Doin’ the Income Shuffle
THE TRIED-AND-TRUE RULE prevails: take deductions now and push income into next year. Every deductible penny spent before Jan. 1 makes happy returns in April more likely. Ernst & Young tells clients to check their miscellaneous deductions now to see if they will top 2 percent of adjusted gross income, the level at which these bits and pieces actually become deductible. If you’re close, there’s time to pile on more of those looked little write-offs like job-hunting costs (who can’t use a new resume?), professional dues and subscriptions, safe-deposit rentals, gifts under $25 for the boss and (most gratifying) tax-advice fees.
Make the most of bigger deductions, too, by squeezing in one more mortgage payment and another payment on estimated state income tax before 1995 runs out.
Remember to set money aside for the nanny. Last year’s law puts household help on your annual return for the first time; you’ll owe a year’s worth of social-security and Medicare payments for any helper you’ve paid $1,000 or more this year.
And leave no money on the table at work: if you have cash in use-it-or-lose-it dependent-care or health-care accounts, give your sitter a bonus or buy those baby-blue contact lenses.
Stock Maneuvers
DONE THE WRONG WAY, year-end securities trades can result in big headaches and bigger tax bills. Winning investors should try to hang on until January, when the capital-gains tax cuts promised by Congress are likely to be effective, says Grant Thornton accountant Tom Ochsenschlager, and worth eight cents on the dollar. Sophisticated investors desperate to lock in big gains can try the Wall Street tactic known as “selling short against the box.” For a $55 commission at Schwab, you can borrow and then sell 100 shares of Microsoft and pocket the profit today. In January, spend another $55 to repay the loan with shares you already own and realize the taxable gain.
Losses are worth more now, while they can offset either gains or up to $3,000 of ordinary income on a dollar-for-dollar basis. Next year taxpayers may need $2 in losses for every$1 of ordinary income they want to offset.
What about buying? If you have a pot of money waiting to go into a high-performing stock mutual fund, sit tight. In December most finds will be distributing this year’s heady gains in the form of new shares; that’s a transaction that’s taxable, even to new shareholders who buy in just before the distribution, even if they’ve missed all the great gains. Invest $10,000 just before a moderately successful stock fired declares its distribution, and you can add $1,150 or more to your taxable income without actually earning any of that income. Fund manager Robert Markman is closing his MultiFund Trust until Dec. $1 so new investors don’t get hit. Other fund companies warn investors that they’ll get a tax bill if they buy before the distribution, but they still happily cash the many checks that roll in.
This year the run-up in stocks has investors racing to give appreciated mutual-fired shares to their favorite charities before those distributions hit. The donor gets a write-off for the full value of the shares without any taxable gain. The Fidelity Charitable Gift Fund in Boston, a tax-exempt charity that invests like a mutual fired and allows donors to select recipients later, reports that 25 percent of donations come in the form of fired shares. Financial planner Jane King says no amount is too small: “If you’re about to write a cheek for $100 and you can give two shares instead, it’s a no-brainer.”
To give fund shares, contact the charity and your broker or fired company and request the transfer. If you’re not transferring all the shares in your account, remember to identify those shares that cost you the most, so you’ll be giving away the biggest gain, says New York CPA Richard Shapiro. And do it fast, before your fired distributes its gains.
Waiting for the American Dream
VIRTUALLY EVERY VERSION of pending legislation gives taxpayers what the Republicans are calling “the American Dream”: a new, improved Individual Retirement Account that can be tapped, penalty free, for tuition, housing down payments and health care. So why lock more money into a nondeductible IRA this year? Because you can! If you’ve cultivated this habit, keep it up, says CPA Nadine Lee. This is your last chance in 1995 to feed a tax-deferred account; that $2,000 you pop in now will be worth $12,000 or so in 20 years.
If you’d rather wait for the Dream to come true, here’s an alternative for the truly tax-averse: plunk the $2,000 into a municipal-bond money-market fund and hold it there until the new IRAs come on board. Then be the first on your block.
