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2000 YEAR END TAX PLANNING

Let’s start out our year end tax planning exercise by reviewing some changes which take effect this tax year 2000.

  • The earnings test for Social Security Benefits was eliminated for everyone aged 65 or older retroactive to January 1, 2000.
  • The official per mile rate for business use of a car rises to 32 ˝ ˘.
  • The tax exclusion of foreign earnings of overseas workers subject to U.S. income tax has been raised to $76,000.
  • The luxury tax on cars dropped to 5% for 2000 and will be completely eliminated by 2002. The floor purchase price that triggers this tax is $38,000.
  • Five-year averaging of lump sum distributions from retirement plans is gone - 1999 was the last year.
  • Long-term care premiums eligible as a medical expense deduction have risen to $2750 for those age 70 and older; $2200 for those age 60-69; $820 for those age 40-49; $220 for those age 39 and under.
  • Education interest deduction (usable even if you do not itemize) is a deduction for interest up to $2,000 in year 2000 on student loans (up from $1,500 in 1999 and rises to $2,500 in 2001).
  • Regular IRAs: The start of the $110,000 phase out range for tax-deductible contributions to ordinary IRAs by active participants in employee-sponsored plans rises to $52,000 for couples and $32,000 for singles.
  • Safe harbor for estimated tax purposes is 108.6% of last year’s tax liability or 90% of this year’s tax if your income is over $150,000. Income under $150,000, then the safe harbor is 90% of your 2000 tax or 100% of your 1999 tax.
  • Limitations on pay-ins and benefits involving multiple retirement plans have been dropped for the 2000 tax year. This helps highly-paid individuals in Pension and Profit Sharing Plans.

Reference Items:

  • Personal Exemption $ 2800
  • Phase out of personal exemption starts: Couple (AGI) $193,400:  Single (AGI) $128,950
  • Phase out of itemized deductions starts at $128,950.
  • Wage base, Social Security Tax $76,200.
  • Automatic exemption from estate tax $675,000.

Tax Savings Strategies

1. Track projected mutual fund distributions!

If you purchased a mutual fund this year in a taxable account, you may have little or no profit and maybe even a loss. However, the fund could still pay out sizable taxable dividends and capital gains. Exchange out before the year end distribution and wait thirty days to go back in.

Estimated Large Distributions

  % of N.A.V.
AIM Aggressive Growth Fund 18.00 % Distribution
AIM Small Cap Opportunities Fund 36.00 % Distribution
Fidelity OTC 16.00 % Distribution
Fidelity Contra Fund II 14.00 % Distribution
Fidelity Fifty Fund 13.88 % Distribution
Fidelity Low Priced Stock 10.78 % Distribution
Fidelity Japan Smaller Companies 29.00 % Distribution
Oppenheimer Global Fund 1 9.50 % Distribution
Oppenheimer Quest Capital Value Fund 33.00 % Distribution
Washington Mutual Investors Fund 12.00 % Distribution

This list is not inclusive, check your funds out! These are some of the largest funds used for example.

2. Use the best method, not the easiest in computing tax on mutual fund profits and stock sales (there are three ways), lump sum pension plan distributions, deductions for business equipment, and foreign taxes.

Other basic strategies to save on taxes is to shift income and deductions between two adjacent years, especially if your tax bracket will be higher in one of them.

How to shift income into next year or deductions into this year:

  • If you expect a year-end bonus, ask your employer to pay it (and/or other salary) early next year. If you’re in a high bracket try to convert current income into deferred compensation, fringe benefits, or incentive stock options (ISOs).
  • If you run your own business, delay income by sending this year’s bills next year.
  • If you plan to marry someone with a roughly similar income, try to delay the marriage until 2001 if you’ll be taxed less on a joint return (marriage can put you into a higher bracket, and if your combined incomes exceed $128,950, you may lose some of your deductions). The opposite may hold if your incomes are very unequal.
  • Bunch expenses such as itemized deductions and medical expenses into high-bracket year.
  • Pay your winter property tax bill in December if this a high income year or wait and pay it in January if next year’s income will be higher.
  • Contribute stock to your favorite charity - you get a tax deduction for the fair market value yet pay no tax on the capital gain.
  • Clean out the house and contribute unneeded items to charity.

Make an itemized list and value each item, DO NOT use the per bag method of figuring your contributions.

