Burton & Co. CPA, Certified Public Accountants serving Broward County, Florida, CPA, Accounting, Accountant

Year End Tax Planning for December 1999

Year End Tax Tips and Strategies

As a taxpayer, you are probably interested in keeping your tax bill as low as possible. With all of the new changes made every year to the tax code, where do you start? As you read through the following information, remember that everyone has a slightly different tax situation. Understanding what you need to do to get ready to talk with your tax professional is half the battle. Not having all the paperwork for your tax professional makes it difficult for him/her to help you save money.

First:
Determine what your individual filing status will be. The four categories are:

Married, filing jointly
Married, filing separately
Head of household
Single

Married couples have a choice of filing separately or filing a joint return. Usually filing separate saves money. Single parents may be able to file head of household and this can save you taxes. This can even apply to a grandparent if the grandchild lives in your home that you maintain for more than half the year. The child does not have to be your dependent. If you are unmarried and you maintain a household for a dependent parent, you also may qualify for head-of-household status. The parent does not have to live with you. The parent may live in a nursing home.

Second:
What category do you fall in?

Taxable Income Brackets

Rate (%)	Married Filing Jointly & Surviving Spouses	Head of Household	Single	Married Filing Separately
15	$0 - 43,050	$0 - 34,550	$0 - 25,750	$0 - 21,525
28	43,051 - 104,050	34,551 - 89,150	25,751 - 62,450	21,526 - 52,025
31	104,051 - 158,550	89,151 - 144,400	62,451 - 130,250	52,026 - 79,275
36	158,551 - 283,150	144,401 - 283,150	130,251 - 283,150	79,276 - 141,575
39.6	Over 283,150	Over 283,150	Over 283,150	Over 141,575

These amounts are adjusted annually for inflation. Deductions for exemptions are phased out at a higher level of income. Below are the phase-out ranges. Your exemptions will be nondeductible if your adjusted gross income exceeds the top of the range shown for your filing status.

Married-joint	$189,950 - $312,450
Head of household	$158,300 - $280,800
Single	$126,600 - $249,100
Married-separate	$94,975 - $156,225

Child Tax Credit
Parents of children who are younger than age 17 at the close of the year can claim a tax credit of up to $500 per child in 2000. The child must be your dependent and be a son or daughter (by blood or legal adoption) or a descendant of either, a stepson or stepdaughter, or an eligible foster child. Generally, only children who are U.S. citizens or legal residents can qualify.

As with exemptions, the child tax credit is reduced for those with higher levels of income:above $110,000 on a joint return; above $75,000 on a single or head of household return; and, above $55,000 on a married-separate return. ("Income" refers to your adjusted gross income with certain modifications.)

Income Planning Strategies
Timing is a big part of tax planning. Knowing what deductions you qualify for is the other important key factor in your tax planning. Below are some of the more common deductions and deferral strategies you might find useful. Remember everyone has a slightly different tax situation. Knowing what is available, early consultation with your tax professional and good bookkeeping will save your hard earned cash. Browse through the following pages and decide what you think is important for you. You might read some of the information that does not apply to you at this time, but it most likely will in future planning. Tax advisors like for you to look at two years rather than one. Many of the decisions you make this year will have an impact on your taxes for more than just one year. A simple change such as the fact that you are expecting an addition to the family, and when the baby is born, is very important information your tax professional needs. Did one of your oldest children leave home this year? Do you take care of a parent in a nursing home? Do you really understand you IRA? Last year, federal, state and local governments collected an estimated $9,900 per person in taxes. That is nearly $40,000 a year for a family of four, more than the average family spends on food, clothing and shelter combined. Some of that money was yours. Think long term and read on to find out what options are available to you for this year and what changes will benefit you in the future.

IRA's
Invest in a traditional IRA. A traditional IRA offers tax-deductible contributions to qualifing individuals. Earnings on account investments accumulate tax deferred. Investors pay taxes on account earnings and previously deducted contributions in the year of withdrawal. You must wait until the age 59 � to withdraw money without a 10% early withdrawal penalty. You must begin taking "required minimum" distributions from a traditional IRA every year once you reach age 70 �.

