More Incentives to Earn Less

New tax breaks are creating big incentives for middle-income Americans to make less money this year.

Accountants and financial planners report that people whose incomes are approaching certain cutoff limits are finding creative ways to defer or offset income.

One of the bigger incentives is the $100,000 income limit for converting a traditional individual retirement account, which is taxable in retirement, to a new Roth IRA, which is tax-free in retirement. People who convert their accounts in 1998 are allowed to spread the income tax bill from the conversion over four years.

To qualify, taxpayers are asking their companies to delay bonuses and other payments until next year, buying tax-free municipal bonds instead of interest-earning certificates of deposit or corporate bonds, putting off stock or other asset sales that might boost their incomes, or selling poorly performing stocks so they can use up to $3,000 of the loss to offset ordinary income. Self-employed taxpayers can delay billing customers until January or purchase up to $18,000 worth of equipment in 1998 to offset their income.

Note that almost all these cutoffs are for adjusted gross income--that is, income after 401(k) contributions and other items--what accountants call “above the line” deductions--are subtracted, but before personal exemptions and itemized (or standard) deductions are. Most cutoffs apply to California income taxes as well.

A Roth conversion isn’t the only incentive for keeping income down:

* Many people who make too much to convert their traditional IRA to a nondeductible Roth IRA can still open a new Roth account. Single taxpayers with incomes of less than $95,000 and joint filers with incomes of less than $150,000 can contribute $2,000 each to a Roth each year. A partial contribution can be made if incomes are less than $110,000 for singles or $160,000 for joint filers.

* The income limits for tax-deductible IRAs have also been raised. Single taxpayers who are active participants in an employer-sponsored retirement plan can deduct all of their regular IRA contributions if their incomes are less than $30,000 and part of their contributions if their incomes are less than $40,000. For joint filers, the full deduction is available when incomes are less than $50,000 and the partial deduction is available until incomes reach $60,000.

Taxpayers who are not active participants in an employer-provided retirement plan can deduct their $2,000 IRA contributions regardless of income.

* $1,000 of student loan interest can be deducted for single taxpayers with incomes of less than $40,000 and marrieds with incomes of less than $60,000. A partial deduction is allowed with income of less than $55,000 for singles, $75,000 for joint filers.

* Two other education incentives--the Hope scholarship credit of up to $1,500 per student per year and the lifetime learning credit of up to $1,000--phase out on income between $40,000 and $50,000 for single filers and $80,000 and $100,000 on joint returns.

* The $400-per-child tax credit, available for the first time this year, starts to phase out for single filers with incomes above $75,000 and joint filers with incomes above $110,000.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

How to Reduce Income

If you are close to an eligibility cutoff for a benefit in the new tax law, here are ways to reduce your adjusted gross income. Of course, not everyone has the ability to control their income.

Work less overtime.

Move assets to tax-free bonds for the rest of the year.

Take capital losses.

Defer capital gains to 1999.

Delay bonuses.

Delay billings (if you’re self-employed).

Increase Keogh, 401(k) or other retirement contributions.

Pay penalties on early withdrawal of savings.

Pay your alimony.*

* This must be reported by your ex-spouse.