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
- 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
- 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.
- 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
||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
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
- 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
- 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
- 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
- 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
- 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
- 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.
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
Tax Planning for 2001
Projected 2001 tax rates are:
Standard deductions: Single $4550|
Married Filing Joint $7600|
Married Filing Separate $3775|
Head of Household $6650|
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
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
- 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