Year-End Tax Planning Tips
Year-End Tax Planning Tips
Here are a few year-end tax planning tips from newsletter editors
that contribute to the Bull & Bear Financial Report. Please consult
with your tax advisor.
EXECUTIVE WEALTH
ADVISORY
1750 Old Meadow Rd., Ste. 302, McLean, VA 22102.
Monthly, 1 year, $125.
Creative ways to qualify
for a home-office deduction
Morey
Stettner: "Beginning in
1999, you can deduct home-office expenses as long as the space is used for
administrative or management tasks and there's no other fixed place for
you do such work. This broadens the current rule that a home office must
be used regularly and exclusively as a principal place of business in order
to take the deduction. If you still don't think you qualify, here are two
ideas that may help. First, hire your spouse as an independent contractor
who works at home. Then, turn part of your home office into your spouse's
office or use a separate room. To maximize the deduction, give your spouse
the larger office. Do you have to divide the room with a wall or partition
if you both use it as an office? Not necessarily, but it's a good way to
show a section of the room is reserved for deductible use.
(Weightman,
TC Memo 1981-301) For this strategy to work, your spouse should probably
work for more than just your company to qualify as an independent contractor.
Another option is to create a separate room for a side business, rather
than using the same room for both your major and minor business."
THE MONEYPAPER
1010 Mamaroneck Ave., Mamaroneck, NY 10543.
Monthly, 1 year, $81.
Year-end tax planning
Vita
Nelson: "Here are the
things you can do in December to make your life less taxing next April:
Count
up your realized gains and losses for 1998 so far. Don't' forget capital
gains distributions from mutual funds (call your fund for an idea of when
you'll receive year-end distributions and how great they'll be).
For
tax purposes, disregard transactions inside taxdeferred retirement plans.
Only taxable transactions matter.
Don't
forget to include any capital loss carryforwards from previous years.
Sell
enough winners or losers by year-end so that you wind up the year with $3,000
in net capital losses. That's the maximum amount you can deduct from the
rest of your income. Of course, if you wind up with a net loss, you won't
owe any capital gains tax for the year.
If
you incurred investment interest expense this year (say you borrowed on
margin to buy securities), check with your tax pro. You need to know whether
it's best for you to wind up with capital losses, as described above, or
if you should shoot for capital gains to offset your investment interest
expense.
If
your year-end strategy calls for you to sell losers, consider buying a similar
issue. After selling Sears, for example, buy J.C. Penney or Wal-Mart. If
you are determined to include the stock you sold in your portfolio, you'll
have to wait at least 3 days before buying it back.
If
your year-end strategy calls for you to sell winners, you can buy them back
right away, if desired. You'll still have your taxable gain, to soak up
realized losses, and you'll increase your basis in that stock.
If
you have college-bound children, give each one up to $10,000 work of appreciated
stock. (for married couples, the limit is $20,000.) Such gifts won't incur
a gift tax. If you need to transfer stock, your broker may need time for
paperwork, so don't dawdle. Your cost basis will be passed along to the
recipient(s).
You
can keep the securities in a custodial account and take profits, now or
in the future. As long as your children are at least 14 when the profits
are taken, those profits likely will be taxed at only 10%, not the 20% you'd
pay on your own gains. Then the net proceeds can be used for college bills.
Similar
year-end gifts should be made to all your relatives if you're worried that
you'll leave a taxable estate. The $10,000 or $20,000 annual gift-tax exclusion
is "use it or lose it," meaning that gifts you neglect to make
in 1998 can't be made up in the future.
Use
appreciated securities for year-end charitable gifts. You're giving away
the tax obligation, as well as the gift, yet the charity won't owe any tax
when it sells the securities.
Beyond
your portfolio, don't forget to:
Use
up any amounts left in your flexible spending account at work. If it's a
medical account, for example, use the money left over for checkups, eyeglasses,
etc.
