Get a Start on Lowering Next Year’s Tax Bill

There may not be much you can do about your current tax bill, but there’s plenty of time to make the kind of changes that will reduce your taxes in the future.

Here are some of the most helpful tax-saving strategies:

* Accelerate and defer. Most people who will be in the same or lower tax bracket next year will be better off deferring as much income as possible until next year and accelerating deductions into this year, 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.

Some situations that may call for accelerating deductions include getting married to someone at a similar income level (which means you’ll face the so-called “marriage penalty”); losing head-of-household status --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 each year’s taxes. Several tax estimators are available onthe Internet, such as Intuit’s version at https://www.turbotax.com.

* Bunch up itemized deductions. 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 in order to itemize next year--or vice versa.

* Watch the thresholds. Several potentially valuable deductions phase out as income rises.

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 to see which strategies would work for you.

* Delay income. To defer income, ask your employer to delay any year-end bonuses you might receive until January; because such compensation is deductible to the company, however, employers may prefer to pay it before year-end. Again, this strategy works best if you expect to be in the same or lower tax bracket next year.

If you’re self-employed, you can delay billing customers until after year-end or ask them to pay you in January. Likewise, if you need to accelerate income 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.

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

* 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 that year 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. Donations 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 aportion 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 spikes upward or you made some big taxable profits in the stock market, you could be in for an unpleasant surprise. 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 is not at least equal to your previous year’s tax bill or 90% of your current year’s bill. The so-called “safe harbor” is higher if your income is over $150,000.

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, 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 Alertnewsletter.

Many online tax preparation sites have free calculators to help you figure your withholding. One to try: TurboTax’s version at https://www.turbotax.com.

*Retirement plans. Contributions to a tax-advantaged retirement savings program at work such as a 401(k) or 403(b) can lower your tax bill now and in the future. 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 $10,500 in 2001. (Contributions by highly compensated employees--those with incomes of more than $85,000 --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 Savings Incentive Match Plan for Employees (SIMPLE). Again, the money comes directly off the top of your taxable income, which can significantly reduce your taxes.

The deadline for setting up a SIMPLE for 2001 is Oct. 1; for a Keogh, it’s Dec. 31, and a SEP for 2001 can be set up as late as April 15, 2001. 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/iras.