."
If you pay quarterly estimated taxes instead of having tax taken out of a paycheck, perhaps because you have an irregular income stream, you could accelerate the payment due Jan. 15 into this tax year. Though it's only a difference of 15 days, moving the payment up gives you a year's difference on when you can deduct it from your taxes.
Like most "bunching" strategies, if you're not going to itemize your deductions this year but think you will next year, the situation is reversed, said Dennis Gurtz, a financial planner in Bethesda, Md., with American Express Financial Advisors. You would want to postpone that state income tax payment until 2000, waiting until Jan. 15 to make it.
Gurtz also recommends trying to pay all your state taxes for this year in 1999, whether you estimate tax or have it deducted. That way you can claim the federal deduction on your next tax return instead of waiting a year. That's particularly helpful for people who have had large income increases, he said.
And clear out those closets
If you've already made some sizable charitable donations, or you're itemizing anyway, you might want to make sure any charitable donations you have in mind fall in this year. Keep track of mileage on your car, Kaufman pointed out, because that's deductible at 14 cents a mile if you're doing charitable work.
You could also clear out your closet and take clothes you don't want down to Goodwill or the Salvation Army and get a charitable deduction. But make sure you get an itemized receipt.
"How many sweaters did you give? How many skirts? Really, that's to your advantage to itemize that way," Hargrave said. You have to value the clothes reasonably, but itemizing often adds up. "It's going to be required if you're audited anyway, and it probably will increase the value of your contributions."
Take in those unwanted clothes now before you get caught up in Christmas and the holiday season, he suggested. Then when it comes time to party like it's the end of 1999, you'll be able to, without having to worry whether you'll have a tax hangover looming over your head once the new year begins.
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