Originally posted November 5, 1999
Year-End Tax Planning Tips
Income Planning: A time-honored aspect of tax planning is to estimate both your 1999 and 2000 adjusted gross income (AGI). It may be difficult but, in many cases, it can save you some tax dollars in the long run. Why? Because, if you anticipate being in a higher bracket in 2000, you may benefit from accelerating income into 1999 and paying taxes on that income at a lower rate. If you believe that you'll be in a lower tax bracket in 2000, you can reverse the strategy and attempt to defer income into 2000.
Just remember that any time that you mess with your AGI, you are also indirectly messin' with other deductions. Deductible IRA contributions, Roth IRA contributions, Roth conversions, medical expense deductions, miscellaneous itemized deductions, taxation of social security benefits, and the threshold for various tax credits are just a few of the items that can be affected when your AGI is increased or decreased. Since your decision to inflate (or deflate) your AGI in a given year may have other far-reaching impacts, make sure to be aware of how other items on your tax return will be impacted by your decision to "tinker" with it.
If you feel that you'll be in a higher tax bracket in 2000, here are just a few ways to accelerate income into 1999:
Year-End Bonuses -- If your employer generally pays bonuses after the end of the current year, you might try to negotiate to have your bonus paid to you before the end of 1999.
Retirement Plan Distribution -- If you are taking money from a retirement plan, consider taking your withdrawals before the end of 1999, rather than waiting until next year. Even if you have no immediate use for the money, paying tax in 1999 and simply putting the money in the bank (or other investments) may be a smarter way to go.
Accounts Receivable Collection/Billing -- If you are self-employed and report your income and expenses on a cash basis, issue year-end 1999 bills early to hopefully receive payment by the end of the year. You'll also want to attempt collection on any current or overdue accounts prior to the end of the year. Remember that many of your customers may also be in the "tax-planning" mode, and might want to pay their bills (and take their deductions) prior to the end of 1999. They might be happy to pay for January 2000 goods or services in advance.
Roth IRA Conversion -- As you should know, if you convert a regular IRA to a Roth IRA, you'll generally be required to report taxable income in the year of the conversion. So you might want to increase your 1999 income by making a Roth IRA conversion prior to the end of the year.
Investments -- Review your portfolio now. Try to determine your gains and losses for the year. See if there are stocks, bonds, or mutual funds you might want to sell. You might want to take some additional short-term stock gains in 1999. Your investment portfolio is the one area in which you have direct control. Don't overlook it.
But, also remember that your focus will be on short-term gains. As we discussed in the previous article, long-term gains are taxed at a preferred maximum rate. As the law currently stands, they'll be taxed consistently at the same tax rate, regardless of your other income or deductions in 1999 or 2000.
On the other hand, if you expect your AGI to be higher in 1999 than in 2000, you'll benefit by deferring income into 2000. You can accomplish this by:
Investments -- Once again, review your short-term gains and see what you might be able to defer into 2000. Additionally, be careful of year-end mutual fund purchases. As we discussed in Part I of this series, mutual funds can throw off income at the end of the year... most of it in the form of ordinary income. If you're trying to defer income into 2000, your plans could be rocked by an ill-timed year-end mutual fund purchase. So, before you leap, make sure that you understand the tax implications. Simply waiting a few more days --until the calendar flips over to 2000 -- may save you a bunch of tax dollars.
Interest and Dividends -- Did you know that interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not included in your income until it's actually received by you? No "interest allocation" (splitting interest partly into 1999 and partly into 2000) is required to be made. Instead, the income is realized when the instrument reaches maturity. To defer interest income, consider buying short-term bonds or certificates that won't mature until next year.
Other Issues -- Basically, as you can imagine, other techniques would simply "reverse" the items that we noted above. If you're self-employed, you might want to delay your billing and collection of your bills into 2000. Don't make a taxable Roth IRA conversion until early in 2000. Take your retirement plan distributions in 2000 rather than 1999. See if you can talk your employer into delaying your year-end bonus into 2000 rather than paying it late in 1999. I'm sure that you can see how it all works. It all depends on which side of the fence you find yourself.
Year-End Tax Planning Tips
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