ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, December 16, 1996 TAG: 9612180002
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
You may think it's too late in the year to do much about the tax bill you'll pay in 1997.
But think again.
A request to two certified public accountants for information about what actions ordinary individuals - not businesses - can take now to cut the tax bite prompted a list of tips from one of them and a five-page letter from another.
Here are only a few of the hints from F. Fulton Galer of McLeod & Co. and Harry Schwarz of Schwarz & Co., both in Roanoke. Anyone who has serious tax problems, however, may want to consult his or her own tax adviser before the year is out.
Both of the CPAs recommended "bunching."
That is the practice of lumping as much income as possible in one year and as many deductions as possible in another year. That may enable you to take more medical and professional deductions, which can be deducted only after reaching a percentage of income.
Galer suggested looking at your tax situation for a two-year period instead of just for 1996. The objective is to reduce your tax liability for the two years combined. So you postpone income and accelerate deductions in one year and do the opposite in the alternate year.
Other smart moves, Galer said, are to trade taxable investment income for nontaxable revenue such as municipal bond interest (if the tax-free yield is greater than the after-tax yield on the old investment) and to turn ordinary income into long-term capital gains.
Schwarz said bunching might be accomplished by accelerating or deferring retirement income. This could affect the amount of Social Security benefits subject to taxation.
Another method, Schwarz said, is to transfer investment income to a child age 14 or older. Minors of that age, he said, are taxed in their own bracket rather than that of their parents.
If you expect to be in a higher tax bracket next year, accelerate income, Schwarz said. If, on the other hand, you expect to file as head of household next year (perhaps because of a divorce), defer income.
Here are some quick and fairly easy tips from Schwarz:
*If you have capital gains on stock sales for this year, look at your portfolio for potential losses. You can use losses to offset the gains and, after that, to offset up to $3,000 in other income.
Exchange matured Series EE Savings Bonds for HH Savings Bonds to defer gains.
*If you are bunching expenses, consider using a credit card if necessary to pay medical bills and to make charitable contributions.
*Check your withholding forms with your employer. If you have underestimated your taxes, increase withholding in the last pay period.
*If you have self-employment income, set up a retirement plan by the end of the year. Under some plans, you can defer taxes on up to 20 percent of your income.
*If you have the money, give your children $10,000 each.
*Make a contribution to your Individual Retirement Account.
*If you have adopted a child, put off paying the costs until next year when you will get a tax credit of up to $5,000 for those bills. The credit is $6,000 for special-needs children.
*Don't borrow from your IRA this year. Next year, you can avoid the 10 percent penalty if the money is needed for health costs. (That's also when you can contribute $2,000 instead of $250 for a nonworking spouse.)
Galer said you can defer income by delaying billings, taking a note instead of a down-payment for sale of property, postponing distributions from retirement plans and avoiding collecting income such as alimony, rents, director fees and bonuses until after the first of the year.
He said you can buy Treasury bills or bank CDs maturing next year and thus postpone the income until 1997. Be sure the bank doesn't pay you interest until next year.
You can increase deductions by donating appreciated stock to a public charity if you have held the stock a year or more.
Galer said the IRS recently ruled that radial keratotomy and laser eye surgery, which are popular ways to correct vision problems, are not cosmetic and are, therefore, deductible. Most insurance does not cover these procedures, so the expenses are ideal for bunching.
Galer suggested converting income into capital gains by selling shares in mutual funds just before they make year-end payments of dividends. Share prices generally fall after such a dividend payout, so what would otherwise be dividend income becomes part of a gain. You can buy the shares again later, usually at a lower price.
Galer also suggested you:
*Add to your retirement funds. If your company sponsors a 401(k) or similar plan, consider putting as much of your salary aside as the law allows.
*Apply now for a Social Security number for a new dependent. The law disallows the $2,550 personal exemption for a dependent unless his or her Social Security number is shown on the return. The only exception is for children born after Nov.30, 1996.
Contact the Social Security Administration now if you want taxes withheld on your benefits starting in January.
Review your tax situation now for possible exposure to the alternative minimum tax. Designed originally to force wealthy citizens to pay at least some tax, this provision is catching more ordinary people in its net.
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