The
same is true if your medical expenses for 1998 already top 7.5% of your
adjusted gross income. If this is the case, further medical outlays will
be fully deductible so you should accelerate discretionary expenses into
December.
Ask
your tax pro if you should prepay state and local income tax by year-end.
Usually, this is a good strategy. However, taxpayers are increasingly exposed
to the alternative minimum tax (AMT); if you're in this category, you're
better off waiting until these payments come due in January."
Bert Dohmen's WELLINGTON
LETTER
1132 Bishop St., Ste. 1500, Honolulu, HI 96813.
Monthly, $295.
Tax swaps
Bert
Dohmen: "I now see many
articles advising on year-end tax strategies for investors. One favorite
appears to be selling stock on which you have a big loss, and then getting
into a stock in the same group in order to preserve a position in that sector.
My
philosophy is different: If you have a big loser, and you don't have good
reason to stay with that sector, take the tax opportunity to take your loss,
but don't reinvest in the same sector.
The
oil service sector is one example. Many of these stocks are down 30% - 50%,
but are still showing good earnings growth. There are a lot of bulls on
this sector. We even played the rally from the bottom, but have recently
given a sell signal.
To
sell a stock now at a loss and then replace it with another stock in the
same group is a losing situation. Take the opportunity to use that money
for investments which have a bitter risk/reward equation. Oil prices will
probably drop below $10 per barrel. When that happens, oil companies will
not be spending a lot of money on new exploration. Why try to find additional
product if you can't sell the product you have today?"
THE NO-LOAD FUND
INVESTOR
P.O. Box 318, Irvington-on-Hudson, NY 10533.
Monthly, 1 year, $135.
Charitable gift funds
Sheldon
Jacobs: "One way to avoid
paying capital gains is to hold an investment until you die, thus letting
your heirs receive the securities at the full stepped-up cost basis. There's
another, less consequential way to achieve the same result. Give a current
gift to charity.
If
you have experienced substantial appreciation in the value of your fund
shares, it is no advisable to sell shares and use the cash for a charitable
donation. Instead, a better strategy is to give the shares directly to the
charity. That way you avoid taxes on the appreciation, while qualifying
for a tax deduction based on the current market value of the gift. You can
do this directly on your own, but there is another way that provides more
flexibility, particularly if you're looking for a year-end charitable deduction
and haven't found a charity to your liking.
This
way is to use a gifting program such as Fidelity Charitable Gift Fund.
You get an immediate income tax deduction (assuming you itemize), and
you can spread grants to the non-profit organizations of you choice over
a numbers of years.
The
Gift Fund, organized five years ago, is not a mutual fund. Rather, it is
an entity set up separately from Fidelity itself, consisting of four asset
pools into which charitable contributions may be invested. You can make
donations of cash or securities, including appreciated stock, into these
pools. The donations are irrevocable, and you may not receive a life income
or interest. Since the IRS has approved the fund as a tax-exempt public
charity, you may claim a tax deduction for the contribution based on the
fair market value at the time of the donation, and the assets will grow
tax-free until you decide to distribute them. The minimum initial investment
is $10,000. The minimum subsequent investment is $1,000, and the minimum
distribution is $250. Designations to non-profit organizations can be made
at any time, in your name or anonymously.
With
a few exceptions, any IRS-approved charity is eligible to receive the payouts.
In part due to the success of the program, (which gave the IRS second thoughts)
Fidelity no longer allows the Gift Fund to donate to private foundations
or foreign charities.
Also,
you can no longer make gifts that result in personal benefit, such as to
a theater party or charity ball in which only part of the gift would be
tax-deductible if you contributed directly. Lastly, the Gift Fund can't
be used to satisfy a pre-existing pledge.
