Don't wait until Tax Time 2001 to lower the amount you will owe Uncle Sam

If you're like many people, you're rushing to meet tonight's midnight deadline to file your 1999 income tax return.<br><br>The last thing you want to think about is your 2000 taxes.<br><br>But

Monday, April 17th 2000, 12:00 am

By: News On 6

If you're like many people, you're rushing to meet tonight's midnight deadline to file your 1999 income tax return.

The last thing you want to think about is your 2000 taxes.

But just as it's good to change your smoke detector batteries during the time changes, it's also good to use tax time to see how you can save on next year's taxes.

"Although most people want to forget about taxes for a while after they file their returns, it's a good idea to take a close look at the way things turned out and see what you can do right now to minimize the damage when you file your 2000 tax return in 2001," said Bob Trinz, an editor at RIA in New York, a provider of tax information and technology.

Start with something very basic. Did you get a refund this year? If you did, you gave Uncle Sam an interest-free loan of funds you didn't owe.

"To avoid this from happening again, consider asking your employer to withhold less from each paycheck or scale back your estimated tax payments," Mr. Trinz said.

Will circumstances in your life change dramatically this year? If so, you may be able to parlay them into tax-saving moves.

For example, determine whether your income will be the same as last year or will increase.

"As soon as you know that you're going to have higher income in 2000 than in 1999, that triggers some planning opportunities," said Hunter Nibert, a partner and certified public accountant at TravisWolff in Dallas. "One thing you can do is you can defer paying some of that tax."

Let's say you've got a $30,000 long-term capital gain from the sale of technology stocks.

You would pay a 20 percent tax, or $6,000, on your gain. If you qualify, you could put off paying that tax until April 15, 2001, instead of sending a check to the IRS immediately.

"You have to look at what your safe harbor is for 2000," Mr. Nibert said.

"Safe harbor" is the amount of taxes you have to pay in this year in the form of withholding or estimated tax payments to be safe from an underpayment penalty.

"For most people, it's the lesser of 90 percent of your tax bill for 2000 or 100 percent of your 1999 tax bill," Mr. Trinz said.

If you expect to have more income this year, it's more advantageous to pay at least what you paid in taxes last year because that would be a lower number.

However, if you expect to have less income this year, then it would be better to pay at least 90 percent of this year's tax because that would be a lower amount than your 1999 tax.
The whole idea is to keep your money in your pocket as long as possible.

Safe-harbor criteria

"If you have met your safe harbor for next year, you don't have to send off that extra money immediately [on your stock gains]," Mr. Nibert said. "The safe harbor amount for most people is last year's tax liability. If you pay at least that much in during 2000, then you're safe from penalties even though you might have a big gain."

So in the case of that $30,000 gain from tech stocks, you could put off paying the $6,000 capital gains tax until April 15, 2001, and earn some interest on the money now.

However, the IRS is tougher on higher-income taxpayers.

If your adjusted gross income or AGI in 1999 was more than $150,000 and you expect higher income this year, you would pay tax equal to 108.6 percent of your 1999 tax.

"The best strategy is to pay the prior year's safe harbor amount or 90 percent of the year 2000 tax, whichever is lower," Mr. Nibert said.

Here's an example if your AGI was more than $150,000 in 1999 and you paid $30,000 in taxes last year:

If you expect your income to go up this year, you should plan on paying $32,580 (108.6 percent multiplied by $30,000) in taxes.

But if you expect less income this year and your tax for this year to be $25,000, then you should plan on $22,500 (90 percent multiplied by $25,000) in tax.

Other changes in your life's circumstances involve children.

If you have a child this year, you'll pick up a $2,800 dependency deduction. The deduction phases out this year at $193,400 adjusted gross income for joint filers and $128,950 for singles.

You can get an extra $500 child tax credit if your AGI doesn't exceed certain thresholds. For a married couple filing jointly, that number is $110,000 and for singles, $75,000.
You may also get a child care credit of $480 or more, depending on your AGI and how many children you're caring for.

Bunch your deductions

Whether or not your personal situation has changed, there are several steps you can take now to cut your taxes this year.

For one thing, bunch up your deductions this year.

"This is for folks who don't have a lot of itemized deductions anymore," Mr. Nibert said. "Their home is either paid off or mostly paid off so there is not a lot of interest expense. What they will have in deductions will come from property taxes and charitable contributions."

The trick is to bunch or double up on the deductions this year.

For example, pay two years of property taxes and double up on charitable contributions this year. Then next year, you skip those moves.

"So in the off year, you get the standard deduction and this year, you get an increased benefit from the deductions you did pay," Mr. Nibert said.

One great way to save on taxes and help you plan for the long term is to increase your contributions to your employer's 401(k) retirement savings account. This not only reduces your taxable income but also enables you to build up retirement funds tax-deferred. If your employer matches your contribution, all the better because that's free money.

If you have an individual retirement account, up your contributions to that, too. If you can't make a deductible contribution to a traditional IRA because you're covered by a company retirement plan and your income is too high, consider opening a Roth IRA.

If you meet certain conditions, you won't pay tax on your Roth IRA earnings when you withdraw the money.

There are other ways to use your investments to cut your taxes.

Consider investing in tax-managed mutual funds because they're managed to keep taxable gains and income low. The funds do this by encouraging long-term investing and by carefully selecting which shares to sell so that capital losses offset capital gains.

Minimizing taxes can substantially boost your return from your funds, especially if you're in a high tax bracket.

High-income taxpayers should also look at converting investments that generate taxable interest, such as corporate bond funds, into those that generate tax-exempt interest, such as municipal bond funds. Interest on most municipal bonds is exempt from federal income tax.

After-tax return

But before you make this move, calculate the after-tax return you get from the investment to determine if it's worth making a change.

"The after-tax amount received from tax-exempt interest may be more than the after-tax amount received from taxable interest, especially if the interest is exempt from state or local taxes, as well as from federal taxes," Mr. Trinz said.

Generally, if you're in the 31 percent tax bracket or higher, municipal bonds will benefit you more than taxable bonds.

Remember that only a muni bond's income is exempt from taxes. You still pay taxes on any capital gains that a tax-exempt fund distributes.

Before you make any investment changes, see how much debt you have.

"If you have both income-earning investments and debts on which you are paying interest, consider reducing your investments and paying off the debts," Mr. Trinz said.

This has several benefits. First, it reduces your taxable income because you will no longer have income earned from investments. At the same time, you would be paying off nondeductible interest from personal debt.

And when you pay off a credit card bill with a 19 percent interest rate, you automatically get a 19 percent return.

"In many situations, your net income after paying off the debt will be higher because the eliminated interest payments will be greater than the amount of lost investment income," Mr. Trinz said. "It's a financial planning tool with a tax edge to it."

"The tax-preparation process should generate planning suggestions," Mr. Nibert said.