Stop Procrastinating; Plan Now for Tax Savings

Labor Day has passed, summer is over. It’s time to stop procrastinating and focus on how to reduce your tax bill come April 15.

Sure, you have more than three months before year-end. But Christmas is too late to start planning tax-saving strategies.

Fortunately, Congress has not performed any major surgery on tax laws this past year, so the steps you used last year generally still apply, says Edward Rosenson, tax partner in the Century City office of Ernst & Young, the accounting firm.

“Basic planning is not a whole lot different,” Rosenson says.

Here’s a checklist of year-end tax strategies you can consider:

* Defer income. By shifting income from this year to next, taxes on it won’t be due until 1992. Consider buying Treasury bills, short-term certificates of deposit or other investment vehicles whose interest won’t be paid until 1991. Ask your employer to defer bonuses or other supplemental pay. If you are self-employed, consider delaying billing your clients until January. If you are selling real estate, consider an installment sale allowing you to receive payments into the future. One caution: Deferring income could backfire if tax rates are significantly raised next year.

* Accelerate expenses. Pushing deductions into this year can generate more deductions sooner, thus reducing your taxable income. Such an outcome is especially useful if you expect your income to decline next year, you are retiring or you plan to stop moonlighting.

Make your mortgage payment, ordinarily due in January, in December instead. Prepay your state estimated tax and property tax.

The same caution applies, however: Accelerating expenses may backfire if tax rates are significantly increased next year. That would make your deductions more valuable next year.

* Bunch expenses. There are some expenses you may not want to accelerate.

Take miscellaneous expenses--including certain employee business costs, magazine subscriptions, union and professional dues, investment and financial planning fees. They are deductible only to the extent that they exceed 2% of your adjusted gross income. Medical expenses are deductible only to the extent that they exceed 7.5% of your adjusted gross income.

Consequently, estimate how much of these expenses you are likely to incur this year. If you’re unlikely to exceed those thresholds this year, consider postponing expenses until next year. Conversely, if you will exceed those thresholds, accelerate expenses that you would have incurred next year.

* Maximize contributions to retirement plans. Put the maximum into your 401(k) company savings plan. It’s arguably the best tax-deferral vehicle around, in part because companies typically match employee contributions by up to 50%. You can contribute up to $7,979 this year.

And if you are planning to contribute to your individual retirement account or Keogh plan, start doing so now. Don’t wait until April 15. You’ll get more time to accumulate tax-deferred earnings.

* Reduce your non-mortgage debt. Only 10% of interest paid this year on car loans, credit cards and other non-mortgage debt is deductible (that falls to zero next year). Considering that credit card debt is so expensive, with interest charges as high as 21%, it makes sense to reduce plastic debt.

One way is through a home equity loan or credit line. Interest on loans of up to $100,000 is fully deductible. But be careful. If you default on a home equity loan, you could lose your house.

* Plan your charitable contributions. If you have assets such as stock that have appreciated in value, plan to give those instead of cash. That way you’ll avoid paying capital gains tax. (If you still like the stock, you can buy it again at the same, higher price, increasing the cost basis upon which future capital gains taxes will be calculated.)

Also, as another alternative to giving cash, consider giving old furniture, books and other garage or attic items. In many cases, you can deduct their fair market value.

If you pay quarterly estimated taxes, consider making charitable contributions now. That way you might generate deductions sooner to reduce income subject to estimated tax.

* Plan your capital gains and losses. It’s often a bad idea to buy or sell assets solely on tax considerations. But if you have some big losers from the stock market, and have other assets on which you’ll pay big capital gains tax, consider whether it makes sense to sell the losers to generate capital losses. Those losses can be used to offset capital gains dollar for dollar. Also, up to $3,000 of capital losses per year can be used to offset ordinary income from wages and salaries.

* Consider gifts to children. The best thing is to give assets that will appreciate in value, such as growth stocks or real estate. That shifts capital gains taxes to the youngsters, who presumably are in a lower tax bracket. It also reduces the size of your estate potentially subject to estate taxes.

You can give up to $10,000 per recipient per year, free of gift taxes. Congress has been considering limiting the total amount you can give, free of gift taxes, to $30,000 per year to all recipients. It’s far from certain that such a provision will be enacted. But to play it safe, you might want to make gifts now instead of later, Rosenson suggests.

* Look at tax-free or tax-deferred investments. In a high tax bracket and need more tax-free income? Consider such investments as municipal bonds, tax-deferred annuities and Series EE savings bonds. And California may soon offer tax-free bonds with face values as low as $1,000.

* Adjust your withholding. If you got a big tax refund last year, adjust your withholding to eliminate it. That refund was a big interest-free loan to the government.

Also, adjust your withholding if your situation was changed by marriage or divorce, a new job, a baby or a new home.