Tax Cutting Ideas
December, 2000

Time is running short for making moves that will minimize your taxes for 2000. If you haven't done your year-end planning yet, make time now before it's too late. Some strategies to consider:

* Shifting income and deductions between tax years is a common approach for delaying and sometimes permanently reducing taxes. If your income tax bracket will be about the same for this year and next, the best strategy might be to defer income until 2001 and accelerate deductions into 2000. On the other hand, if you expect your tax bracket to increase next year, simply reverse this plan.

* If you are close to the cutoff point between itemizing or taking the standard deduction, consider bunching your deductible expenses (medical expenses, state and local taxes, charitable contributions, mortgage and investment interest) into every other year. You can then alternate between itemizing one year and taking the standard deduction the next, saving tax dollars by doing so. Keep in mind that medical, charitable, and miscellaneous itemized deductions are limited to a percentage of your income, so they are best utilized in years when your income is lowest.

* Deciding which investments to sell, and when, can have a big impact on your taxes. Most investments must be held more than twelve months to receive the preferred, long-term capital gain tax rate. Make sure you meet the holding period, or you'll pay taxes at your higher ordinary tax rate.*  If you have capital gains from sales made earlier in the year, consider dumping under-performing investments at a loss to offset these gains. If losses exceed gains, you might want to create some taxable gains before year-end. Rules prevent taxpayers from receiving a current tax benefit from net losses in excess of $3,000. 

*  If you've decided to sell a mutual fund, consider doing so before dividend and capital gain distributions are made at the end of the year. Conversely, buying mutual funds at year-end may cause you to pay tax on distributions you don't generally benefit from. Remember that you must pay tax on dividends even if you reinvest them in additional shares of stock.

* Consider shifting income to children over 14 to take advantage of their lower tax bracket. If you gift shares in a mutual fund, for example, a child in the 15% bracket could sell shares and pay 10% on long-term capital gains. You would pay 20% tax on these gains if you are in a 28% or higher tax bracket. 

* Gifts can save both income and estate taxes. You can generally make gifts up to $10,000 per year, per person, free from gift tax. Annual gifts can be increased to $20,000 if your spouse joins in. Take advantage of this year's tax-free gifting allowance by completing your gifts before December 31. For more information regarding gifts and taxes, see Can Gifts Reduce My Estate Taxes?.

* Consider donating certain appreciated stock to your favorite charity. You won't be taxed on the appreciation and will generally be able to deduct the fair market value of the stock as a charitable contribution.

* There's been a great deal of publicity about the marriage penalty. When people marry, they can end up paying more tax than they did as singles. Postponing a planned marriage until 2001 or finalizing an impending divorce in 2000 could save taxes. Your marital status on the last day of the tax year will determine your filing status. For more information, see Getting married? Time to talk about money.

* If you have dependent children entering college next year, your assessment for financial aid will be based on this year's tax return. Consider deferring income, fully funding all retirement accounts, accelerating investment losses, and postponing gains to hold down income.

Now is the time to schedule your tax planning meeting. We may be able to find things you can do before year-end that will increase your tax refund next year.

© Copyright 2000 Raymond S. Kulzick. All rights reserved. 001104.