A Few Tax Moves Before Jan. 1 Hits
Tax advice at this time of year usually amounts to four words: Defer income, accelerate deductions.
But this year, the new tax laws have changed the rules, and some people might want to accelerate income and defer deductions.
“It might turn out the same as every other year, where you want to pile up the deductions and put off income now, but you really won’t know that unless you look at the numbers,” said R. Wallace Wertsch, a partner in tax services with Deloitte & Touche in San Francisco.
Of course, most individual taxpayers cannot easily defer or accelerate income or deductions, and each tax trick will help only a select group of people. Overall, unless they have a lot of potential capital gains and losses from investments, most taxpayers can influence their tax bill by only a few hundred dollars one way or the other this late in the year.
But money is money, so before the clock runs out on 1997, here are a few questions to ask and ideas you might want to consider.
* Do you want to double your first contribution to a new Roth IRA account?
The Roth individual retirement account (IRA) is a new retirement savings account that will let you accumulate after-tax dollars and lets them grow tax-free. The new accounts are open to singles with adjusted gross income of up to $95,000 and couples with income of up to $150,000. They are a great deal for anyone with a few thousand dollars that they are fairly certain they won’t need for at least a decade.
Many people with existing individual retirement accounts who will earn less than a $100,000 income limit next year may want to roll their holdings into a Roth IRA.
But if you don’t have an IRA now, you have nothing to roll over and can only put in $2,000 to get a Roth IRA started in 1998. One easy way to double that is to fund a traditional IRA right now with the maximum $2,000 ($4,000 for a married couple filing jointly), whether or not it is tax-deductible. Then you can roll that $2,000 into a Roth account in January, and add another $2,000 right away. Any taxes on your rollover will be negligible, since you’ll do this in a few weeks.
That’s like making one extra year’s worth of contributions, which will accelerate your ability to grow the Roth account.
* Will you be near an income threshold in 1998?
As you can see in the first example, a lot of the new benefits are limited by income level. You can roll over an existing IRA into a Roth account only if your income, single or married, is below $100,000 next year. If you want to convert a large IRA into a Roth IRA, that becomes an important number.
There are limits on the new tax credit for children, too. That provides $400 for each dependent child under the age of 17. Congress extended this gift to singles earning less than $75,000 and couples with adjusted gross income of no more than $100,000. Beyond those levels, the credits phase out quickly.
One easy way to keep your income below a threshold next year is to put more money in a deductible retirement account. So if your income will be near the threshold and you need a little push to increase your 401 (k) contributions next year, maybe getting this credit is it. If you are close, you might want to make the election now, to make sure the money is taken out of every paycheck next year.
* Are you about to tap a retirement plan?
Maybe wait a few weeks. The holidays are a time when people sometimes feel the financial pinch, the urge to splurge without the cash to do it. Many people also drain their 401(k) plans to pay for a home or cover emergencies.
If you have to disturb your retirement plan, wait until January. It puts off the taxes and penalties due for an entire year, as opposed to heaping them on you in the next few months.
* Are you planning to take capital gains and losses for tax reasons?
As always, accountants and other financial advisors caution against excessive focus on taxes. No one wants to pay more tax than they have to, but the gains or losses from market moves can dwarf those from taxes.
“Investing involves tax considerations, but they are hardly the only things that you should be taking into account,” said Bob Rywick of RIA Group, a New York publisher of tax guides.
But taxes are to a certain extent controllable, so it’s worth looking at what’s available and how you can arrange your affairs to the best advantage. Long-term investors who have no plans to sell and who are prepared to ride out downdrafts can take a detached view at this point. The new tax law has complicated things, but these truths remain.
* So should you bunch your deductions--and income--where you need them?
If your income is not high enough to disqualify you from taking the new tax benefits next year, then the advice returns to the standard of putting off any income that can wait and picking up all available deductions soon.
That means making charitable contributions, setting more money aside into tax-deferred retirement accounts, taking care of medical expenses (if you already have paid significant bills this year and will qualify for the medical deduction) if you can this year.
“But if you are close to the thresholds, you might put off your deductions until 1998 so that you have a cushion and get the credit or make the Roth conversion,” said Ed Slott, a Rockville Centre, N.Y., certified public accountant and author of “Your Tax Questions Answered.”
He adds: “It’s not standard tax advice, but you may need to pay more this year to be better off in the future.”
*
Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, MA 02107-2378.
