Start now to reduce 2000 tax bill
- By Milt x_Zall
- Jul 28, 2000
April 15 is a long way off, so you can forget about taxes until next year,
Now is a good time to focus on your 2000 tax liability. There are many
ways to cut your tax bill, and there is plenty of time to do it. Here are
some strategies to consider:
* Donate appreciated assets to fund charitable gifts.
You and your charity can benefit if you donate appreciated assets instead
of selling the assets and donating the after-tax proceeds. The savings can
be significant, depending on how much capital gains tax you would have paid
on the sale.
For example, suppose you are in the 36 percent bracket and plan to make
a gift to a charity of appreciated securities worth $100,000 for which you
paid $40,000. You must choose between gifting the securities outright or
selling the securities and giving the cash proceeds. The gift of stock allows
you to take a full $100,000 charitable gift deduction and permanently avoid
$12,000 of tax on the stock’s appreciation ($60,000 appreciation times 20
percent capital-gains tax rate). If you sell the securities, you must pay
the $12,000 capital gains tax, leaving you with just $88,000 in cash to
donate to the charity. Your charity gets less of a donation and you get
a smaller deduction by selling the stock and donating the proceeds. By donating
the appreciated stock, someone in the 36 percent bracket saves $4,320.
Keep in mind, however, that the maximum deduction you can take in any
one year for charitable contributions is limited to 30 percent of your adjusted
gross income. Any excess can be carried forward for five years (subject
to the same percentage limitations in those years).
* Open an IRA for your nonworking spouse.
Think about a $2,000 individual retirement account contribution for
your spouse if his/her earnings are less than $2,000. Joint filers can contribute
as much as $4,000 to IRAs in one year — $2,000 per spouse.
* Calculate your tax liability as if filing both jointly and separately.
In certain situations, filing separately may save money for a married
couple. If you or your spouse is in a lower tax bracket or if one of you
has large itemized deductions, filing separately might lower your total
taxes. If an accountant prepares your taxes, make sure this is being done.
If you do your own taxes, make sure you go though this exercise. It could
pay off handsomely.
Filing separately may also lower the phase-out of itemized deductions
and personal exemptions, which are based on adjusted gross income. When
choosing your filing status, you should factor in the state tax implications.
You don’t want to shoot yourself in the foot by reducing your federal tax
liability if that means increasing your state tax liability by more than
you saved on your federal return.
The bottom line: Use the remainder of 2000 to fine-tune your tax planning
— don’t fritter away the time that’s left. If you do, it’s going to cost
--Zall, Bureaucratus columnist and a retired federal employee, is a freelance
writer based in Silver Spring, Md. He specializes in taxes, investing, business
and government workplace issues. He is a certified internal auditor and
a registered investment adviser.