It’s Time to Start Planning for Your 1990 Taxes
It’s almost over. Tax filing deadline is tomorrow. You won’t have to worry about deductions and credits and those lousy forms until next year, you say.
But that would be a big mistake.
The best time for tax planning is now, when you’ve just finished reviewing the state of your finances in the course of doing your taxes. “Everything’s fresh in your mind now,” says William G. Brennan, tax partner at the accounting firm of Ernst & Young in Washington.
Also, most tax-saving strategies are best put into effect early in the year, not when Thanksgiving or Christmas roll around.
With that early-bird spirit in mind, here is a checklist of time-honored tax planning tips that you can put into use now:
* Adjust your withholding. If you received or expect a big refund or paid a lot of additional tax, it’s time to redo your W-4 form. Getting refunds may be fun, but what you’re really doing is giving the government an interest-free loan of your money.
* Organize your records. Resolve to spend a couple of hours each month to bring your files up to date. “A good time to do that is when you are reconciling your checkbooks and bank statements,” says Julian Block, a Larchmont, N.Y., tax attorney and author of “Julian Block’s Year-Round Tax Strategies.”
* Make gifts to children. A bill is under consideration in Congress to curb the amount of assets you can give to your children, relatives or others each year--exempt of gift taxes--to $30,000. Now, the limit is $10,000 in gifts per person, but there is no limit as to how many individuals you can give to. Accordingly, if you were planning to give--as this is a good way to reduce the amount in your estate that might be subject to estate taxes--you might want to write checks or give that stock now instead of later.
* Defer taxable income. If you earn a lot of taxable interest income from ordinary savings accounts or money market mutual funds, consider buying Treasury bills, Brennan suggests. Not only are they exempt from state tax (a real advantage in a high-tax state such as California), they are not taxable on the federal level until they mature. Thus, if you get a 12-month bill that matures next year, you won’t owe tax on the interest until you file your 1991 tax return in early 1992--two years from now (although you might have to make estimated tax payments in the interim).
* Fund your IRA early. Waiting until April 15 of next year to make your contribution for this year will mean you’ll miss out on several months of tax-deferred interest earnings. Over the years, the buildup in additional earnings from funding your IRA early each year can amount to thousands and thousands of dollars.
* Review your retirement plans. Is the investment mix in your IRA, Keogh, 401(k) or other retirement plan appropriate for your risk-tolerance, age and investment outlook? Most people are inadequately diversified, having put too much of their retirement eggs in the same basket.
* Review employee benefits. You may be missing out on some tax breaks in company benefit plans out of ignorance or neglect. For example, many employees don’t enroll in flexible-spending accounts that allow them to use pretax money on medical or child-care bills. Savings from these accounts can be quite substantial, because you are using funds to pay bills that otherwise would have gone to Uncle Sam in taxes.
* Consider savings bonds. Series EE bonds are now exempt from federal tax if used to fund college education and if you meet certain income and other criteria.
* Review your appreciated stocks. Instead of selling any stocks, bonds or mutual funds on which you have a large capital gain, consider transferring them to your children aged 14 or older, Brennan suggests. Thus the gains will be taxed at their presumably lower rate.
* Update your beneficiaries. You may be unaware that the persons you named as beneficiaries of your insurance policies or retirement plans automatically acquire ownership of those assets upon your death independently of your will, Block says. So if you have remarried and the beneficiary of your insurance policy is your former spouse, you might want to update the policy.
* List your assets. If you haven’t already done so, make a list of all your assets, Block suggests. This can be useful for many things, including helping the executor of your estate or other fiduciaries. That will save expense in the administration of your estate. Keep a copy at home so your spouse or children can find it.
* Educate yourself. YMCAs, community colleges and others offer good adult education courses on tax and financial planning, Block suggests. But be wary of courses sponsored by brokerage houses, insurance companies and others that may be pushing a specific product, he says.
* Pay off personal debt. This is the last year you can deduct interest on credit card and other non-mortgage debt, and that writeoff is only 10%. Next year you get nothing.
