Last-Minute Tax Planning Can Save You Money

‘Tis the season to do some last-minute tax planning.

If you are quick and follow some time-tested strategies, you may be able to reduce your tax payments. But like the 17 sweaters you might receive for Christmas, some of 1992’s best tax-planning strategies look a lot like what you saw in 1991. Still, there are a few new twists you need to consider.

Specifically, doing an estimate before year-end of your tax liability is more important than ever. That’s because tax withholding rates were altered last March to take out less and give you more cash to spend during the year. If you’re caught unaware, you could find yourself owing more money in April and, possibly, get hit with underpayment penalties to boot.

Meanwhile, higher-income filers, who weren’t affected by the withholding changes, got hit with a Byzantine new rule that makes it more likely that they too will face penalties for not paying enough.

But these penalties can be avoided if you spend a few minutes before year-end to roughly determine your taxable income, deductions and tax.

You don’t need to get your liability down to the penny. Just make sure you’re within a few hundred dollars of what’s owed. (The IRS doesn’t levy underwitholding penalties against those who owe less than $500.)

Also new for 1992: Wealthy taxpayers, who face the prospect of higher tax rates in 1993, may want to put their normal tax planning strategies in reverse and try to speed up recognition of income and delay deductions. That would cause them to pay more now. But it would save them tax in coming years, assuming that President-elect Bill Clinton makes good on campaign promises to raise the top federal tax rate to 36% from today’s 31%.

The rest of the year-end gambits are the old standards:

Contribute to a retirement plan. If you are self-employed, you can contribute 20% of your earned income, to a maximum of $30,000, to a Keogh plan. If employed by a company that has one, you can contribute up to 20% of your wages--to a maximum of $8,728--to a 401(k) plan. And, if neither you nor your spouse is covered by an employer-sponsored pension plan, you may deduct up to 100% of your wages to a maximum of $2,000 per worker per year, in contributions to individual retirement accounts. (If one of you is covered by a company pension, contributions are fully deductible only if you earn less than $25,000 individually or $40,000 as a couple.)

Each of these tax-favored accounts is administered a bit differently. However, they all have the same bottom-line effect. Contributions reduce your taxable income and, consequently, your tax.

Contributions to 401(k)s must be made by year-end. The Keogh must be set up before the end of the year. But you can contribute to an IRA until April 15 of next year and still claim the deduction on your 1992 return.

There is a strong argument for making the contributions as quickly as possible, however. You earn tax-deferred income on the deposits for more months in the year. Someone who contributes $2,000 annually on the first day of the tax year and earns an average 10% return for 20 years, would have $14,948 more saved at the end of the period than somebody who contributed the same amount on the final day of the tax year, according to Liberty Financial Cos. in Boston.

Bunch deductions. Business and miscellaneous expenses are only deductible to the extent that they exceed 2% of your adjusted gross income. In other words, if you earned $30,000 in 1992, you must spend more than $600 on subscriptions, unreimbursed business mileage, job training, job hunting and the like before you can claim deductions.

To the extent that it’s justifiable and viable, consider trying to push two years’ worth of these costs into one year to get more mileage out of the expenses.

The same holds true for medical bills, which are only deductible to the degree they exceed 7.5% of your income. If you had high medical expenses in 1992, consider scheduling your annual eye exam and getting those overgrown tonsils out before year end. Otherwise, procrastinate.

Give to charity. Every dollar given to charity cuts your federal tax by 15, 28 or 31 cents, depending on your tax bracket. And it usually cuts your state tax as well.

If you give property, it should be accounted for at current market value.

Old clothes, for example, can be deducted at garage-sale prices. Appreciated property, on the other hand, must be appraised to get the full value of the deduction.

If you are giving a significant amount of appreciated property to charity, you also need to be wary of the alternative minimum tax, a dreaded catch in the tax code that forces you to recalculate your tax based on a lower overall rate but fewer itemized deductions.

Consider making deductible state and property tax payments before year-end. However, only make the payments early if they’re due within a few months. Otherwise, the “opportunity costs”--what you could have earned on the money if you’d left it in the bank or brokerage until it was due--may be more substantial than the tax savings.