Dec. 15, 1998 by Rachel Kendall NMSU News Center
The end of the year is swiftly approaching. Amidst making plans and buying gifts for Christmas, taxpayers may want to consider making moves now to reduce the amount of taxes they will have to pay on April 15, 1999. Larry Tunnell, associate professor of accounting in New Mexico State University’s College of Business Administration and Economics, has some tips.
–Make a charitable contribution. Now is a good time to review your charitable contributions for the year to see if you have given all that you intended, Tunnell said. This can be a particularly good time to contribute appreciated stock you have held for at least a year, since you can get a deduction equal to the fair market value of the stock without having to include in income any capital gain from the stock, he said.
Those who don’t have the cash to contribute right now should keep in mind that if they charge a charitable contribution to a credit card by the end of the year, they can get the deduction in 1998, even if they don’t pay off the card until 1999, he added.
–Pay deductible expenses early. It also is a good idea to compute your state income tax liability for the year and send in an early payment (on or before Dec. 31) equal to the amount you will owe, Tunnell said. That payment then would be deductible in 1998, not 1999. Similarly, you could send in your January mortgage payment or an early payment of your 1999 property taxes before year-end and get a larger interest deduction, he said.
Cash basis businesses should consider paying their bills before Dec. 31 (even if they are not yet due) to get a deduction in 1998, Tunnell suggested. Businesses that buy less than $218,500 of equipment each year may be able to deduct up to $18,500 of the 1998 equipment costs this year, in addition to the depreciation they will get on the rest of the equipment costs. In addition, businesses that purchase equipment late in the year still may deduct six months of depreciation in 1998.
However, Tunnell cautioned, always keep in mind that the Alternative Minimum Tax might reduce the benefit of these deductions if too many of the wrong kind of expenses are deducted.
–Convert to a Roth IRA. If you are considering converting your regular IRA to a Roth IRA, you should do that this year, Tunnell recommended. The income recognized from conversions occurring in 1998 can be spread out over four years, rather than being recognized only in the conversion year.
–Sell investments that have declined in value. With the stock market as volatile as it has been, some people might have some stocks or mutual funds that have declined in value, Tunnell said. If so, they could sell them to create losses offsetting gains from other capital assets, provided they do not buy back the investment within 30 days of the sale, he said. They could, however, immediately buy stock in a similar company or shares in a mutual fund with a similar investment strategy. Those whose losses are greater than their gains may deduct up to $3,000 of the losses against other income, he said.
–Take advantage of educational tax incentives. Some new educational incentives might help college students reduce their tax bill, Tunnell suggested. The Hope Scholarship Credit can reduce your taxes by up to $1,500 of the tuition paid by you, your spouse or a dependent in the first two years of college, he said. Alternatively, the Lifetime Learning Credit allows a credit of 20 percent of the tuition paid in any year of college, for a maximum credit of $1,000. Tuition paid in December 1998 for the spring 1999 semester will add to the 1998 credit. A deduction of up to $1,000 of student loan interest also is now allowed, he added.
–Contribute to a retirement plan. Contributions to tax-deferred plans such as a 401(k), Keogh or 403(b) also will result in lower taxes in April, Tunnell said.