Be Stingy With Uncle Sam

By LIZ PULLIAM

Oct. 4, 1998 12 AM PT

TIMES STAFF WRITER

The year may be three-quarters over, but you’ve still got time to make moves that will save you money on your 1998 tax bill.

A few adjustments in the next three months can save you hundreds, if not thousands, of dollars. But if you don’t act soon, you could lose the potential benefits for good.

Here’s a closer look at some of your options:

* At Work: If your income has spiked or plunged during the year, or if you’ve had a major life change, now is the time to adjust your withholding or your estimated tax payments so that you don’t face a big tax bill in April (or an outsize refund). Financial planners agree it’s better to have and invest the extra money during the year than to get a whopping check from the IRS--unless you know you’d just squander it.

As for withholding too little, that can have painful consequences. If you undershoot by too much, you could owe penalties. Generally, you’ll be safe if the underpayment is less than $1,000 or if your withholding and estimated tax payments equal 100% of your 1997 tax bill.

Adjusting tax withholding or estimated payments is especially important for people who have married, divorced, changed jobs, refinanced a mortgage, bought or sold a house, had a birth or death in the family or had a sharp spike or drop in their incomes this year.

Parents with children under 17 should note that they qualify for a new $400-per-child tax credit, which can affect your withholding decision. But that credit starts to phase out when incomes reach $110,000 for married couples filing jointly and $75,000 for singles.

If you do your own taxes, “head-start” editions of tax software can help you determine if you’re on track. Otherwise, contact a tax preparer for assistance. A professional review for most people should cost between $25 and $100.

Changing your withholding is simple: Just fill out a W-4 form, available at your company’s personnel office.

If you’re a taxpayer who makes quarterly estimated tax payments, consider not only adjusting your Jan. 15 state installment but also paying it early. San Francisco financial planner Tim Kochis points out that since you get a federal deduction for the state taxes you pay, the benefits of paying by Dec. 31 outweigh the investment advantage of delaying.

A tax review can also help you decide if you’d benefit if you accelerate or delay income. If you’re about to slip into a higher tax bracket, for example, putting off outside work or asking your company to delay a bonus until after year-end might make sense.

You definitely should pay attention to income limits if you’re planning to take advantage of many of the tax breaks created by the 1997 Taxpayer Relief Act. The new student loan interest deduction, for instance, starts to phase out for singles with incomes over $40,000 and for married couples with incomes above $60,000.

Obviously, some people have more control over their income than others. People whose only income is their paycheck have few options aside from taking compensatory time off in lieu of overtime, or vice versa. Those who get bonuses may also be out of luck; your company may refuse to delay the payment for tax reasons of its own. Those who work for themselves have more control, of course, since they can either delay billing clients or drum on their doors to speed up payment, depending on the tax situation.

* Your Benefits: Among companies that offer health benefits, October and November are typically open enrollment periods that allow employees to sign up or change plans. Chances are good that your company has modified your options and costs, so a pre-year-end review may be in order.

You can help pay for your health costs--child-care expenses too--if your company offers a flexible spending account. (This benefit goes by many different names, including “tax savings plan” or 125[c].) These accounts allow you to put aside before-tax income that you can use to pay child care or medical expenses.

However, flexible spending accounts require that you figure out how much you’ll spend over the next year, and the money is taken out of each paycheck. You forfeit any money you don’t spend by the end of the plan year.

The good news is that you can save hundreds of dollars if you plan right. For someone in the combined 35% bracket for state and federal taxes, for example, setting aside $3,500 for medical or child-care costs would save $1,225 in taxes.

Most companies give you only one chance a year to sign up. Mark the deadline on your calendar, crunch the numbers and then enroll before this opportunity passes you by.

If you’re already enrolled in a tax-savings plan, check your statements to make sure you’ll have spent every dollar by Dec. 31. If you still have a big balance, consider having that long-delayed dental work done or schedule a few extra hours of child care during holiday shopping times.

* Retirement: If you haven’t taken full advantage of your workplace retirement plan this year, you still have a chance to do some damage control.

Tax law allows you to contribute up to $10,000 annually to a 401(k) or 403(b) plan and up to $8,000 to a 457 (although your company may make further restrictions). If you’ve just decided to join a plan or just became eligible, you can make up for lost time by contributing the maximum percentage of your pay possible between now and the end of the year, then adjusting the percentage in January.

