For the last two weeks, we've been discussing items that you might consider to reduce your 1999 tax bite. We're on a roll now…let's look at a few more.
Income Planning: A time honored aspect of tax planning is to estimate both
your 1999 and 2000 adjusted gross income (AGI). It may be difficult, but in
many cases it can save you some tax dollars in the long run. Why? Because
if you anticipate being in a higher bracket in 2000, you may benefit from
accelerating income into 1999...and paying taxes on that income at a lower
rate. Obviously, if you believe that you'll be in a lower tax bracket in
2000, you'll then reverse the strategy and attempt to defer income into year
2000.
But just remember that any time that you mess with your AGI, you are also
indirectly messin' with other deductions. Understand that many tax
deductions, credits, and other tax opportunities are tied to your AGI. So
your decision to inflate (or deflate) your AGI into a given year may have
other far-reaching impacts. Deductible IRA contributions, Roth IRA
contribution, Roth conversion, medical expense deductions, miscellaneous
itemized deductions, taxation of social security benefits, and the threshold
for various tax credits are just a few of the items that can be effected
when your AGI is increased or decreased. So make sure to be aware and alert how
other items on your tax return will be impacted by your decision to "tinker"
with your AGI.
So if you feel that you'll be in a higher tax bracket in 2000, here are just
a few ways to accelerate income into 1999:
Year End Bonuses - If your employer generally pays out bonuses after the end
of the current year, you might try to negotiate to have your bonus paid to
you before the end of 1999.
Retirement Plan Distribution - If you are taking money from a retirement
plan, consider taking your withdrawals before the end of 1999, rather than
waiting until next year. Even if you have no immediate use for the money,
paying tax in 1999 and simply putting the money in the bank (or other
investments), may be a smarter way to go.
Accounts Receivable Collection/Billing - If you are self-employed and report
your income and expenses on a cash basis, issue year-end 1999 bills early in
the hope to receive payment by the end of the year. You'll also want to
attempt collection on any current or overdue accounts prior to the end of
the year. Remember that many of your customers may also be in the "tax
planning" mode, and might want to pay their bills (and take their deductions) prior to
the end of 1999. They might be happy to pay for January 2000 goods or
services in advance.
Roth IRA Conversion - As you should know, if you convert a regular IRA to a
Roth IRA, you'll generally be required to report taxable income in the year
of the conversion. So you might want to increase your 1999 income by making
a Roth IRA conversion prior to the end of the year.
Investments - Review your portfolio now. Try to determine your gains and
losses for the year. See what stocks, bonds, or mutual funds that you may
want to hold on to, and which you might want to sell. You might want to
take some additional short-term stock gains in 1999. Your investment portfolio
is the one area in which you have direct control. Don't overlook it. But also
remember that your focus will be on short-term gains. As we discussed last
week, long-term gains are taxed at a preferred maximum rate. As the law
currently stands, they'll be taxed consistently at the same tax rate,
regardless of your other income or deductions in 1999 or 2000.
On the other hand, if you expect your AGI to be higher in 1999 than in 2000,
you'll benefit by deferring income into 2000. You can accomplish this by:
Investments - The same statement as above holds true: Review your short-term
gains and see what you might be able to defer into year 2000. Additionally,
be careful of year-end mutual fund purchases. As we discussed in Part I of this series, mutual funds can throw off income at the end of the year...most
of it in the form of ordinary income. If you're trying to defer income into
2000, you plans could be rocked by an ill-times year-end mutual fund
purchase. So before you leap, make sure that you understand the tax
implications. Simply waiting a few more days...until the calendar flips over
to 2000 may save you a bunch of tax dollars.
Interest and Dividends - Did you know that interest income earned on
Treasury securities and bank certificates of deposit with maturities of one year or
less is not included in your income until it's actually received by you?
There is no "interest allocation" that is required to be made at the end of
the year which would allocate interest partly into 1999 and partly into
2000. Instead, the income is realized when the instrument reaches maturity. So
to defer interest income, consider buying short-term bonds or certificates that
won't mature until next year.
Other Issues - Basically, as you can imagine, other techniques would simply
"reverse" the items that we noted above. If you're self-employed, you might
want to delay your billing and collection of your bills into 2000. Don't
make a taxable Roth IRA conversion until early in 2000. Take your
retirement plan distributions in 2000 rather than 1999. See if you can talk your
employer into delaying your year-end bonus into 2000 rather than paying it
late in 1999. I'm sure that you can see how it all works. It all depends
on which side of the fence you find yourself.
Well...we're out of time for this week. But I'm having so much fun with this
series of articles that I think that I'll extend it for a few more weeks.
That way we'll be able to discuss deduction planning, tax credits, other
retirement issues, and other business planning issues. So stay tuned.
- November 5, 1999
