Client Newsletter
December 1999

Briefs:

Financial Strategies is intended to provide generalized information that is appropriate in certain situations.  However, because of the complexities of the applicable laws and regulations and the continuing developments in these areas, the contents of this newsletter should not be acted upon without specific professional guidance.

There are a number of steps you might take by year-end to cut your 1999 tax bill, such as deferring income, accelerating deductions and capital gain planning.

Caution: If you expect to be subject to the alternative minimum tax (AMT), you may want to accelerate income and delay deductions.

Deferring Income

• If you are planning on selling an investment on which you have a gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements).
• If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the portion withheld) for another year. 

• If your company grants stock options, it may be wise to wait until next year to exercise the option or sell stock acquired by exercise of an option.

• If you're self employed, and can afford the delay in cash inflow, defer sending invoices or bills to clients or customers until the end of December. (Very few suppliers will pay before year-end.)

Caution: Keep an eye on the estimated tax requirements.

Accelerating Deductions

• Pay a state estimated tax installment in December instead of at the January due date. However, the payment should be based on a reasonable estimate of your state tax.
  

• Pay your entire property tax bill, including installments due in year 2000, by year-end (not applicable to mortgage escrow accounts).

• Try to bunch “threshold” expenses, such as medical expenses and miscellaneous itemized deductions. (Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income.) By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby  maximizing your deduction. For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.

Caution: Credit cards charges are considered paid in the year of the charge regardless of when you pay them.

• Make charitable contributions. You can donate property as well as money to a charity. A deduction is usually available for the fair market value of the property. However, for certain property, the deduction is limited to your cost basis. While you can also donate your services to charity, you may not deduct the value of these services. You may also be able to deduct charity-related travel expenses and some out-of- pocket expenses.

	TIP: Contributions of appreciated property (i.e. stock) provide an additional benefit in that you avoid paying capital gains on any profit. See item below on How To Save Taxes By Giving Appreciated Securities To Charity.
	Related Financial Guide: CHARITABLE CONTRIBUTIONS: How To Give Wisely.

Other Tax-Saving Techniques

• Minimize taxes on investments by judicious matching of gains and losses. Where appropriate, try to avoid short-term gains, which are usually taxed at a much higher tax rate (up to 39.6%) than long-term gains (20%). You might consider, where feasible, trying to reduce all capital gains and generate short-term capital losses up to $3,000.

	TIP: If you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses are deductible up to the amount of your capital gains plus $3,000.
	TIP: After selling an investment to generate a capital loss, you can repurchase it after 30 days. (If you buy it back within 30 days, the loss will be disallowed.) Or you can immediately repurchase a similar (but not the same) investment, e.g., another mutual fund with the same objectives as the one you sold.
	TIP: If you have losses, you might consider selling securities at a gain and then immediately repurchasing them, since the 30-day rule does not apply to gains. That way, your gain will be tax-free, your original investment is restored and you have a higher cost basis for your new investment (i.e., any future gain will be lower).

• Maximize retirement plan contributions. If you own an incorporated or unincorporated business, consider setting up a retirement plan if you don’t already have one. (It need not be actually funded until you pay your taxes, but allowable contributions will be deductible on this year's return.) If you are an employee and your employer has a 401(k), contribute the maximum amount ($10,000 for 1999, but income restrictions apply). If you are employed or self-employed with no retirement plan, you can make a deductible contribution of up to $2,000 a year to a traditional IRA (deduction is sometimes allowed even if you have a plan).

These are just a few of the steps you might take. Contact your Professional Advisor for help in implementing these or other year-end planning strategies that might be suitable to your particular situation.

How To Save Taxes By Giving Appreciated
Securities To Charity

It's not often that you can get a double dose of tax savings on the same transaction. But that's exactly what happens when you donate appreciated securities to a charity.

How does this happen? It's simple. You get the same charitable deduction you would get for giving cash. And you avoid capital gains tax to boot! This is especially attractive when the market has been in an upswing.

Example: Mr. and Mrs. Brown have pledged $10,000 to their alma mater. They own shares in ABC Company, now worth $10,000--shares that cost $4,000 when purchased six years ago. If the Browns were to sell $10,000 in shares and donate the resulting cash, they would have a charitable gift tax deduction of $10,000, which would be worth about $4,000 in tax savings (if they are in the top bracket).  They would also have to pay capital gains tax of $1,200--20% of  their $6,000 gain. (We’re assuming they could deduct the entire $10,000, which might not be the case if they exceeded certain limits imposed by the tax law.) On the other hand, if they gave the appreciated shares to the college, they would still get the same $4,000 tax saving--and they avoid the capital gains tax.