Every dollar that you could contribute but don’t is likely to cost you much more in retirement. Say you put aside $8,000 this year in your 401(k). The $2,000 you didn’t contribute could have grown to nearly $35,000 over 30 years, assuming an average annual investment return of 10%.

You’ll find boosting your contribution is less painful to your wallet than you might expect, because the money is taken off the top of your paycheck, before taxes.

What if you don’t contribute at all this year? If you’re in, say, the combined 35% tax bracket, you’re giving up an immediate tax break of up to $3,500. And if your company matches 50 cents of each dollar you contribute up to 6% of your salary--a standard match--you could be missing out on as much as $227,000 in future income, under the same assumptions as above.

One caveat: If you’re already contributing close to the maximum, make sure you understand how your company figures its match. Some people have found themselves shut out of part of their match because they hit the maximum before the end of the year and their contributions were suspended.

You may have heard arguments that it’s better to contribute retirement money in excess of what your company will match to a Roth IRA rather than putting it in your company’s retirement plan. The idea is that you will be able to withdraw money tax-free in retirement from a Roth IRA, whereas your 401(k) contributions will be taxed at regular income tax rates at that time. Many of those advancing this argument are brokerages and mutual funds that hope to get that money. Before you give up a current tax break, consult a tax advisor to see if it is likely to make sense for you.

The same advice applies if you are considering converting a traditional IRA to a Roth IRA, which requires paying taxes on your IRA balance. If you make the conversion before Dec. 31, Congress will allow you to spread the income, and thus the income tax bill, over four years.

Whether conversion would make sense for you is a complicated decision--one that depends on your age, financial situation and your guess about what your tax rate might be when you retire. Mutual fund giant T. Rowe Price at (800) 332-6407 offers software for $9.95 that can help you play with the assumptions; the company also offers a free work sheet.

If you do decide to convert--or you converted earlier this year--you might be able to turn last quarter’s stock market mess to your advantage. Lower investment values in your traditional IRA mean a lower tax bill when you convert. Technical amendments passed earlier this year allow you to undo a previous conversion and then re-convert. If your $50,000 IRA has fallen 10% since you converted, for example, you could save $1,750 in taxes in the 35% bracket.

* Your Deductions: Just as you can speed up or delay income, so can you change the timing of your deductions to maximize your tax savings.

Most people will want to accelerate deductions, because a tax dollar saved today is usually worth more than one saved next year. But some may need to put off deductions, particularly if their incomes are expected to jump and they’ll need the write-offs more in 1999.

Paying your whole property tax bill on Dec. 10, rather than just half, is one way to speed up a deduction. Buying office equipment for a home-based business is another. You might also consider scheduling medical exams and elective procedures before Dec. 31 if your medical expenses for the year are already close to the deductible threshold, which is 7.5% of your adjusted gross income. That is, any medical expenses beyond that 7.5% will be deductible.

If your deductions will total close to the standard deduction (currently $7,100 for married couples, $4,250 for singles), tax advisors also recommend bunching deductions so you itemize every other year. Accelerate some charitable contributions or tax payments into this year, for example, so you’ll have more than the standard deduction; next year your deductions will be lower, but you can still claim the standard write-off.

Speaking of charity, one of the easiest ways to do good while reducing your tax bill is to donate used items. A thorough search of your closets and attic could turn up hundreds of dollars’ worth of deductions. Contributions of more than $250 need to be documented with a receipt; those worth more than $5,000 must have an independent appraisal.

Take special care when donating cars and other items of value. Although some charities imply you can deduct more than such items are worth, the IRS limits you to declaring only the fair market value of the item--in other words, what you could get for it if you sold it in the open market. The IRS knows that you’re more likely to donate a rusted wreck than a mint-condition classic, so don’t try giving your junker an inflated value on your tax return.

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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 marrieds filing jointly and for single filers:

Portion of income: Tax rate

Married, filing jointly

$0 to $42,350: 15.0%

$42,351 to $102,300: 28.0

$102,301 to $155,950: 31.0

$155,951 to $278,450: 36.0

More than $278,450: 39.6

Single

$0 to $25,350: 15.0%

$25,351 to $61,400: 28.0

$61,401 to $128,100: 31.0

$128,101 to $278,450: 36.0