There’s Still Time to Do Things That Will Help Reduce Your 1999 Tax Bill

Individual taxpayers hoping to reduce their 1999 tax bill won’t find many new tax breaks this year.

So far this year, no major tax legislation has been enacted--President Clinton vetoed the Taxpayer Refund and Relief Act of 1999. Two of the changes that do take effect for tax year 1999--liberalized home-office deduction rules and the one-year holding period for capital-gains tax treatment--were created in earlier years.

That doesn’t mean significant savings aren’t available to those who plan carefully, however. Among the most significant year-end strategies:

* Accelerate and defer. Most people who will be in the same or lower tax bracket for tax year 2000 will be better off deferring as much income as possible until 2000 and accelerating deductions into 1999, said Mildred Carter, federal tax analyst with CCH Inc., a Riverwoods, Ill., tax research firm. But if you are going to be in a higher tax bracket next year, you may want to do the opposite: move as much income as you can into ‘99, when your tax rate is lower, and put off deductions until 2000, when they can do you more good.

Some situations that may call for accelerating deductions include getting married to someone at a similar income level in 2000 (which means you’ll face the so-called “marriage penalty” beginning with your 2000 return); losing head-of-household status in 2000--because a child moves out of the home, for example; or losing surviving-spouse status (widows and widowers with minor children are allowed to use more favorable joint tax rates for two years after the death).

To know which path is best, you’ll probably have to do estimates of both your 1999 and 2000 taxes. Several tax estimators are available on the Internet, such as Intuit’s version at https://www.turbotax.com. Tax forms and tables for 1999 are available at local IRS offices or through its Web site, https://www.irs.gov. Your taxes for 2000 will be tougher to estimate, but you can use 1999 forms and tables as a guide.

* Bunch up itemized deductions. For 1999, the standard deduction for joint filers and surviving spouses is $7,200, and for singles it’s $4,300. If you usually don’t have quite enough deductions to itemize each year, consider whether you may be able to maneuver your income and write-offs in such a way that you could itemize every other year. This technique, known as bunching, might require you to take the standard deduction this year and to put off enough deductions into 2000 in order to itemize next year--or vice versa.

* Watch the thresholds. Several potentially valuable deductions phase out as income rises. The deduction for student loan interest, for example, begins to disappear when a single person’s modified adjusted gross income reaches $40,000 and is gone completely at $50,000. (The phase-out range for married couples filing jointly is $60,000 to $75,000.)

There are limits on certain itemized deductions for high-income taxpayers. Deductions for taxes, home mortgage interest, charitable gifts and miscellaneous itemized deductions must be reduced by 3% of the amount the deductions exceed $126,600 for married or single taxpayers.

It can make sense for affected taxpayers to delay income or take other steps to stay below thresholds. Again, you’ll need to calculate your probable taxes for both 1999 and 2000 to see which strategies would work for you.

* Delay income. To defer income, ask your employer to delay any bonuses you might receive until January; because such compensation is deductible to the company, however, employers may prefer to pay it before year-end.

If you’re self-employed, you can delay billing customers or ask them to pay you in January. Likewise, if you need to accelerate income into 1999, you can be more aggressive about billing and requesting payment by year-end.

Investors who have had big stock market gains in taxable accounts might consider selling some of their losing positions to offset their gains. Remember, short-term losses must first be offset against short-term gains, and long-term losses against long-term gains, before the results can be offset against each other. For 1998 there were three categories of long- and short-term gains and losses, but for 1999 there are only two: anything held less than one year is considered a short-term gain or loss; anything held longer is long-term.

After that netting-out process, up to $3,000 of capital losses can be used to reduce ordinary income each year.

The self-employed or business owners can reduce income by buying business equipment. Up to $19,000 of the cost can be deducted as a business expense for 1999, although the deduction is limited to the taxpayer’s taxable business income.

* Boost deductions. Most people find it easier to boost their deductions than to trim their income.

Some of the most common ways to boost deductions include paying both halves of a property tax bill by Dec. 31 and making your January mortgage payment before the end of December. (Make sure to send the mortgage payment in early enough so that the lender includes it on the 1099 tax form sent to you in January. Call your lender for details.)