	TIP: If you have made periodic purchases of stock, you will get the biggest tax savings by giving the shares bought at their lowest prices.
	Related Financial Guide: CHARITABLE CONTRIBUTIONS: How To Give Wisely

As a general rule, if you are able to prepay your mortgage you should prepay as much as you can every month (assuming there is no penalty for doing so). However, here are some exceptions to the general rule:

• If you do not have an emergency fund stashed away (three to six months’ worth of expenses), you should use any extra funds to build up this fund first. You can begin paying down your mortgage afterwards.
• If you have a large amount of credit card debt, use all of your extra funds to pay down those debts.
• If you strongly believe you can achieve a better return by investing that money elsewhere, then do so. 

Note: This can be a risky decision, and depends on your marginal tax rate, mortgage interest rate, return achievable on an investment, and long-term investment goals.

Are you thinking of moving to another state for retirement or other reasons? If so, it’s important to take into account the state and local taxes imposed in that state. Knowing what rate you’ll be taxed at in the new state will allow you to plan for the higher or lower taxes you’ll be paying.

Note: The effect a change in rates will have on your finances depends on your income level.

Find out whether the state income tax is imposed on all income, or only on certain types of income. Most states use federal taxable income as a base on which to levy the tax, but some use gross income.

If you’re going to reside in two different states, find out whether you’ll have to pay income tax--or at least file a return in order to claim a credit--in both states. This will probably be determined by whether you are a resident in the state--which is determined by numerous factors.

Look not only into the income,  but also the sales and property tax rates. If the sales tax or property tax in the new state is higher than in your old state, you’ll have to figure this into your finances. 

When planning for their survivors, many people overlook the needs of their animal companions. We don’t mean you should leave the bulk of your assets in trust to your treasured pet, as various eccentric animal lovers have done! Rather, most people who keep pets simply want to make sure their animals will be cared for if they become incapacitated or die. Here are some suggestions to consider:

• Include a provision in your will designating someone to care for your pet. If you can’t find someone to agree to accept this responsibility, find an animal shelter to which the pet can be taken for possible adoption (after you’ve determined that you are comfortable with their policies).
• If you feel it is necessary, include a provision in your will setting aside an amount of money for the feeding, shelter, and veterinary care of your animal.
• Be sure to include a provision stating what should be done with your pet during the time between your death and probate of the will.

The "exchange privilege," or the ability to exchange shares of one fund for shares of another, is a popular feature of many mutual fund "families" (i.e., fund organizations offering a variety of funds.)

Many taxpayers believe that such exchanges are tax-free. Not so. For tax purposes, exchanges are treated as if you had sold your shares in one fund and used the cash to purchase shares in another fund. This means that any capital gain from the exchange must be reported on your return, using the same tax rules for calculating gains and losses that apply when you redeem shares. 

Note: Gains on these redemptions and exchanges are taxable whether the fund invests in taxable or tax-exempt securities.

Most taxpayers hear about the advantages of Roth IRAs but the drawbacks are often overlooked. Keep these drawbacks in mind when planning for a Roth IRA:

• There’s never a deduction for Roth IRA contributions.
• To build a sizable Roth IRA fund, you must convert a traditional IRA ­ and such conversions are taxable.
• In converting to a Roth IRA, you risk an excess contribution penalty and an early withdrawal penalty, if income exceeds $100,000.

It may seem obvious, but you generally don't need to pay whopping interest rates on unsecured personal loans or credit card purchases. Instead, you can borrow at more reasonable rates, as long as you have a home with untapped equity, a sturdy brokerage account, a 401(k) plan or a cash-value life insurance policy. 

Related Financial Guide: APPLYING FOR A LOAN: How To Get The Best Loan At The Lowest Cost

Competition among lenders has also driven rates down.  

TIP: Avoid variable rates. If interest rates rise, you will be overpaying.

If you decide on a home-equity loan, shop around. You may get a great deal at a small bank or thrift that doesn't advertise much. And don’t forget mortgage bankers, finance companies and credit unions. In any case, unless you get a very low interest rate, go for a deal with no points, closing costs or other fees.  

Related Financial Guide: HOME EQUITY LOANS: How To Shop For The One That Is Best For You.

IRS often gives incorrect information. An IRS spokesman admitted that incorrect information is often given to taxpayers. Yet, even though the IRS gives a taxpayer bad information, it holds the taxpayer responsible for filing  an accurate tax return. That’s another reason why professional tax guidance is so important.

Related Financial Guide: CREDIT REPORTS: What You Should Know--And Do About Yours