Shop for Tax Savings and You'll Know Your Financial Score

By LIZ PULLIAM

Nov. 27, 1998 12 AM PT

TIMES STAFF WRITER

The turkey’s been picked bare, the game’s on, and the day is yours to spend however you like. Naturally, it’s the perfect time to take out a pencil and do a preliminary estimate of your 1998 tax bill.

Not exactly how you planned to spend your Friday?

Well, tax advisors say a few hours spent doing some year-end planning could be a far more profitable use of your time than watching a game or cruising a crowded mall.

Sketching in the numbers now can show you where you may want to squeeze in a few extra deductions.

With all of December still ahead of you, there’s a chance to make some wise strategic decisions.

You might need to adjust your withholding or find ways to delay income to take advantage of new tax breaks--many of which will be long gone by the time April 15 rolls around.

If your taxes are simple or you have sufficient experience in preparing your own forms, then you can make this a do-it-yourself project. You can download many 1998 tax forms from the IRS’ Web site at https://www.irs.ustreas.gov or use the forms in a tax book such as J.K. Lasser’s “Tax Guide 1999” (Macmillan, $14.95).

If your returns are more complicated or you would like some professional help, consider gathering your paperwork today and making an appointment to consult a tax preparer such as a certified public accountant or an enrolled agent.

Even experienced do-it-yourselfers can be overwhelmed by all the tax changes of the past two years; court decisions and IRS rulings can also alter how the tax code affects you, and it’s the professionals’ job to know the laws, rules and relevant changes.

Here’s what to consider as you work your way through your 1040:

Roths and Other IRAS

Taxpayers have until Dec. 31 to take advantage of special tax treatment that allows them to spread income from a Roth IRA conversion over four years.

Converting a traditional IRA, which is taxable in retirement, to a Roth IRA, which is not, is not for everyone. In fact, people whose adjusted gross incomes are more than $100,000, married or single, are not allowed to convert their IRAs. But people who qualify and who can afford to pay the taxes from funds other than the IRA itself may benefit from the move. (Adjusted gross income is your income after retirement-plan contributions but before itemized or standard deductions are taken out.)

Steven J. Handelman, 42, will pay about $6,000 more a year in taxes for the next four years after converting his $77,000 traditional IRA to a Roth IRA. But he expects to have hundreds of thousands of dollars more to spend in retirement because his Roth withdrawals won’t be taxed.

“It is really a shame that so many people who may be eligible to convert . . . at least are not considering doing a conversion,” said Handelman, a California Public Utilities Commission transportation engineer who lives in Sherman Oaks.

Some of the best candidates for conversion are people--like Handelman--who expect to be in the same or higher tax bracket in retirement and who have many years before they need to tap their retirement money. Other good candidates are wealthier people who might not spend their IRA at all but instead are likely to pass the money to their heirs.

(The Times explored the ins and outs of Roth conversions in a package of articles that ran Nov. 15. You can view the articles at https://www.latimes.com/HOME/NEWS/WALLSTCA/rothira.htm, or request a copy for $10 by calling (800) LA TIMES, Ext. 76999. Another Web site to visit for information is https://www.rothira.com.)

Even if you decide not to convert your existing IRA, consider contributing to a new Roth IRA. Married couples with adjusted gross income under $150,000 and single taxpayers with incomes under $95,000 are allowed to contribute $2,000 a year to a Roth; smaller contributions can be made for those with incomes as much as $160,000 for marrieds and $110,000 for singles. Your contributions are not tax deductible, but the money would be tax-free in retirement. You have until next April 15 to open and fund an account for 1998.

If you are eligible to write off your deduction to a regular IRA, however, you have a tough choice to make: either contributing to a traditional IRA and taking the deduction now, or contributing to a Roth and gambling that the future tax breaks will outweigh the deduction you’re giving up. For many people who expect to be in a lower tax bracket upon retirement, it makes sense to make a deductible contribution rather than contributing to a Roth, but this is an area in which you might want to consult a qualified tax preparer or financial planner.

Deductible IRAs are available to anyone who is not an active participant in an employer-provided retirement plan. Taxpayers who are active participants in an employer plan and whose incomes are under certain limits can also deduct their contributions. The deduction phases out for singles with incomes between $30,000 and $40,000 and for joint filers with incomes between $50,000 and $60,000.

New Deductions

The Taxpayer Relief Act of 1997 created a host of new tax breaks that took effect this year, such as the new deduction allowing middle-income taxpayers to write off as much as $1,000 in student-loan interest.

That was welcome news to Tom and Betsy Sunstrom, Los Angeles teachers who are paying off $33,800 in student-loan debts. Their income is less than $60,000, the limit for married couples to take full advantage of the deduction. The deduction disappears entirely after adjusted gross income reaches $80,000. For single filers, the deduction phases out between $40,000 and $55,000.

Tom Sunstrom, a college professor who teaches acting, said the tax break--and the couple’s recent decision to refinance the debt at 7.46% rates--will help ease the burden of paying for the couple’s schooling.

“They tell you when you take out student loans that they’re easy to pay back, but that’s so untrue,” Sunstrom said.

Two other education incentives, the Hope credit of as much as $1,500 per student per year and the Lifetime Learning Credit of as much as $1,000, phase out on income between $40,000 and $50,000 for single filers and $80,000 and $100,000 on joint returns.