You
can make contributions into 1) a Growth Pool, currently invested in Fidelity
Fund, New Millennium, Magellan, MidCap, Spartan Market Index, Diversified
International, and Overseas; 2) an Equity Income Pool, invested
in Dividend Growth, Value Equity Income, Growth & Income, Spartan
Market Index, and U.S. Bond Index (an institutional fund); and
4) a Money Market Pool. Fidelity selects and apportions the investments
in each pool on a discretionary basis. You can switch between pools twice
per calendar year.
All
sales loads are waived for the portfolio funds, but there is an annual 1%
administrative fee charged against the account for recordkeeping, distributions
and tax reporting. Amounts also are deducted for the ongoing fees and expenses
of the underlying portfolio funds. Total fees are far less than the cost
of setting up a private foundation yourself to receive similar benefits.
If your securities are a Fidelity, you still have time to set up your program
before year-end and receive a 1998 tax deduction. (You can also transfer
stock into Fidelity in a couple of days, but a mutual fund transfer, which
takes up to three weeks, probaly won't make it). Call 800-682-4438 for further
details."
Standard &
Poor's THE OUTLOOK
25 Broadway, New York, NY 10004.
1 year, 48 issues, $298.
Tax savings with a year-end deadline
Arnold
Kaufman: "Late-year tax
planning may be especially rewarding this time around because of recent
changes in the tax law, in particular the reduction of the period for establishing
long-term capital gains from 18 months to 12 months for all of 1998 and
setting up tax-free Roth IRA's that can start on New Year's Day. Here are
some pointers to consider before the end of the year:
Roth
IRA's. If you haven't opened one
yet, you have until April 15, 1999 to do so, even if you get an extension
of the tax filing deadline. Filers of both joint and single tax returns
with modified adjusted gross income this year of $100,000 or less can also
convert traditional IRAs to Roth IRAs.
Not
all taxpayers, however, will benefit from rolling traditional IRAs into
Roth IRAs. To make the switch you must pay taxes on the traditional IRA's
deductible contributions and earnings, but if you do it in 1998 you can
spread the taxes over four years.
Under
recently amended rules, if you take the money out of the old IRA, begin
the conversion before the end of the year and complete it within 60 days
of receiving the distribution, it will count for 1998, even though you actually
complete the rollover in 1999.
Another
important change: If you converted to a Roth IRA before the stock market's
slide reduced the old IRA's value, the IRS now says you can unconvert and
reconvert back into a Roth IRA at a lower taxable valuation. You have until
the due date of your 1998 tax return plus any extensions for which you have
applied to unconvert and reconvert, but it may pay to take action soon because
the IRS is considering a more restrictive interpretation of Roth IRAs.
Capital
gains. Last year's 18-month holding
period for establishing long-term capital gains and 12-month period for
mid-term gains have been eliminated. For 1998 and future years, assets held
more than 12 months will be taxed at a top long-term capital gains rate
of 20%. For assets purchased in 2001 and held five years, the top long-term
capital gains rate will fall to 18%.
For
defensive reasons in the current market, you may want to shift this year
to greater emphasis on fixed income. For long-term planning, though, the
reduced rate on long-term capital gains has made stocks more attractive.
If you live in a high-tax state, your effective tax rate on ordinary income
from fixed-income investments is likely to be more than twice the effective
rate you pay on long-term capital gains from equities. Fixed-income securities
are best held in tax-deferred accounts such as traditional IRAs and 401(k)
plans, which tax all distributions as ordinary income.
Income
shifting. If you expect to be in
a lower tax bracket next year or if your 1998 income tax is near the threshold
where the alternative minimum tax (AMT) kicks in, you might benefit by postponing
income and accelerating deductions. It might pay to reverse the process
if you expect to be in a higher bracket next year or are sure to pay the
AMT this year.
Treasury
issues that pay interest in the coming year can be used to postpone income,
and items that can go either way include fourth-quarter estimates of state
taxes due in January, self-employment income, certain miscellaneous deductions,
dividends from closely held corporations, real estate tax and personal property
tax, charitable contributions, mortgage interest and investment interest."
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