Personal Finance > Taxes
Year-end tax strategies
November 7, 2000: 11:41 a.m. ET

As Dec. 31 closes in, experts suggest fourth-quarter steps to reduce impact
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - Taxes, like time, creep in this petty pace from day to day. As year-end approaches, experts say it's time to ensure you're set come April 15.

"Most people don't think about it [tax planning] until they start thinking, 'Oh, I have to set an appointment with my tax preparer,' in February or March. And it's too late," David Bergmann, a certified financial planner in Marina del Rey, Calif., said.

Bunch those miscellaneous deductions

The first strategy tax planners recommend is "bunching" deductions.

The strategy applies in two areas: your "miscellaneous" deductions, and medical deductions.

  graphic TAX TIPS  
    1. "Bunch" deductions 2. Speed up payments 3. Manage income, if possible 4. Donate to charity 5. "Harvest" capital gains 6. Check retirement plans

The deduction for miscellaneous expenses includes professional dues and other business expenses that weren't covered by your company, as well as accounting fees, investment-advisory fees and the like.

It kicks in only at 2 percent of your adjusted gross income, or AGI. You can then deduct the amount of those expenses exceeding 2 percent of your AGI.

But you may have optional expenses toward the end of the year, such as paying for magazine subscriptions or for vocational training. If you're near the 2 percent threshold, "bunch" those payments by taking them this tax year, accountants suggest.

If you aren't near 2 percent of your AGI, defer those payments until next year. Maybe you can take the deduction then.

Medical threshold at 7.5 percent

The strategy is the same for medical deductions. But the threshold for deducting medical expenses is 7.5 percent of AGI, and it covers only nonrefunded expenses that weren't covered by your health plan.

That means you must have had unusually high medical bills this year. If you did, though, you might as well "bunch" other medical costs into this year, too.

Click here for's full coverage from the Taxes page in the Consumer Strategies section.

Most medical expenses aren't that flexible -- you have to go to the emergency room. Cosmetic surgery doesn't count toward tax deductions, either.

But Martin Nissenbaum, national director of personal income-tax planning for Ernst & Young, points out that classes to help you stop smoking are tax-deductible. The Internal Revenue Service also allows you to deduct laser surgery to correct eyesight.

So if you already have big medical bills and you're planning to pay to stop smoking or get your vision corrected, do it this year, tax planners say. Likewise, if you're due for a physical or new glasses, why not pay in 2000?

Pay this year, deduct this year

Similarly, if you are itemizing your deductions, it's a good idea to speed up property-tax payments, Bergmann said. Assessments in California, where he lives, are due on Dec. 10 and April 10.

Bergmann suggests you "accelerate" by paying the April real-estate tax bill by Dec. 31. That way you get the tax break this year, instead of having to wait until April 15, 2001.

  You get a deduction in the same year you had the income.  
  Larry Foster, Richard A. Eisner  
The same theory applies if you realize you are going to owe money on state and local taxes come April 15. Larry Foster, a partner with Richard A. Eisner & Co. in New York, suggests you pay in December.

"You get a deduction in the same year you had the income," Foster said. He pointed out that you need to get an estimated-tax voucher.

Can you manage your income?

If you have any way of managing your income, now is the time to consider your tax bracket, according to accountants. It's easiest for self-employed people to manage income, they say.

If you're self-employed, plan when you bill now. If you have made more this year than you expect to make next year, bill at the end of the year for services you perform near year-end. That way, you'll get paid next year, when you may be in a lower tax bracket.

For employees, Lew Altfest, president of L.J. Altfest & Co. in New York, recommended asking your boss to defer your bonus to next year, if you're in a high bracket this year.

But make sure the company doesn't account for the bonus in one year and you in the next, Altfest said.

Time to be charitable

The end of the year is also the time to make charitable contributions. Those are deductible if you're itemizing. Make sure you get a receipt for any donation worth $250 or more, Nissenbaum said.

You need an appraisal on any donation of $5,000 or more, he added. Sometimes the cost of the appraisal renders the tax break unappealing.

The IRS is looking carefully at large charitable donations such as cars, a popular gift, he said.

"Be careful to make sure the condition and age of the car are clearly documented," Nissenbaum said. If the car is worth more than $5,000, you need to get it appraised.

Donating stock or other investments can be attractive. It is likely better than donating cash, Nissenbaum said.

If you donate stock, you can claim the full market value as a deduction. But you also avoid paying the capital gains from selling the investment. So if you were going to donate anyway, it's an idea, he said.

'Harvest' returns where possible

U.S. tax payers can also give up to $10,000 to anyone in a given year without any tax consequences. Particularly if your children are in a low tax bracket, it might make sense to give them investments they could later sell at a lower tax rate.

If someone is in the 15 percent federal income tax, long-term capital gains are taxed at 10 percent. For higher brackets, the long-term capital gains rate is 20 percent.

Many investors took gains early this year, when the market was riding high. Now is the time to "harvest" those gains by offsetting with losses, tax planners say. Investors are never keen to take a loss, but it will help reduce your tax burden.

  graphic WASH SALES  
    The "wash sale" rule prevents investors from claiming a capital loss on stock they sold, then bought back within 30 days. The loss will count toward the future basis of the rebought stock. But the loss won't offset any gains this year.
Beware the "wash sale" rule. That states that investors cannot claim capital losses on a sale if they buy back the same investment within 30 days.

The loss gets added to your basis on the stock you rebought. But you won't be able to take the loss now, meaning you can't use it to offset capital gains in 2000.

If you have short-term capital gains or losses -- on stock held less than 12 months -- try and maximize how they offset each other. Short-term losses offset short-term gains first, then any long-term gains.

Short-term gains are taxed as regular income, which likely will be taxed at a higher rate than the 20 percent long-term capital gains rate. So a short-term loss is "worth more" if it is offsetting a short-term gain, at a high tax rate.

Check your retirement plans

People have until April 15 to contribute to a Roth IRA or a regular IRA. (The Roth benefit begins to phase out if you're single and earn more than $95,000. For married couples, that cutoff is $150,000.)

But plans that come out of your paycheck have to be funded this year. That means you have to make any 401(k) or 403(b) contributions by Dec. 31.

Click here to read's full coverage of 401(k)s and IRAs.

It may be worth ramping up if you haven't been maxing out your payments you'll be paying in pretax dollars, so you'll reduce your AGI this year.

The federal government caps your 401(k) contribution at $10,500 of your salary, without your employer's match. But your plan may restrict you to less. Check with your plan for the limit -- many employers restrict contributions to 15 or 16 percent of your salary. That might be less than $10,500.

Valerie Adelman, a certified financial planner with Chestnut Financial in Riverdale, N.Y., said now is a good time to check whether you're eligible for various plans such as your 401(k).

"Some people don't take advantage of them," she said. "If you're not already doing that, make sure you enroll, because it lowers your adjusted gross income." graphic


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