Also new this year is the Education IRA, which allows most taxpayers to contribute up to $500 per child to a tax-deferred account. The contribution limit begins to phase out at $150,000 for marrieds and is gone completely at $160,000. (The limits for single donors are $95,000 to $110,000.) Remember, the limit is per child, so grandparents and other generous souls should consult with parents to make sure only $500 is contributed each year.

Finally, the new $400-per-child tax credit starts to phase out for single filers with incomes above $75,000 and joint filers with incomes above $110,000. The credit should help the Sunstroms too; the couple are expecting their first child next week.

If your income is close to the limit for a tax break, you may be able to take steps now to make sure you still qualify on Dec. 31.

You can ask your company to delay bonuses and other incentive payments until next year.

Investors might consider putting off stock sales or other asset sales that might boost their incomes or selling poorly performing stocks so that they can use up to $3,000 of the loss to offset ordinary income.

If you have a 401(k) or other retirement savings plan at work, you might be able to increase your contributions as a way of lowering your adjusted gross income.

Self-employed taxpayers can reduce their incomes by delaying customer billing until January or by purchasing as much as $18,000 worth of equipment in 1998 to offset their income.

Timing Deductions

If your income is going to be about the same or lower in 1999, you might consider paying some deductible expenses early to get them on your 1998 return, where they can do more good. Thanks to low inflation, tax brackets are not expected to change much in 1999.

Homeowners can pay their whole property tax bill on Dec. 10 instead of just half, for example, and make their January mortgage payment before Dec. 31. (It’s a good idea to send the payment early to make sure it clears before the end of the year.) If you qualify for the Hope or Lifetime Learning credits, you can pay next semester’s tuition expenses now. Make charitable contributions before Dec. 31; if you’re short on cash, you can charge your pledge, but make sure you pay off the expenses quickly or interest charges will eat up any potential tax benefit.

If you have already spent enough on medical expenses to reach the floor for deductions--anything more than 7.5% of your adjusted gross income--you might schedule elective procedures, routine doctor or dental visits or renewals on your medications to increase your deductions.

If your income is going to be significantly higher next year, you will probably want to delay deductions until 1999.

Boost Your Withholding

If your income rose or deductions dropped significantly in 1998, you could wind up paying penalties for not having enough taxes withheld from your paychecks.

Increasing your withholding now can head off problems. You can avoid penalties if your total withholding on Dec. 31 equals at least 90% of your 1998 tax bill or 100% of your 1997 tax bill.

After you’ve penciled through your tax return, compare what you owe with what has been withheld so far on your paychecks. If you won’t be within the limits to avoid penalties, fill out a new W-4 at your company’s human resources department and boost your withholding enough to make up the difference.

You have less flexibility if you’re self-employed or run a business and are required to make estimated quarterly tax payments. You are supposed to pay at least 25% of your final tax bill each quarter, and thus can’t “backload” the payments--that is, pay more at the end of the year--unless you earn most of your income in the last quarter.

Medical and Child-Care Expenses

Self-employed people can now deduct 45% of their health insurance premiums for themselves, their spouses and their dependents. The other 55% of the bill is treated as a medical expense itemized deduction, which means that any costs that exceed 7.5% of a taxpayer’s adjusted gross income can be deducted.

You must also spend by Dec. 31, or lose forever, any money left in your dependent-care or health-care account. These tax-favored accounts offered by many employers help offset the costs of day care and medical expenses that aren’t reimbursed by insurance. Schedule a few extra hours of child care to do your holiday shopping unencumbered. If you have money left in the medical account, schedule an eye exam, a visit to a chiropractor or a dental appointment before Dec. 31. Make sure to submit your bills to the plan before the plan deadline, which is usually in March.

Times staff writer Liz Pulliam can be reached by e-mail at liz.pulliam@latimes.com.

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Year-End Reminder: The Taxman Cometh

There’s still time to make changes to minimize your tax bite. Start by knowing your marginal tax rate--the tax bite on the last dollar of adjusted gross income (after deductions and credits). Here are 1998 federal marginal tax brackets for married couples filing jointly and for single filers. Projected 1999 brackets appear for comparison:

Married, filing jointly

*--*

1998 income brackets Projected 1999 brackets Tax rate $0 to $42,350 $0 to $43,050 15.0% $42,351 to $102,300 $43,051 to $104,050 28.0 $102,301 to $155,950 $104,051 to $158,550 31.0 $155,951 to $278,450 $158,551 to $283,150 36.0 More than $278,450 More than $283,150 39.6

*--*

Single

*--*

1998 income brackets Projected 1999 brackets Tax rate $0 to $25,350 $0 to $25,750 15.0% $25,351 to $61,400 $25,751 to $62,450 28.0 $61,401 to $128,100 $62,451 to $130,250 31.0 $128,101 to $278,450 $130,251 to $283,150 36.0 More than $278,450 More than $283,150 39.6

*--*

And Watch That State Tax Bite

California’s tax take is significant and in effect boosts your overall marginal tax bracket. The four highest California brackets:

Married, filing jointly

(Portion of income: Tax rate)

$24,323 to $38,386: 4.0%

$38,387 to $53, 287: 6.0%

$53,288 to $67,345: 8.0%

More than $67,345: 9.3%

Single

(Portion of income: Tax rate)

$12,161 to $19,193: 4.0%