Doing Taxes Now May Save You Money and Headaches Come April
It may be the last thing you want to hear, but anyone who owns mutual funds, trades stocks frequently or who cashed in stock options; or got married, divorced or had a child; or changed jobs or retired in 2000--in other words, nearly everyone--needs to start thinking about taxes.
That’s because your tax bill may be considerably bigger this year than it was last year. If you find out the extent of the damage now, you have time to act, whether that means quickly paying bills that are tax deductible, selling stocks to trigger capital losses, or simply saving like crazy so you’ll be able to pay the tax bill in April.
“Anybody who has either owed a significant amount of tax in the past, or who has had something unusual happen this year--that’s anything that doesn’t normally happen to them, including doing a lot of trading or cashing in stock options--needs to do a projection” of how big their tax bill will be, says Philip J. Holthouse, a partner at the Los Angeles tax law and accounting firm of Holthouse, Carlin & Van Trigt.
That means you ought to spend some time in the next few days pulling together your tax information, ranging from income statements from wages, investments and interest, to deductible expenditures such as mortgage interest and charitable gifts.
Generally speaking, your most recent W-2 forms and mortgage, brokerage and bank statements will be sufficient to help estimate your taxable income and deductions. But don’t forget to get capital gains information from your mutual fund companies, which don’t normally report this information for another month.
Then, as onerous as it may sound, you need to fill out a 1040 with these estimated numbers to get an idea of how much tax you may owe next year.
The best way to do an accurate estimate is to pull “draft” 2000 forms and tax tables from the Internal Revenue Service Web site at https://www.irs.gov. To get a 1040 and tax tables for individuals, scroll to the bottom of the page and click on “Tax Info for Business.”
At the next screen, click on “Tax Professional’s Corner.” From there, look for “Early Release Drafts of Forms.” That screen will offer a long listing of year 2000 forms sorted by date. If you click “sort by form,” the 1040 and all the relevant schedules and tax tables will rise to the top.
But be warned: The IRS could still readjust the litany of tax figures tied to inflation. Even so, doing a tax projection off the draft 2000 forms should get you close enough for discomfort.
What do you do if you discover you’re facing a massive tax bill?
It depends on why you’re behind the eight-ball, tax-wise. If it’s because you changed jobs, retired, married or had too little tax withheld from your wages, now is the time to start looking for capital losses in your portfolio that you might want to trigger and charities you might want to endow. Losing money and giving it away reduce your tax obligation.
Too extreme? Then consider making your January mortgage payment in December and paying your state income taxes and property taxes early. These are expenses you’re going to face sooner or later. If you face them now, you get the benefit of 2000 tax deductions in return. Naturally, if you do this, you lose that tax-deductible expense a year from now.
However, if you owe a lot because you realized a large amount of capital gains during the year from active trading, mutual fund capital gain pass-throughs, the exercise of incentive stock options or the sale of a rental property, for example, you should turn this advice around. Instead of speeding up deductible payments, postpone making them until next year.
Why? You may be flirting with the onerous alternative minimum tax, which takes away credit for certain deductions such as your state income tax payments and certain business expenses.
Advice to delay deductions and possibly even accelerate ordinary income goes against the grain of most tax-averse Americans, but if you’re subject to the AMT, do it anyway.
“If you postpone deductions into a year when you’re not affected by the AMT, you’ll at least eventually get credit for them,” Holthouse says. “Otherwise, they just go to waste.”
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Times staff writer Kathy M. Kristof welcomes comments and suggestions for columns but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com.
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Income Tax Estimators
Several Web sites offer free calculators that can help you determine your likely tax bill for 2000 and whether you may need to adjust your withholding or make extra tax payments.
Intuit’s TurboTax has a detailed tax estimator at https://www.turbotax.com.
H&R; Block has a withholding estimator and a refund estimator at https://www.hrblock.com.
H.D. Vest’s “Quick Tax Calculator” at https://www.hdvestonline.com is a year out of date but can provide a rough tax estimate for simple situations.
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Source: Times research