  • Avoid gift taxes by making gifts of up to $10,000 per person per year ($20,000 if your spouse joins in).
  • Investment Losses - If you have unrealized losses on your investments now might be a good time to make them real. Note - you need to stay out of the investment for 30 days for the loss to be usable on your tax return. (See Mutual Fund idea). Sell the losers, keep the winners.
  • Avoid shortcuts such as a simpler forms when longer forms may generate greater tax benefits. Also, avoid using fixed-rate allowances for business trip meals.
  • Contribute as much as you can to retirement plans (IRAs, 401ks, 457, etc.). If you have net self-employment income, set up a Keogh, SEP, or SIMPLE.
  • Review your receipts for deductible items, go over credit card statements, cancelled checks, and sales receipts.
  • Time your state estimated fourth quarter payment due January 15, 2001. If 2000 tax year income high, make your payment early.
  • Keep track of your charity mileage, tolls and parking if you drive for your church or charity. Deduction is 14 ˘ a mile.
  • Maximize your new business equipment deduction of up to $20,000 for tax year 2000.
  • Shift income to other family members who have a lower bracket, i.e. your children may be in a zero bracket vs. your 28%. The first $700 of a child’s investment income is tax free.
  •  
  • Sell real estate on the installment method if you have a large gain on the sale of investment land or real estate. This spreads the tax due out over a longer period of time reducing the chance that you are pushed into a higher tax bracket.
  •  
  • Swap Real Estate Investment property by using the Like-Kind Exchange provisions in the tax code.

Michigan Tax Planning

New for 2000 - Michigan now has a Section 529 Educational Savings Plan. Contributions to this plan qualify for a maximum $5,000 tax deduction on your state return This deduction has no income limits.. These plans have many features and restrictions so carefully review the plan. NOTE - Maximum contributions to the Michigan 529 Plan is $50,000.

2001 Pre-Planning

NEW Lower Capital Gain rate goes into effect January 1, 2001.

The new rates are 8% (15% tax bracket tax payer) and 18% for assets with a 5 year or longer holding period. Planning trap, the 8% rate goes into effect immediately, but the 18% rate only applies to assets purchased after January 1, 2001. NOTE - There is a special election one can make to have assets bought before January 1, 2001 to be covered under the 18% rate but the election needs to be made in 2001. Consult your advisor for more details.

Business mileage rate rises to 34.5 ˘ per mile.

Simple retirement account contributions increase to $6,500 from $6,000.

Tax Planning for 2001

Projected 2001 tax rates are:

bullet Standard deductions: Single $4550
bullet Married Filing Joint $7600
bullet Married Filing Separate $3775
bullet Head of Household $6650
bullet Extra standard deductions for age 65 or older is projected to be; $1,100 single and $900 married.

Personal exemption increases to $2900 and phase outs begin at:

  • Single $132,950
  • Married Filing Joint $199,350
  • Married Filing Separate $ 99,725
  • Head of household $166,200

Itemized deductions phase out rise to $132,950 ($66,475 for married filing separate).

The tax brackets are projected to be:

Married Filing Joint

  • 15% $0 to $45,200
  • 28% $45,200 to $109,250
  • 31% $109,250 to $166,450
  • 36% $166,450 to $297,300
  • 39.6% more than $297,300

Single

  • 15% $0 to $27,050
  • 28% $27,050 to $65,550
  • 31% $65,550 to $136,750
  • 36% $136,750 to $297,300
  • 39.6% more than $297,300

Married Filing Single

  • 15% $0 to $22,600
  • 28% $22,600 to 54,625
  • 31% $54,625 to $83,225
  • 36% $83,225 to $148,650
  • 39.6% more than $148,650

Head of Household

  • 15% $0 to $36,250
  • 28% $36,250 to $93,600
  • 31% $93,600 to $151,600
  • 36% $151,600 to $297,300
  • 39.6% more than $297,300

Estates and Trusts

  • 15% $0 to $1,800
  • 28% $1,800 to 4,250
  • 31% $4,250 to 6,500
  • 36% $6,500 to $8,900
  • 36.9% more than $8,900
 

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Disclaimer
We do not offer legal advice. All information provided on this website is for informational purposes only and is not a substitute for proper legal advice. If you have legal questions, we recommend that you seek the advice of legal professionals.

Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.

Copyright © 2017 Wink Tax Services / Wink Inc.
Last modified: January 30, 2017