Although contributions to a Roth IRA are not tax deductible, account earnings accumulate tax deferred and may eventually be withdrawn tax- free. You can qualify for tax-free withdrawals of earnings if you have had a Roth IRA for five years and you are 59 � or older. Tax-free withdrawals after five years are also allowed for first time home-buying expenses (subject to a $10,000 lifetime cap) or on account of disability or death.

You won't have to pay the 10% early withdrawal penalty if you take a distribution before age 59 � from your IRA to pay medical expenses (up to the amount allowable as a medical expense deduction), to pay for medical insurance if you have been unemployed for 12 weeks or more, for qualified higher education expenses, or for qualified "first home" expenses up to a lifetime cap of $10,000. It's also possible to begin taking periodic distributions over your life expectancy (or the joint life expectancies of yourself and a beneficiary). Finally, distributions made on account of disability or your death won't be subject to a penalty.

To contribute to either a traditional IRA or a Roth IRA, you (or your spouse) must earn compensation at least equal to the amount of the contribution. No more than $2000 per year may be contributed to all IRAs maintained for an individual. A married couple filing a joint return can contribute a total of $4000, even if one spouse earns less than $2000 or has no earnings for the year, as long as together they have at least $4000 in earnings.

Will your contribution to a traditional IRA be tax deductible? That depends if your deduction is reduced or eliminated. If you do not fit into any of the listed categories, your contribution should be fully deductible.

Limitations on IRA Deductions
You are covered by an Employer Retirement Plan

Filing Status
Reduced Deduction
if Modified AGI

No Deduction
if Modified AGI

Single/Head of Household $32,000 - $42,000 $42,000 or more

Married-joint $52,000 - $62,000 $62,000 or more

Married-separate $0 - $10,000 $10,000 or more

You Are Not Covered by an Employer Retirement Plan but your Spouse is

Filing Status	Reduced Deduction if Modified AGI	No Deduction if Modified AGI
Married-joint	$150,000 - $160,000	$160,000 or more
Married-separate	$0 - $10,000	$10,000 or more

Note that the Roth IRA contributions are phased out for unmarried individuals as modified AGI rises from $95,000 to $110,000; for married-joint filers as modified AGI rises from $150,000 to $160,000; and, for married-separate filer as modified AGI rises from $0 to $10,000.

Converting to a Roth IRA
You are allowed to convert a traditional IRA to a Roth IRA if your modified AGI(not counting the converted amount) is $100,000 or less and you file a joint return if you are married. If you convert, you must include the taxable conversion amount in your income for the year. This could significantly increase your taxes. However, your future withdrawals from the Roth IRA would be tax free, assuming you met the qualifying requirements. You need to evaluate the pros and cons of converting.

Retirement Plans Sponsored by Employers
One if the best ways to cut your taxes is to take advantage of a retirement savings plan. 401(k) plans, 403(b) plans, and Savings Incentive Match Plans (SIMPLE plans) all offer you the opportunity to invest for your future by contributing a portion of your pay to the plan. The tax benefits of participation include:

Pretax Contributions- The salary you contribute to the plan is not subject to income taxes until you receive a distribution from the plan.
Tax-Deferred Account Earnings- Your contributions can be invested on a tax-deferred basis. Because the IRS doesn't share in your earnings until you receive a distribution, your investment can grow faster than it would if taxes were paid each year.

The maximum pretax contribution to a 401(k) or 403(b) plan is $10,000 (for 1999, with possible inflation adjustment for 2000). The SIMPLE plan maximum is $6,000. Other limitations apply.

Paying for Higher Education
Financing a higher education can be a very expensive proposition. In your planning, consider whether any of the tax incentives discussed in this section might be helpful to you.

