Tax-saving tactics: make this year different – don’t wait ’til the eleventh hour
It’s more likely that a giant asteroid will demolish the earth than Congress will raise taxes in an election year. “It’s anybody’s guess what may be passed,” says Gary N. Cohen, a senior manager with the national tax department of Ernst & Young. “But most changes won’t take effect until 1993.” The sole exception is if you’re thinking of buying some extravagant baubles for Christmas. Pending proposals would eliminate the stiff tax on luxury items–boats, furs, jewelry–so it’s wise to postpone these purchases.
Despite the wrangling on Capitol Hill, the time-honored strategies apply: Shrewdly use the calendar to bunch deductions into one year and defer income into the next, fund pension plans and retirement accounts to the regulatory limit, and get the maximum mileage out of your company’s benefit package.
Any number of items can be prepaid to clump writeoffs into 1992, such as state income taxes, property taxes, medical and dental bills, tuition for work-related continuing-education classes, child-care costs, and accountants’ fees. You can even charge them on your credit card as long as the transaction is executed by December 31.
If you received a pink slip this year, the IRS offers relief for job hunters. Costs for resume preparation, job-counseling and employment-agency fees, mileage to interviews (at 28 cents per), even payments to a nanny to watch your brood while you’re dazzling prospective employers, are all deductible.
If you relocated more than 35 miles for a new job, expenses related to the move may be fully deductible. These include money spent traveling to the new city to find a home, the cost of a mover, penalties on unexpired leases, temporary living expenses–even fees for transporting Fido to your new abode.
Pumping money into tax-deferred retirement programs, like IRAs and 401(K) plans, is another way to whittle down taxable earnings. If you receive any self-employment income, open a keogh account by December 31. Twenty percent of net self-employment income up to $30,000 a year can be tucked away in these tax-deferred plans.
In fact, being self-employed or having a moonlight operation can generate a wealth of writeoffs. Rack up deductions for a percentage of the mortgage or rent, heat, electricity, telephone, cleaning, and insurance if you use a portion of your residence as an office. Reward yourself with writeoffs for business gifts, dues to professional organizations, office supplies, education expenses for classes to keep skills current, travel, or any other costs legitimately incurred in the course of running your business.
You can also claim up to $10,000 for the purchase of computers, modems, and furniture. Again, these purchases must be made by the year’s end, but you can pay for them with plastic. “If you want to buy $20,000 worth of business-related property,” says Ralph Grant, a CPA in Oakland, California, “time the purchase to maximize the tax break. Acquire $10,000 this year and the rest in 1993.”
On the flip side, find out if you can defer income until 1993. For example, can you postpone the payment of your Christmas bonus or profits from the sale of stocks? If you’re self-employed, delay invoicing some clients until January. This buys an extra 12 months use of that cash before giving the IRS their slice.
And it’s not too soon to start preparing next year’s taxes. Find out if your employer offers dependent-care accounts, which permit workers to deposit up to $5,000 of earnings–tax free–and then withdraw the money to pay for childcare costs. Medical reimbursement accounts work the same way, though there is no cap on contributions. The deadline for opening these accounts for 1993 is usually in December. But these programs can translate into hefty savings because you’re paying for ordinary expenses in pretax dollars. “Anything,” says Janice M. Johnson, a New York City tax attorney, “that can be paid for in pretax dollars is a real benefit.”
COPYRIGHT 1992 Omni Publications International Ltd.
COPYRIGHT 2004 Gale Group