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September 2000 QUALIFIED RETIREMENT PLAN DISTRIBUTIONS - CHOICES Hopefully your 1999 return has been signed, sealed, and delivered to the IRS. At this time of year it is easy for both of us to sit back and relax and perhaps wait until the end of the year to look at your tax picture again. However, in order for you to take maximum advantage of all of the planning opportunities available in the tax laws and regulations, it is important for you to take this opportunity to strategize how best to plan your tax picture for this year. Although Congress did not pass "big" tax legislation last year (in comparison to legislation passed in the last three years), the legislation that did pass has had an impact on a large number of people. In addition, some of the provisions from the tax legislation passed in 1997 and 1998 were not effective until this year. There are also legislative proposals on the table that may change your tax picture before the end of the year. Here are some tax planning strategies that you should be thinking about and should provide a basis for implementing a tax planning strategy for this year. This list is by no means exhaustive, and it is not meant to preclude the use of certain tried-and-true strategies that may still work for you. Alternative Minimum Tax An increasing number of what are considered "middle income" taxpayers are being caught in the web of alternative minimum tax liability. However, the Ticket to Work and Work Incentives Act of 1999 provided some relief to these taxpayers for tax years beginning in 2000 and 2001 by permitting the personal nonrefundable credits to offset both the regular tax and the minimum tax. This is done by limiting the amount of nonrefundable credits by the sum of (1) the taxpayer's regular tax liability less any allowable foreign tax credit, plus (2) the amount of alternative minimum tax liability. Estimated Taxes With the increased income that many of you may be experiencing due to Istock market bonanzas, along with the boom in the real estate market, it is imperative to review whether you are paying enough estimated tax to avoid penalties for failure to pay sufficient estimated tax. When evaluating the amount of estimated tax, it is important to consider that last year Congress increased the estimated tax prior-year safe harbor percentages for prior tax years that begin in 1999 and 2000. Taxpayers with prior year's AGI above $150,000 must pay 108.6% of their prior year's tax for a prior tax year beginning in 1999, and 110% for a prior tax year beginning in 2000, to qualify for the prior-year safe harbor. Investment Planning So far it has been a year of extremely active trading on the stock market - many taxpayers have bought and sold aggressively. Most taxpayers that are actively involved with the market are bound to have both gains and losses this year. Particularly given the inclination toward day trading (or, at least, buying and selling without holding on to stock for too long) many taxpayers may have short-term gains and losses. As these short-term sales are made, it is important to plan, as much as possible, to match any short-term gains realized with appropriate short-term losses. Regardless how long a taxpayer holds stock, it is very important that careful records are kept in order to establish the cost basis of the stock and to establish the length of time the stock has been held. This is especially important for this year since special capital gains rates begin to apply to certain property held for five years. It is also important to be aware that there is a trap for the unwary lurking in many investment portfolios. If a taxpayer sells mutual funds at a loss this year but has dividends from that fund reinvested in shares within 30 days of the sale, the Internal Revenue Code wash sale rule can be triggered. This rule provides that a taxpayer cannot recognize a loss on the sale of securities if the taxpayer buys substantially identical securities within 30 days of the sale. If this has already occurred, all is not lost, however. You can recoup this loss in future years by adding the loss to the basis of the newly purchased stock. Retirement Planning It is important to try to plan to maximize benefits in any tax-qualified plan that your employer offers, including 401(k) plans. It is also imperative to coordinate the amounts that you are investing in your employer's plans with amounts that you are investing in individual retirement arrangements, especially if you are in certain income tax brackets. Education Planning: If you or your children are either in college or planning to go to college, there are a number of tax benefits that you may want to consider, including deductions available for student loan interest, the Hope scholarship credit and the lifetime learning credit, and education IRAs. The Hope and lifetime learning credits begin to phase out, however, for joint filers with adjusted gross income above $80,000, $40,000 for single filers. If you are in this position and are willing to forego the dependent exemption on your tax return for next year, your child can claim these credits if he or she has sufficient tax liability against which to claim the credit. You may want to discuss this with your college-aged child or children, particularly if they are on the fence about working part-time while they are in school. For planning purposes, you should also note that last year's tax act retroactively extended the income exclusion for employer-provided education benefits. As you can see from this discussion, there have been many changes to the tax law that can potentially affect your personal tax picture this year. There are also legislative proposals on the table that may further impact your planning for this year. Please feel free to contact us if you want further explanation of any of the developments or if you want us to work out a personal tax planning strategy for this year. Please call us if you would like to discuss the details of your particular circumstances.
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