Hope Scholarship and Lifetime Learning Credits
These two tax credits are available for the payment of qualified tuition and related expenses at an eligible institution. The Hope Scholarship Credit is available for your own expenses or those of your spouse or dependents. The credit is limited to the first two years of post-secondary education, and the student must carry a minimum half-time course load. The maximum credit is $1,500 for each eligible student (100% of the first $1,000 of eligible expenses plus 50% of the next $1,000 of expenses). Availability of the credit phases out with modified AGI of $40,000 to $50,000 ($80,000 to $100,000 on a joint return).

The Lifetime Learning Credit is not restricted to the first two years of post-secondary education, and any number of undergraduate, graduate and professional degree courses can qualify, as can courses to acquire or improve job skills. The Lifetime Learning Credit in 2000 is $1,000 per taxpayer return (20% of expenses up to $5,000), regardless of the number of students. The credit is subject to the same income phase-out amounts as the Hope Scholarship Credit.

If you pay qualified expenses for your child in 2000 but cannot claim a credit because of the income limitation, consider not claiming your child as a dependent. Your child might then be able to claim the credit for the expenses you paid, offsetting taxes owed on his or her own tax return. You might take a similar tack if your dependency exemption for your child will be phased out.

Proceed cautiously if you are a divorced parent who pays qualified expenses for a child you don't claim as a dependent. You can't claim the credit, but the child's other parent will be able to take the credit for your payments if he or she claims the dependency exemption for the child and doesn't exceed the applicable income limitation. Note, too, that if you are legally married, you must file a joint return to claim either credit.

Deduction for Student Loan Interest
If eligible, you can deduct up to $2,000 of interest paid on qualified higher education loans in 2000- whether you itemize deductions or claim the standard deduction. The interest must relate to a loan you took solely to pay your own qualified higher education expenses or those of your spouse or a dependent (at the time you incurred the debt). Only the first 60 months of scheduled interest payments- whether or not consecutive- are deductible. The interest deduction is phased out with modified AGI between $40,000 and $55,000 ($60,000 and $75,000 on a joint return).

You may be able to deduct interest paid on loans you took some time ago. If your loan payments were deferred (because you returned to school, for example), those months are not counted against the 60-month eligibility period.

Education IRAs
Parents, grandparents, and anyone else interested in contributing to an Education IRA for a child under age 18 can do so if they meet income eligibility requirements. (The available contribution is phased out with modified AGI between $95,000 and $110,000, or between $150,000 and $160,000 on a joint return.) Total contributions made for the child by all individuals cannot top $500 a year.

Although Education IRA contributions are nondeductible, earnings on account investments are not taxed and may be withdrawn tax free to pay the child's qualified higher education expenses. No Hope or Lifetime Learning Credit can be claimed for the child's expenses in any year a tax-free Education IRA distribution is taken. Consider waiving the interest exclusion if money is needed from the Education IRA to pay expenses but the credit saves more tax than the exclusion.

U.S. Savings Bonds
Interest earned on Series EE and Series I bonds is normally taxable in the year you redeem the bonds (unless you elect to report the interest annually as it accrues). However, you can avoid tax in the year of redemption if you use the proceeds to pay qualified higher education expenses (your own, your spouse's, or your dependent's) and you bought the bonds after reaching age 24, registering them in your name (or jointly with your spouse). Also, you must file a joint return if you are married. The interest exclusion is phased out as modified AGI rises from $53,100 to $68,100, or from $79,650 to $109,650 on a joint return (subject to inflation adjustment for 2000).

Employer-Paid Educational Expenses
2000 is the last year to take advantage of a tax exclusion for educational assistance offered by your employer. If certain requirements are met, up to $5,250 of employer-paid assistance can be excluded from your taxable wages. This exclusion is available only with respect to undergraduate courses beginning on or before May 31, 2000.

The articles are intended to provide resources for the tax and accounting needs of small businesses and individuals. The information contained in this Web site is intended to provide general information on matters of interest in the areas of tax and accounting. Users are encouraged to contact their own accountant regarding specific situations.

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