Get a grip on 1999 tax, and a jump on 2000, too

PERSONAL FINANCE

April 02, 2000|By EILEEN AMBROSE

THE tax deadline is fast approaching, and if you're scrambling to get your return together, you now may be haunted by "If only--"

"If only I saved those charitable receipts." "If only I kept track of my mileage." "If only I were Bill Gates."

Rather than be troubled by regrets, be proactive. You can still take a few steps to trim your 1999 tax bill, such as making sure you don't overlook any deductions, tax experts say. Now is also a good time to start working on lessening next year's tax burden.

Experts offer the following advice for 1999 taxes and beyond: It's not too late to contribute to an Individual Retirement Account for 1999. You have until the filing deadline, which this year is April 17 because the usual cutoff date falls on a weekend.

If you aren't covered by a retirement plan at work, you may be able to deduct your contribution to a traditional IRA. The maximum contribution is $2,000 annually.

Even if you are participating in an employer's retirement plan, you still may be eligible for a full or partial deduction, depending on your income. For instance, a single person with an adjusted gross income of up to $31,000 can take a full deduction. Thereafter, the deduction is reduced and then eliminated for singles with adjusted gross income of $41,000 or more. Not eligible for an IRA deduction? It's still a good idea to put money into an IRA, experts say.

With a traditional IRA, "you still get tax-deferred growth on those funds. So that's a good thing," said Todd Cleary, vice president of financial planning services with T. Rowe Price Associates in Baltimore. If you're eligible for a Roth IRA, you won't get any deduction but your money will grow tax-free.

Don't overlook deductions. A common oversight is forgetting to deduct additional state taxes you might have paid last year for 1998, said Dom LaPonzina, chief spokesman for the Internal Revenue Service in Baltimore.

For instance, if the amount withheld to pay 1998's state and local taxes wasn't enough and you wrote a check last year to make up the difference, you can include the amount of the check in 1999's state and local income tax deductions, he said.

Many people last year overlooked the new child tax credit because they were unfamiliar with it and it was hard to find on the tax form, said Gail Perry, author of the "The Complete Idiot's Guide to Doing Income Taxes." The credit allows filers to subtract $500 from their tax bill for each child under age 17 during 1999, she said.

Did you take a computer science class to get ahead or some other course to improve your job skills? Don't forget the lifetime learning credit that allows you deduct up to 20 percent of post-secondary education expenses for a maximum credit of $1,000 a year, Perry said.

You don't have to be a full-time student to get the credit, although the course must be provided by an eligible educational institution, she said.

Did you refinance your mortgage in recent years and pay points to get a lower interest rate? If so, you can deduct the cost of those points over the life of the loan, Cleary said. Many homeowners take the deduction the first year of refinancing and forget about it later, he said.

Be careful of over-reporting income. Mutual fund investors will sometimes lump dividends and long-term capital gains distributions together on tax forms, Cleary said.

By doing this, they pay income tax, with a maximum federal rate of 39.6 percent, on both dividends and long-term gains, he said. The distributions, however, should be taxed as long-term capital gains, with a maximum rate of 20 percent, he said.

As you look ahead to trimming next year's bills, consider taking advantage of tax-favored accounts at work.

For example, sign up for your employer's 401(k) savings plan or, if you're already in the plan, increase your contributions if possible, said Edward P. Nevin, a tax partner at Deloitte & Touche in Baltimore. The maximum contribution for 2000 is $10,500, up $500 from the year before.

Your contributions are not included in your taxable income. However, you'll pay income tax on the contributions and the gain on that money when you later make withdrawals.

Employers' flexible spending accounts also help reduce taxes. These accounts allow you to set aside up to $5,000 to pay for dependent care or medical expenses not covered by insurance, such as deductibles or laser eye surgery, Nevin said. You won't pay any taxes on the amount you set aside in the account.

A word of warning: You decide how much money each year to set aside. If you overestimate the amount, you'll forfeit any money left in the account at the end of the year, Nevin said.

Keeping good records can trim taxes. Expenses that may seem small today can add up to a sizable deduction if tracked over a year's time, experts said.

For instance, if you do charity work you're allowed to deduct the mileage (14 cents per mile) and parking costs racked up while volunteering.

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