1999 Year-End Tax Planning Tips
Part 1

By Roy Lewis (TMF Taxes)
Originally posted October 22, 1999

(Nov. 18, 1999) With a month before the end of the year and about five months before the April 15th tax filing deadline, why think about tax planning now?

Because now you can still do something about your taxes before December 31st rolls around. You may still be able to make some tax smart moves before Dick Clark rings in the New Year in Times Square. There is very little you can do after December 31st to reduce your taxes for this year. So, now is really the time to take stock of the year and your tax issues and see what you can do about them... how you can pay Uncle Sammy only your fair share... and not a penny more.

So, in this series we'll look at some tax-saving moves that may help you reduce your tax bill. Hopefully one (or more) of these tips will allow you to plan your affairs in such a way that you can pull a bicuspid out of your tax bite. Here we go...

Contributions to your favorite charity: If you have appreciated stock that you've held for more than one year, you might want to keep the cash in your pocket and donate the stock. You'll avoid paying tax on the appreciation, but will still be able to deduct the full value of the stock. You win, your charity wins, and the only loser is Uncle Sammy. If you still love the stock and want to maintain a position in the shares after your charitable contribution, you can simply buy new shares in the company. Your charity will be able to assist you with this transaction, but it can really be a great deal for all involved.

Use your credit card: What was that? I thought the Fool was all about getting out of debt? Well, you're absolutely correct. And we're not talking about running up your card unnecessarily. But, if you have year-end deductible expenses (such as business expenses, medical expenses, miscellaneous itemized deductions, etc.), you can use your credit card to make the purchase in 1999, take the deduction in 1999, and pay your credit card bill in 2000. You see, when you pay with a credit card, the IRS considers the expense deductible in the year that the charge is incurred... and not necessarily when you pay the credit card charge. In fact, going back to the first tip, you can even find charitable organizations that accept credit cards for charitable contributions. If you have the right credit card, you can receive a 30-day "float" that amounts to an interest-free use of the bank's money if you pay it off when the bill comes.

Convert ordinary income into capital gain income: Remember that the long-term capital gains tax rate is a preferred rate. And, while the tax rate on ordinary income can reach as high as 39.6%, your maximum capital gains rate will only be 20% (and some may pay a capital gains rate as low as 10%). So, when at all possible, try to convert ordinary income and gains into capital gains.

This can be done by simply only selling stock that you've held for more than one year. But, there is another little trick that those of you who are still investing in mutual funds might find interesting. If you have a mutual fund (that you've held for longer than one year) that you expect will pay out a substantial amount of regular dividends (which are taxed at your normal tax rate), you might want to sell those shares immediately prior to the pay-out date. Why? Because the share price of the mutual fund will generally drop by about the amount of the dividend. So, if you sell the fund before the payout date, you'll lose the dividend, but you'll get the higher sales price on your shares. You've just converted ordinary income into capital gains.

We certainly don't advocate doing this on a whim. But, if you have a mutual fund that you were thinking about getting rid of soon anyway, dumping it before the dividend pay-out date may save you a few (or even several) tax dollars.

Prepay your state and/or local taxes: If you believe that your tax bracket next year will be no higher than this year, and you won't be bothered by any alternative minimum tax issues, consider making those state/local tax payments before the end of this year.

After all, you're going to owe the money on April 15th anyway, right? So, why not make those payments before December 31st and take the federal tax deduction this year? You might think that this strategy only applies to people who have 4th quarter estimated tax payments to make on January 17, 2000, but it really doesn't. If you are a W-2 wage earner and expect a state/local tax balance due, even you can use a state/local prepayment voucher and make your tax payment before the end of the year.

Continue »

 Year-End Tax Planning Tips

  • Part 1
  • Part 2
  • Part 3
  • Part 4
  • Part 5
  • Taxes Message Board

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