ROANOKE TIMES
Copyright (c) 1995, Roanoke Times
DATE: Monday, December 11, 1995 TAG: 9512110029
SECTION: MONEY PAGE: A-8 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
December brings your last chance to write the record you'll face next spring when you sit down with your tax forms.
Tax planning should be a year-round process. But, in reality, year's end for many people is the best time to assess their tax situation. Before 1995 runs its course, there is one final opportunity to make an impact on the year's tax bill.
The Virginia Society of Certified Public Accountants suggested several tax-saving strategies for the last few weeks of the year.
One is to shift income to the most favorable tax year.
You should, to the extent you can, time the receipt of income for the year in which you will owe less tax.
If you anticipate receiving a year-end or holiday bonus, for example, consider the tax implications of receiving this additional income at the end of 1995 vs. the beginning of 1996.
Try to schedule - to the extent that tax law allows - receipt of the bonus in the year in which it will be subject to the smallest tax bite. That might be the year in which you have less income or in which you will have more dependents. Or maybe you anticipate a one-time major deduction.
Generally, the CPAs said, if you are self-employed or work on a free-lance basis, you have more flexibility in timing the receipt of income. To push income into 1996, simply delay billing clients until early January or bill them late in December when payment during the old year is unlikely. To speed up income for 1995, bill clients earlier this month.
You can also reduce your 1995 taxable income by incurring more deductible expenses, such as the purchase of new equipment and supplies, subject to some limitations, by Dec. 31. To reduce next year's income, delay these purchases until after New Year's Day.
You can also try timing investment income, the CPAs said.
If you defer receiving income from your investments into 1996, you may not have to pay taxes on those earnings until April 1997, subject to rules for paying estimated taxes.
Buying six-month or one-year U.S. Treasury bills may accomplish this objective because the income won't be earned until 1996.
You might also consider shifting money from taxable investments to tax-free investments such as municipal bonds and municipal bond funds. Interest income on municipals is never taxed by the federal government. You will also start earning tax savings as soon as the shift takes effect.
Another strategy, the society said, is to contribute now to charities.
The CPAs said most taxpayers make their charitable contributions at the end of the year. The reason is simple: you would be entitled to the same deduction if you made the contribution in January, but paying later means you have use of the money all year.
Remember that you now must get a receipt for your donation of $250 or more to a qualified charity. The receipt must state that you received no benefits from your gift. Canceled checks are no longer sufficient proof of such gifts.
A tax-savvy way to make donations is with appreciated property such as stocks, bonds, real estate and other investments that have increased in value since their purchase. If you've owned the asset for more than a year, you can generally deduct the current market value of your contribution and avoid paying tax on the appreciation.
Remember to bunch your medical expenses.
The CPAs said medical expenditures are deductible only to the extent that they exceed 7.5 percent of your adjusted gross income. That figure is 10 percent if you're subject to the alternative minimum tax.
If your family experienced high medical expenses so that you are at or near the necessary 7.5 percent, accelerate other medical expenses such as dental work, new eyeglasses or hearing aids into 1995 so you can take the deduction. If you will fall short of the minimum, postpone optional medical expenses until next year.
You should also look at your miscellaneous expenses, following the same logic.
Miscellaneous deductions must exceed 2 percent of your adjusted gross income to be deductible.
Review items that qualify as miscellaneous expenses - tax-related advice, safe deposit box rental, Individual Retirement Account custodial fees, union and professional dues, and unreimbursed employee business expenses.
If you're close to the 2 percent threshold, speed up payments for qualified expenses that you would ordinarily pay next year. If you'll clearly fall short, delay these expenses into the new year.
If you're unsure about what expenses qualify as a deduction or how you can time the receipt of certain income, you may want to seek help from a tax adviser now. If a significant amount of money is involved, an investment in advice before the end of the year could save you a problem when taxes are due in April.
To learn more about tax planning, send a stamped, self-addressed envelope to the Virginia Society of Certified Public Accountants, P.O. Box 4620, Glen Allen, Va. 23058-4620. Ask for a copy of the brochure ``20 Ways to Reduce Your Taxes: A CPA's Guide to Financial Fitness."
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