Other deductions that you may be able to accelerate include:

Job-related expenses. Union dues, subscriptions to professional journals, some uniforms and certain job-related courses can be deducted to the extent that they exceed 2% of your adjusted gross income. If you’re already at or near that threshold, it would make sense to pay such costs by Dec. 31.

Medical expenses. Only amounts of more than 7.5% of your adjusted gross income can be deducted. If you’re close to that limit, consider pushing what medical expenses you can into 1999 by, for example, refilling prescriptions, buying that new pair of glasses or scheduling elective procedures before year-end. Smoking-cessation plans that meet certain criteria are now tax-deductible, a change from previous years; there’s never been a better time to quit.

Charitable gifts. Many charities depend on year-end largesse, and a last-minute donation of money, household items or appreciated property can reduce your tax bill if you itemize.

A caveat: Some popular car donation programs are running into trouble with the IRS because of misleading advertising and questionable business arrangements. If you do donate a vehicle, make sure the charity, rather than a for-profit processing firm, gets most of the proceeds. Also, you cannot deduct more than the fair market value of the vehicle, and donations worth more than $5,000 must be substantiated by an independent appraisal.

* Home offices. Congress liberalized home office deduction rules so that it is easier for some people to write off business-related costs. Homeowners who take this deduction, however, run the risk of losing a portion of their capital gains exemption when the house is sold. Also, depreciation taken as part of a home office deduction after May 6, 1997, will be taxed at a maximum 25% rate when you sell, said Philip J. Holthouse, a Los Angeles certified public accountant. For more details, see IRS Publication 587, Business Use of Your Home.

* Check your withholding. If your salary spiked upward in 1999 or you made some big taxable profits in the stock market, you could be in for an unpleasant surprise come April 15. In addition to a bigger tax bill, you may face under-withholding penalties if you owe more than $1,000 in federal taxes and your withholding for 1999 is not at least equal to your 1998 tax bill or 90% of your 1999 bill.

If you can, try to have the extra tax withheld from a paycheck, rather than pay it separately as an estimated tax payment. People who make estimated payments can be penalized for not sending in at least 25% of their tax bill each quarter; a large payment at the end of the year, unless directly related to a large gain or salary increase in the last three months of 1999, could subject you to underpayment penalties. Taxes withheld by an employer, however, need not be taken in even installments to avoid the penalty.

“Even if it’s withheld in the last paycheck of the year, it is treated as if it had been deposited ratably over the year,” said Bob Trinz, an editor for the Research Institute of America’s Federal Taxes Weekly Alert newsletter.

* Retirement plans. If you participate in a tax-advantaged retirement savings program at work such as a 401(k) or 403(b), you still have time to boost your contributions and lower your 1999 tax bill. Such contributions directly reduce your taxable income, and the money you contribute is not taxed until it is withdrawn in retirement. You are allowed to contribute up to certain limits; most workers can chip in as much as $10,000 in 1999. (Contributions by highly compensated employees--those with incomes of more than $80,000 for 1999--may be further restricted. Your employer also limits contributions to a certain percentage of pay.)

If you’re self-employed, you are allowed to set up and to contribute to a variety of retirement plans, including a Keogh, a Simplified Employee Pension (SEP) or a SIMPLE. Again, the money comes directly off the top of your taxable income, which can significantly reduce your taxes.

To be able to deduct from your 1999 taxes, you must set up the Keogh by Dec. 31; the SEP can be set up as late as April 15, 2000. The deadline for setting up a SIMPLE for 1999 has passed, but you are allowed to contribute to any existing SEP or Keogh until the due date of your 1999 tax return (in 2000 that will be April 17, plus any extensions). Anyone with earned income can also contribute up to $2,000 to a traditional IRA; the contribution may be deductible if you don’t have a retirement plan at work or if your income is below certain limits. If you can’t deduct your contribution, consider contributing instead to a Roth IRA, which offers tax-free withdrawals in retirement. For more on Roth IRAs, visit The Times’ Web site at https://www.latimes.com/invest101.

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